economy issn: 2313-8181 vol. 2, no. 2, 44-48, 2015 www.asianonlinejournals.com/index.php/economy 44 an empirical investigation of the impact of foreign remittances on poverty in developing countries mohammad imran hossain 1 1 graduate school of asia pacific studies, ritsumeikan asia pacific university, japan abstract this work is licensed under a creative commons attribution 3.0 license asian online journal publishing group contents 1. introduction ............................................................................................................................................................................... 45 2. methodology .............................................................................................................................................................................. 46 3. results and discussion .............................................................................................................................................................. 46 references ...................................................................................................................................................................................... 48 remittances sent to home countries by migrant workers became significant in amount. such funds can have profound implications for economic development, human welfare and poverty reduction in a developing country context. this paper examines the impact of foreign remittances on poverty in selected developing countries. a set of time series data has been utilized to empirically check the relationship between remittances and poverty for a list of 44 developing countries worldwide. for the purpose of the study, the ‗three stage least squares‘ (tsls) regression technique has been applied. a separate analysis for a group of countries among the list which recorded a remittances to gdp ratio of 2% or more has been performed. the study finds that remittances have a significant negative impact on poverty in a developing country. keywords: foreign remittances, poverty, developing countries, tsls. http://creativecommons.org/licenses/by/3.0/ economy, 2015, 2(2): 44-48 45 1. introduction workers‘ remittances represent a significant portion of financial flows to a developing country (okodua and olayiwola, 2013). billions of such funds are transferred through official as well as unofficial channels. in 2012, total official flows of remittances to developing countries were estimated at $401 billion, an increase of 5.3% over the previous year. the figure becomes $529 billion if remittance flows to high-income countries are also included. remittances sent home by migrants to developing countries are equivalent to more than three times the size of official development assistance (oda) and can have very important implications for economic development and human welfare (world bank, 2012). for many developing countries the amount of remittances flow has reached to such a large level that it becomes significant in terms of the share in gdp (international monetary fund, 2009). in many developing countries, more than 20% of gdp is contributed by remittances. examples include tonga (38%), nepal (22%) and the kyrgyz republic (28%). for some of the developing countries, remittances form almost 40-50% of their gdp (world bank, 2013). for instance, in 2012 the remittances to gdp ratio in tajikistan was as high as 47% (world bank, 2012). hence, today in many developing countries worldwide, remittances play an important role in the national economy and because of the large magnitude of remittances relative to their total income flows, those countries rely on remitted funds in many ways (mpi, 2011). certainly, remittances do not go unnoticed in most of the countries that receive them (imf, 2009) and recent data indicates that remittances are increasingly becoming an important source of external financing for many developing countries (martín et al., 2007). on the other hand, in developing countries large numbers of people live under poverty and remittances help lift a huge number of people out of poverty. the phenomenon has been explained by the world bank (2013) as such: ―remittances can contribute to lowering poverty and building human and financial capital for the poor. remittances generally reduce the level and severity of poverty, typically leading to: higher human capital accumulation; greater health and education expenditures; better access to information and communication technologies; improved access to formal financial sector services; enhanced small business investment; more entrepreneurship; better preparedness for adverse shocks such as droughts, earthquakes, and cyclones; and reduced child labor.‖ figure-1. remittances as a share of gdp (in 2011) for selected developing countries (%) source: world bank (2013) typically, migrant people leave their family members behind in their country of origin and support their livelihood with a steady flow of remittances. this implies that remittances transferred by migrant workers directly affect many more people because remitted funds are generally spent on consumption necessities which include food, clothing, shelter, medicine, and education etc. thus, remittances support poor families with a higher level of consumption than would otherwise be possible. in this way, at least on the surface, remittances help reduce poverty. although the empirical literature on the effects of remittance flows on growth appears to be inconclusive, there is a lot of evidence to support the hypothesis that foreign remittances significantly affect poverty and development. imf (2005) found no statistically significant effect of remittances on economic growth. but giuliano and ruizarranz (2005) and ramirez and sharma (2009) found that remittances appear to have positive effects on growth only in countries that possess small financial sectors. chami et al. (2003) and chami et al. (2005) found that remittances and economic growth are negatively correlated. nevertheles, remittances can impact family welfare, poverty and economic development in direct as well as indirect ways. for an example, pant (2008) concludes that remittances may stimulate demand for other goods and services in an economy and consequently impact the economy positively. faini (2003) also suggests a positive relationship between migrant remittances and economic growth. according to hildebrandt and mckenzie (2005), remittances cause knowledge transfer and change in attitudes of the members of the recipient family. yang (2003) economy, 2015, 2(2): 44-48 46 and woodruff and zenteno (2001) concluded that remittances can spur entrepreneurial activity at the household level. lopez cordova (2005) and adams and page (2005) indicated a strong and statistically significant negative impact of remittances on poverty (i.e. remittances help reduce poverty). taylor (1992) and gustafsson and makonnen (1993) discovered that international remittances help reduce both poverty and inequality. adams (2004) also found a similar result and concluded that foreign remittances help reduce the squared poverty gap. 2. methodology this study makes an effort to estimate the impact of remittances on poverty in selected developing countries. we use cross-country panel data to gather enough observations to analyze the remittance-poverty nexus. the ultimate objective of this research is to measure the impact of remittances on ‗poverty headcount‘ ratios, ‗poverty gap‘ at $ 1.25 a day (ppp) and ‗poverty gap‘ at $2 a day (ppp) using a set of panel data starting from 1990 to 2012 for 44 developing countries. in order to test whether the impact of remittances share in gdp is stronger beyond a certain threshold level, a separate analysis is undertaken for 27 countries within the list which have recorded a remittance to gdp ratio of 2% or higher. this paper provides the associated systematic theoretical analysis and robust empirical estimation, using the most accurate and comprehensive remittances data available in the world bank database. we derive a simple set of two simultaneous equations incorporating the remittance variable, and then we perform several estimations for the defined model by implementing the study‘s empirical research on remittances and poverty. one important objective of this study is to trace a relationship between remittances and poverty in the context of selected developing countries. in the econometric model two simultaneous equations are introduced following united nations (2011). in the first equation ‗poverty‘ (poverty headcount ratios, poverty gap at $ 1.25 a day, and poverty gap at $2 a day) is considered as the dependent variable while ‗per capita gdp‘, ‗inequality‘ (gini coefficient), and ‗remittances as a share of gdp‘ are modeled as independent variables (ravallion, 1997). in developing countries poverty trends seem to maintain a robust relationship with the choice of poverty estimates. the ‗poverty headcount ratio (pcr)‘ only measures the percentage value of poverty incidence, but does not say anything about the distance of the poor households from the estimated poverty lines. to overcome this problem and to measure the depth of poverty accurately we need to employ one of the two important tools: the poverty gap (pg) index and the squared poverty gap (spg) index. this pair of distributional sensitive techniques can appropriately estimate the depth of poverty in the population by closely tracking the movement in the headcount ratios. considering the fact that differences in income or consumption between the poor and the poorest group have an important implication for the poverty reality in any developing country, the present study uses both poverty headcount ratio and poverty gap indices. on the other hand, following imf (2007), the second equation captures the determinants of remittances by indicating that ‗remittance‘ (as a share of gdp) is explained by ‗poverty‘, ‗trade‘ (as a share of gdp), ‗education‘ (secondary school enrolment ratio) and lagged values of remittance. hence, the empirical model for this study is obtained as follows: …………..………………...…(1) …(2) where in equation (1), pov stands for poverty, pcy represents per capita gdp, the variable ineq represents inequality in terms of gini coefficient, and remit indicates remittances as a share of gdp. in the second equation, trade stands for the trade openness indicator in the form of the total volume of export and import as a share of gdp, edu represents adult literacy rate which is a proxy for secondary school enrolment ratio and is lagged remittances. in both equations is for error terms where . here is an individual (country) effect, is a time effect, and is independently and identically distributed among countries and years. for this study all the variables are in real terms and the errors are assumed to be independently and identically distributed. in order to take account of the endogeneity problem (that there is a possibility of having a bi-directional relationship within two variables such as poverty and remittance) we estimate through the ‗three stage least squares‘ (tsls) method using two equations, as indicated above (imf, 2007). we assume to be negative because poverty is expected to decline as per capita income rises. on the other hand, literature suggests that greater inequality leads to higher poverty rate; thus is expected to be positive. the proposed model estimates the sign and magnitude of which defines the impact of remittances on poverty. for the above model, is expected to be positive because it is likely that a higher rate of poverty will cause more people to migrate and thus more remittances will be flowing to a certain country. the coefficient is also expected to be positive because the more open an economy is the more amount of remittances it will receive. the reason is that more openness will allow remittances to flow in the country easily; also compared to a less open economy labor mobility also may take place more easily. next, the coefficient of the variable ‗education‘, may take a positive (negative) sign if the situation of the country is in a way that more (less) educated people migrate. finally, the last variable ‗lagged remittance‘ captures the dynamic impact. in the model a log transformation has been adopted for all the variables, which allows us to interpret the coefficients as elasticities. the scope of this paper covers a panel data set from 1990 to 2012 in estimating the specified model. the world bank data bank and world development indicators act as the main source. another source that was also utilized is the international financial statistics (ifs) database. 3. results and discussion the empirical findings of the study are presented below. table 1 shows the statistical estimations for a three stage least squares estimations where the dependent variables, ‗poverty‘ (poverty head count ratio, poverty gap at $ 1.25 a day, and poverty gap at $ 2 a day) and ‗remittances‘ were estimated against six explanatory variables namely ‗per capita gdp‘ (current us $), ‗gini coefficient‘, ‗remittances as a share of gdp‘, ‗lagged remittances‘, economy, 2015, 2(2): 44-48 47 ‗trade as a share of gdp‘ and ‗education‘ (secondary school enrolment rate, %) for the whole sample. table 2 depicts the empirical results for 27 countries that have reported remittances to gdp ratio of 2% or more. the ‗three stages least square‘ estimation results show that remittances have a significant negative impact on poverty gap at $ 1.25 a day but the impact on other measures of poverty is not statistically significant (table 2). in both cases gdp per capita significantly affects poverty negatively at 1% significance level as it was expected. hence, the explanatory variable gdp per capita has a viable effect in poverty reduction. similarly, gini coefficient turns out significantly positive meaning that with increasing ‗inequality‘, ‗poverty‘ also increases. other variables like ‗trade‘ and ‗education‘ are found to have the right signs and to be statistically significant. the impact of poverty on remittances appeared to be statistically insignificant but lagged remittances is found to have a significant impact on remittances. it can be inferred here that countries with higher remittances in the initial year, possibly indicating a higher migrant stock, have higher remittances. however, the study shows better results when the analysis is undertaken for countries with ‗remittances as a percentage of gdp‘ of 2% or more (table 3). remittances are found to have a significant impact on two of the three measures of poverty namely poverty head count and poverty gap at $1.25 a day. this is indicative of the fact that in developing countries remittances have a stronger impact on poverty reduction if they are above the threshold of 2% of gdp. that remittances can reduce poverty in some developing countries has been reflected in the empirical findings of the study; however, the process of how remittances work for poverty cannot be identified. in the short run, remittances lift poor people out of poverty through helping them finance their necessities. but even if the poor receive the remittances, proper use of them is more important for the sustainable reduction of poverty in the context of a developing country. for this purpose, remittances are required to serve as a source of investments. therefore with proper policies, remittances may be channeled to achieve both of these ends. table-1. three stage least squares estimations: dependent variables—poverty and remittances (44 developing countries; 1995-2010) variables dependent variable-poverty hcr at $1.25 a day (ppp)(% of population dependent variable-poverty gap at $1.25 a day (ppp)(%) dependent variable-poverty gap at $2 a day (ppp)(%) phcr remittances pov. g1 remittances pov. g2 remittances per capita gdp(current us $) -0.0013*** (0.0002) -0.0004*** (0.00007) -0.001*** (0.0001) gini coefficient 0.2471*** (0.058) 0.174*** (0.0223) 0.189*** (0.0437) remittances as a ratio to gdp 0.1733 (0.1173) 0.0201 (0.044) 0.119 (0.088) poverty 0.065 (0.0796) 0.118 (0.1797) 0.0792 (0.0997) lagged remittances 6.459*** (0.6268) 6.592*** (0.5754) 6.544*** (0.6434) trade (% of gdp) 0.072*** (0.0122) 0.073*** (0.0136) 0.070*** (0.0126) education 0.124*** (0.024) 0.1231*** (0.0267) 0.125*** (0.0242) constant 0.600*** (3.31) 13.27*** (2.67) -3.501*** (1.294) -13.177*** (3.055) -3.18*** (0.76) -13.29*** (2.714) r square 0.3549 0.6409 0.4439 0.6516 0.3960 0.6438 chi2 102.22 299.68 137.35 315.81 118.04 310.28 table-2. three stage least squares estimations: dependent variables—poverty and remittances (27 countries with remittances as a ratio of gdp as 2% or more) independent variables dependent variable-poverty hcr at $1.25 a day (ppp) dependent variable-poverty gap at $1.25 a day (ppp) dependent variable-poverty gap at $2 a day (ppp) phcr remittances pov. g1 remittances pov. g2 remittances per capita gdp(current us $) -1.1*** (0.09) -1.11*** (0.098) -0.91*** (0.08) gini coefficient 1.67*** (0.41) 2.52*** (0.43) 0.87*** (0.34) remittances as a ratio to gdp -0.53*** (0.096) -0.76*** (0.101) 0.45*** (0.08) poverty 0.064** (0.026) 0.054** (0.026) 0.081** (0.031) lagged remittances 0.97** (0.024) 0.99*** (0.027) 0.97*** (0.024) trade (% of gdp) 0.10** (0.05) 0.103* (0.05) 0.116** (0.54) education -0.013 (0.12) -0.02 (0.11) -0.044 (0.114) constant 2.10*** (0.74) -0.46 (0.27) -0.42 (0.78) -0.17* (0.26) -3.18*** (0.76) -0.167 (0.26) r square 0.6295 0.9592 0.69 0.95 0.61 0.96 chi2 156.47 2146.47 209.93 2132.64 147.14 2204.60 note: in both tables *** ** and * indicate a significant level of 1%, 5%, and 10% respectively. economy, 2015, 2(2): 44-48 48 references adams, j.r., 2004. remittances and poverty in guatemala. world bank policy research working paper, no. 3418. washington: the world bank. adams, r. and j. page, 2005. do international migration and remittances reduce poverty in developing countries? world development, 33(10): 1645-1669. chami, r., c. fullenkamp and s. jahjah, 2003. are immigrant remittance flows a source of capital for development? imf working paper no. 03/189. washington: international monetary fund. chami, r., c. fullenkamp and s. jahjah, 2005. are immigrant remittance flows a source of capital for development? imf staff papers, 52(1): 55-81. faini, r., 2003. the brain drain: an unmitigated blessing? centro studi luca d'agliano development studies working paper no. 173. giuliano, p. and m. ruiz-arranz, 2005. remittances, financial development, and growth, imf working paper. research department, international monetary fund. gustafsson, b. and n. makonnen, 1993. poverty and remittances in lesotho. journal of african economies, 2(1): 4973. hildebrandt, n. and d. mckenzie, 2005. the effects of migration on child health in mexico. world bank 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http://databank.worldbank.org/ddp/home.do [accessed july 2, 2013]. yang, d., 2003. financing constraints, economic shocks, and international labor migration: understanding the departure and return of philippine overseas workers. harvard university, dissertation chapter. views and opinions expressed in this article are the views and opinions of the authors, economy shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. http://www.migrationinformation.org/datahub/ http://databank.worldbank.org/ddp/home.do http://databank.worldbank.org/ddp/home.do median regression analysis of gender-wise income gap in punjab, pakistan economy issn: 2313-8181 vol. 1, no. 1, 15-19, 2014 www.asianonlinejournals.com/index.php/economy 15 median regression analysis of gender-wise income gap in punjab, pakistan muhammad aslam 1 --arslan saeed 2 --saima altaf 3 1,3 department of statistics, bahauddin zakariya university, multan, pakistan 2 govt. science college, multan, pakistan abstract this work is licensed under a creative commons attribution 3.0 license asian online journal publishing group 1. introduction income is the central motivating factor of human activities. according to the classical and modern economists, materialistic life is the game of income earning and spending. according to robbins (1945) “economics is the study of human behavior adopted between unlimited end and scare means”. every human tries to satisfy his end with his scare resources. the main head of resource is income that is the reward of man’s mental and physical effort. income and income related issues are very important for study to a research scholar. the most relevant income related issues are unemployment, inflation, income inequality and poverty etc. income is one of the vast fields of study. so, how much research is made about income or its related issues (development, poverty, inflation, and living standard etc.) is insufficient due to dynamic changes in the world. however, the study of income gap is one of the important areas for the researchers. various researchers have analyzed the income gap in different forms. for instance, falaris (2003) has analyzed the wage differences between males and females at various quantiles of income in panama. machado and mata (2005) have analyzed the wage gap or wage changes over various periods of time in their study. a number of studies have also been conducted about the income gap in pakistan. for example, hyder and reilly (2005) have analyzed the public and private sector wage gap in pakistan. sabir and aftab (2007) have also given the study about dynamism in the gender wage gap. some other important studies are given by ali et al. (1999), ahmad (2000), shahbaz et al. (2007) and cheema and sial (2012) etc. the present article is also about the income related issues focusing the province of punjab in pakistan. we primarily aim to discuss the gender-wise gap in income. however, the impact of area (urban or rural), education, and job type on income of the people of punjab are also being targeted in this study. it is common to use the ordinary least squares (ols) method to estimate the values of dependent variable, depending on different covariates. but sometimes the conditional mean of response variable is not desirable when one wants to obtain a good estimate that satisfies the location and shape properties better than the ordinary mean as found in the ols. koenker and bassett (1978) argued that the ols estimators may be seriously deficient in linear models with non-gaussian errors. they introduced the quantile regression for this situation. the traditional regression analysis is focused on mean. the conditional mean models have certain attractive properties under ideal conditions (assumptions). the conditional mean models have some deficiencies i.e. (a) these models are not extendable for non central location (b) the assumptions of conditional mean modeling are not always met in the real world (c) the conditional mean models do not go beyond location. they do not cover all this paper primarily examines the impact of gender on the monthly income of the working class in punjab, pakistan. the relevant data have been obtained from pakistan labour force survey (2008-9). a special case of quantile regression i.e. the median regression is used for the desired investigation. in addition to gender, the other covariates are marital status, area of residence, level of education, job type and status etc. as in many other regions and countries, the male workers in punjab tend to have higher average income and the income tend to increase with increase in level of education. the workers with permanent jobs earn more as compared to temporary job holders. keywords: income gap, labour force survey, median income, poverty, quantile, quantile regression. http://creativecommons.org/licenses/by/3.0/ economy, 2014, 1(1): 15-19 16 characteristics (like scale, skewness and other higher order properties) of relationship between response distribution and explanatory variables. when we study the distribution of income, it is found to be highly skewed and invites the quantile regression to be used. when the distribution is highly skewed then mean is not good representation of location as median. the conditional median regression model is used in modeling the location and shape of distribution of response variable which is specific type of quantile regression. therefore, in the present study, we aim to use the median regression model. the upcoming section elaborates the structure of such model. we are not the first who are using this approach. many researchers used the same in their studies about income or wages e.g., see buchinsky (1997), tasi and kuan (2003), falaris (2003), machado and mata (2005) among many others. similarly, a number of studies about the income modeling in pakistan can also be found in hyder and reilly (2005) and sabir and aftab (2007) etc.. however, the present work addresses the income gap focusing of the largest province of pakistan i.e. punjab. 2. material and methods our analysis based on the secondary data taken from “pakistan labor force survey” (plfs) 2008-09 conducted by the federal bureau of statistics, pakistan. previously, hyder and reilly (2005), among many others, have also used the plfs data in their research. such data give detailed and comprehensive characteristics of employed persons of age greater than 10 years. in our study, the data of earning persons in punjab consist of 7070 individuals whose monthly incomes are given. 2.1. variables and description for our study, we used the variable as given in table 1. table-1.variables and coding variable notation definition income y natural logarithm of the monthly income of a person. gender g = 1 if a person is male; = 0 if female. age x1 age of a person in years. area x2 = 1 if a person belongs to urban area; = 0, otherwise. marital status x3 = 1 if a person is married; = 0, otherwise. primary education level and training e1 = 1 if a person has primary level education but below middle; = 0, otherwise. middle e2 = 1 if a person has middle level education but below matriculation; = 0, otherwise. matric e3 = 1 if a person has matric level education but below intermediate; = 0, otherwise. intermediate e4 = 1 if a person has intermediate level education but below graduation; = 0, otherwise. graduate e5 = 1 if a person has ordinary graduate level education but below masters; = 0, otherwise. profdeg e6 = 1 if a person has a professional degree in engineering, medicine, computer and agriculture etc.; = 0, otherwise. postgraduate e7 = 1 if a person is postgraduate or has higher degree; = 0, otherwise. training e8 = 1 if a person has received any on/off job training; = 0, otherwise. job status job nature and status j1 = 1 if a person has a permanent job; = 0, otherwise. lsom j2 = 1 if a person is legislator, senior official or manager etc.; = 0, otherwise. professionals j3 = 1 if a person is professional doctor, engineer etc.; = 0, otherwise. tasp j4 = 1 if a person is technician or associate professional etc.; = 0, otherwise. clerks j5 = 1 if a person is clerk; = 0, otherwise. swsmsw j6 = 1 if a person is service worker, sale’s person etc.; = 0, otherwise. safw j7 = 1 if a person is skilled agricultural or fishery worker etc.; = 0, otherwise. ctw j8 = 1 if a person is craft or related trade worker; = 0 otherwise. pmoa j9 = 1 if a person is plant or machine operator or assembler etc.; = 0, otherwise. eo j10 = 1 if a person belongs to elementary occupation; = 0, otherwise. although hyder and reilly (2005) also used the majority of such variables in their studies but we added few variables, displaying the job type and status. 2.2. median regression for the empirical analysis of our study, the relationship between response variable and covariates is established. in statistics, we know that the basic descriptive aspects of any data are location (average) and shape (dispersion). in analysis our concern lies in the both aspects of the distribution of response variable with the connection of covariates effects i.e. how the covariates affect the location and shape of response variable. thus, we chose to use the quantile regression model. the concept of quantile regression has given by koenker and bassett (1978). they have explained the significance of the quantile regression approach when the distribution of response variable is non-gaussian. in economy, 2014, 1(1): 15-19 17 statistics, for non-gaussian distribution the suitable descriptive statistic for location is median rather than mean. so the median regression which is a special case of a quantile regression, gives the estimates of median of response variable distribution with the connection of covariates effects. one more advantage of such regression approach is that it is robust technique in handling the extreme values and outliers. consider a real valued random variable y characterized by the following distribution function, f(y) = prob (y  y), the -th quantile of y is defined as the inverse function q() = inf {y: f(y)  }, where 0 <  < 1. in particular, the median is q(1/2). the -th sample quantile )(ˆ  , which is an analogue of q(), may be formulated as the solution of the optimization problem, ),(min 1     y i n ir where ,10)),0(()(   zizz is usually called the check function. when covariates x are considered, the linear conditional quantile function, )()|(  xxxq  , can be estimated by solving, )(minarg)(ˆ 1   xy ii n i   , (1) for any ).1,0( the quantity )(ˆ  is called the regression quantile. the case 0.5  , which minimizes the sum of absolute residual, is usually known as median regression. for more details and use of the median regression, see koenker and hallock (2001), buhai (2004) , martins and pereira (2004), chen and wei (2005) and aslam et al. (2010) . our model of interest is 3 8 10 0 1 1 1 ( ) ,i i j ji k ki m mi i j k m q y g x e j                       (2) where ( )iq y is the desired  -th quantile of the log-income of the ith individual, i is the random error with zero mean and constant variance and rest are the respective coefficients and covariates defined in table 1. however, for 0.5,  we have the model of interest, the median regression model. 3. results and discussion there are 7,070 individuals of the punjab, whose monthly incomes are given in the data (plfs, 200809). out of 7,070 persons 4,848 (68.57%) belong to the urban and 2,222(31.43%) belong to the rural areas of punjab. there are 85.40% males and 14.60% females. it seems that the working class of men is greater than five times of that of women in punjab. mean age of the respondents is 33.29  12.43(standard deviation: sd). in the data, there are 76.40% literate and 23.6% illiterate persons and this shows that literacy rate in employed community is high. only 32.57% of the individuals have permanent job. the average monthly income is reported to be rs. 8,293.72  8,405.26 (95% c.i: rs. 8,097.76, 8,489.67). the median of monthly income is found to be rs. 6,000. it means than 50% of the working class in punjab earns just rs. 6,000 or below per month. it is noted that the distribution of income is positively skewed the mean is far from median and close to the upper quartile. it is also evident from fig. 1. fig-1.histogram of monthly income from table 2, it is reported that the average income of males and females in punjab are rs. 8,554 and rs. 6,770, respectively (using plfs 2008-9). thus, the average income gap is rs. 1,784 which is also statistically significant. table-2.comparison of average income of males and female gender n mean std. deviation std. err. t p-value male 6038 8554.09 8413.23 108.27 6.32 0.00 female 1032 6770.31 8198.33 255.20 table 3 presents the median regression estimates which are the chief targets of the present study. all the regression coefficients are found to be statistically significant at 1% or 5% level of significance. since the logarithmic income is used in model (2), the coefficients in table 3 are directly interpretable. they merely tell the 0 50000 100000 0 500 1000 1500 income f re q u e n c y economy, 2014, 1(1): 15-19 18 percent change in the median monthly income of an individual in punjab. it is reported if a person in punjab is male he can earn 46.77% more income as compared to female for just being male. in other words, if the 50% of the females in punjab earn monthly income rs. 10,000 then 50% of their male counterparts will earn rs. 14,677. however, when we compare our result with that given in hyder and reilly (2005), this figure is 21.28% for the entire country (using lfs 2001-02). thus, the income gap between males and females almost double in punjab when compared with entire pakistan. being married can increase 9.53% of income and it is evident due to change in the responsibilities after getting married. moreover, if we compare the urban and rural residents of punjab, the gap in income is found to be 9.87%. the urban workers tend to earn more. however, it should be noted that in plfs (20089), the area means the area of residence not the work area so we cannot assess the true income gap between the rural and urban workers. it may possible that a rural resident works in some urban area and vice versa. when we focus on the education level of the workers in punjab, we note expectedly that with the increase in the education, there is increase in the income. professional degree holders earn at highest rate as compared to the others. according to hyder and reilly (2005) , the change in the median income is 6.83% if a person has primary level of education in pakistan. this figure is almost double i.e. 11.35% in punjab. it shows that there are fair available sources of income for low educated persons in punjab as when compared with entire pakistan. if we focus on the job status and nature in punjab, we report that after having a permanent job, the median monthly income can be increased as much as 41.17%. the median income of is legislators, senior officials or managers is at the highest level in punjab. now we elaborate the results of the estimated median regression model with the help of hypothetical information of a working individual of punjab. suppose, if we consider a graduate married male (e5 =1, g =1, x3 =1) worker of age 30 (x1 = 30) who lives in an urban area (x2 = 1) and is a clerk (j5 = 1) on permanent (j1 = 1) basis. the median monthly income of the persons in punjab having such characteristics can be computed to be rs. 11,762. in other words, 50% of the male workers with the above stated characteristics will have monthly income more than rs. 11,762 and 50% less than this amount. if such person is a female then the median income is rs. 7,368. thus, there is a gap of rs. 4,394 between the males and females of the same cadre and status as stated above. 4. conclusion a data set of 7,070 individuals of the punjab, whose monthly incomes are given in plfs (2008-09) is considered. in addition to income, several other variables are included in the study whose impacts are being measured on the monthly income. these covariates are gender, age, marital status, education level and job status etc. it is found that the female labour force participation is very low (14.60%) in punjab. more than 75% of the working class is literate 68.57% belongs to the urban areas. majority of the employers do not have permanent jobs. the average monthly income is reported to be rs. 8,293.72. moreover, 50% of the employees in punjab earn less than rs. 6,000 per month according to the information available in plfs (2008-9). similarly, from the distribution of income, it is depicted that a huge working class has low income. the average monthly income of males and females are reported to be rs. 8,554 and rs. 6,770, respectively (using plfs 2008-9). the males tend to earn rs. 1,784 more income, on average, as compared to their female counterparts in punjab. the median regression analysis has the following main findings: a) a male can increase 46.77% in the median monthly income as compared to working female in punjab; b) the factor of marriage increases 9.53% in the monthly income; c) the people with urban origin can earn 9.87% more; d) permanent job is prime factor in the increase of income. table-3.the median regression estimates variable coef. std. err. t p-value [95% conf. interval] constant 7.1111 0.03821 186.10 0.0000 7.0362 7.1860 age 0.0097 0.0007 13.89 0.0000 0.0083 0.0111 gender 0.4677 0.0207 22.60 0.0000 0.4272 0.5083 marital status 0.0953 0.0185 5.15 0.0000 0.0590 0.1315 area 0.0987 0.0146 6.76 0.0000 0.0701 0.1274 primary 0.1135 0.0488 2.33 0.0296 0.0179 0.2092 middle 0.1758 0.0525 3.35 0.0029 0.0729 0.2787 matriculation 0.2768 0.0521 5.31 0.0000 0.1747 0.3789 intermediate 0.4510 0.0553 8.15 0.0000 0.3426 0.5593 prof. degree 1.0322 0.0682 15.13 0.0000 0.8985 1.1659 graduation 0.5280 0.0316 16.71 0.0000 0.4661 0.5899 post graduation 0.8989 0.0364 24.69 0.0000 0.8275 0.9702 training 0.0634 0.0206 3.08 0.0055 0.0230 0.1037 job status 0.4117 0.0165 24.95 0.0000 0.3794 0.4440 lsom 0.7308 0.0369 19.80 0.0000 0.6584 0.8031 professional 0.4715 0.0376 12.54 0.0000 0.3978 0.5452 tasp 0.2965 0.0322 9.21 0.0000 0.2334 0.3596 clerk 0.3685 0.0372 9.91 0.0000 0.2956 0.4414 swsmsw 0.3087 0.0287 10.75 0.0000 0.2524 0.3649 safw 0.2601 0.0541 4.81 0.0001 0.1540 0.3661 ctw 0.3977 0.0238 16.71 0.0000 0.3510 0.4443 pmoa 0.4673 0.0305 15.32 0.0000 0.4075 0.5270 eo 0.2705 0.0238 11.36 0.0000 0.2238 0.3171 economy, 2014, 1(1): 15-19 19 references ahmad, m., 2000. estimation of distribution of income in pakistan, using micro data. the pakistan development review, 39(4): 807-824. ali, s.s., s. tahir and g.m. arif, 1999. dynamics of growth, poverty, and inequality in pakistan. the pakistan development review, 38(4): 837-858. aslam, m., a. saeed, g.r. pasha and s. altaf, 2010. median regression analysis of body mass index of adults in pakistan. pakistan journal of nutrition, 9(6): 611-615. buchinsky, m., 1997. changes in the u.s. wage structure 1963-1987: application of quantile regression. econometrica, 62(2): 405-458. buhai, s., 2004. quantile regression: overview and selected applications. rotterdam: tinbergen institute and erasmus university. cheema, a.r. and m.h. sial, 2012. poverty, income inequality, and growth in pakistan: a pooled regression analysis. the lahore journal of economics, 17(2): 137–157. chen, c. and y. wei, 2005. computational issues on quantile regression. sankhya, 67(2): 399-417. falaris, e.m., 2003. a quantile regression analysis of wages in panama. department of economics, university of delaware. (mimeographed). hyder, a. and b. reilly, 2005. the public and private sector pay gap in pakistan: a quantile regression analysis. the pakistan development review, 44(3): 271–306. koenker, r. and g. bassett, 1978. regression quantiles. econometrica, 46(1): 33-50. koenker, r. and k.f. hallock, 2001. quantile regression. journal of economic perspectives, 15(4): 43-56. machado, j.a.f. and m. mata, 2005. counterfactual decomposition of changes in wage distribution using quantile regression. journal of applied econometrics, 20(4): 445-465. martins, p.s. and p.t. pereira, 2004. does education reduce wage inequality? quantile regression evidence from 16 countries. labour economics, 11(3): 355-371. robbins, l., 1945. an essay on the nature and significance of economic science. london: macmillan and co. ltd. sabir, m. and z. aftab, 2007. dynamism in the gender wage gap: evidence from pakistan. the pakistan development review, 46(4): 865-882. shahbaz, m., n. aamir and m.s. butt, 2007. rural-urban income inequality under financial development and trade openness in pakistan: the econometric evidence. the pakistan development review, 46(4): 657672. tasi, s.l. and c.m. kuan, 2003. assortative mating and income inequality in taiwan: a quantile regression approach. conference of research committee on social stratification and mobility of the international sociological association. university of tokyo, japan. views and opinions expressed in this article are the views and opinions of the authors, economy shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. economy issn : 2313-8181 vol. 2, no. 1, 16-20, 2015 www.asianonlinejournals.com/index.php/economy * corresponding author 16 fiscal sustainability in the ghanaian economy: a fiscal reaction function approach kugbee s. james 1* --insah baba 2 1 st. francis xavier minor seminary. wa, upper west region, ghana 2 school of business, wa polytechnic, wa, upper west region, ghana abstract this work is licensed under a creative commons attribution 3.0 license asian online journal publishing group contents 1. introduction ............................................................................................................................................................................... 17 2. literature review ...................................................................................................................................................................... 17 3. theoretical framework and methodology ............................................................................................................................. 18 4. results and discussion .............................................................................................................................................................. 18 5. conclusion .................................................................................................................................................................................. 20 references ...................................................................................................................................................................................... 20 fiscal policy sustainability has been a major concern in ghana with an increasing debt situation. this has led to the government of ghana seeking a bailout from the international monetary fund. the objective of this research is to determine the role of budget deficits on the growth of debt. it will also evaluate the current fiscal stance on sustainable economic growth. this is achieved by testing a fiscal reaction function for the ghanaian economy based on the intertemporal budget constraint. the estimation was performed using the ordinary least squares (ols) estimation technique. stationarity test for the variables was conducted using the augmented dickey-fuller tests. the results point to a high degree of inertia present in government behaviour when it sets its primary balance. an increase in past primary deficit leads to an increase in current primary deficits. also increase in debt has a significant and positive influence on primary balance. the study thus recommends that government should cut down on borrowing to finance its deficits. keywords: primary balance, debt, fiscal sustainability, intertemporal budget constraint, deficits, fiscal policy. jel classification: e60, e61, e62. http://creativecommons.org/licenses/by/3.0/ economy, 2015, 2(1): 16-20 17 1. introduction sustainability of fiscal policy emerged as a major economic issue in ghana following the high levels of debt experienced in the 1980s. ghana is ranked among the most heavily indebted poor countries (hipc) in the world. the country’s high public debt and debt servicing impairs the capacity of the economy to achieve desired growth and development. ghana, like other developing countries, has encountered several fiscal challenges. observably, the level of government spending has been higher than government domestic revenue. the higher spending relative to revenue stems from the fact that various governments desire to increase and enhance the socio-economic wellbeing of her people. the resulting fiscal deficits have been resolved by both domestic and external financing. further, the domestic financing of the deficits have usually come from banking and non banking sectors. ghana has secured various forms of external financing to supplement domestic sources (indermit and brian, 2005). for instance, there was an issue of us$ 750 million sovereign bond that ghana secured in 2007, and that increased ghana's debt. also, ghana has obtained loans, both from bilateral and multilateral sources for development. ghana’s total outstanding external debt stock at the end of september 2012 stood at us$7,843.2 million. and total outstanding external debt stock at the end of june 2013 stood at us$9,342.9 million and constituted 20.5 per cent of gdp (bank of ghana, 2013). total revenue and grants for the year 2011 was gh¢12,851.56 million (22.8% of gdp) and total government expenditures amounted to gh¢13,379.98 million (23.8% of gdp). the main objective of this study is to determine the role of budget deficits on the growth of debt. it will also evaluate the current fiscal stance on sustainable economic growth. the rest of the paper is organized as follows: section two is the literature review. the theoretical framework and methodology is in section three. section four is the discussion of results. lastly section five is the conclusion to the study. 2. literature review 2.1. intertemporal budget constraint the literature has proposed several definitions for fiscal sustainability. the requirement that the tax rate should not rise forever is one of the first definitions of sustainable fiscal policy. balassone and franco (2000) have noted that theory has proposed different conditions for sustainability. employing domar’s model, they derived a necessary condition for sustainability: an ever-growing tax ratio cannot be sustainable. blanchard (1990) noted that sustainability is about whether current fiscal policies of governments leads to excessive debt accumulation. operationalising this, blanchard defines sustainable fiscal policy as a policy that ensures that the ratio of debt to gdp converges back towards its initial level. in a similar vein, buiter (1985) calls a fiscal policy sustainable if it maintains the ratio of government net worth to gdp at the present level. apart from the statistical point these definitions are essentially the same. by this net worth, buiter explicitly recognises that the government may temporarily keep its gross debt from rising by using its assets to finance the deficits. 2.2. fiscal rules: definitions and application different definitions by different authors have being provided for fiscal rules. notably, all definitions implied a constraint of fiscal policy actions over time (kopits and symansky, 1998; kell, 2001; buti and giudice, 2002; milesi-ferretti, 2003; drazen, 2004; kopits, 2004; siebrits and calitz, 2004). several other authors view fiscal rules as restrictions on budget deficits, the level of public debt or government expenditure. differences do exist as to whether rules should be permanent or could also include temporary restrictions and whether rules should be contained in policy statements or also encoded in law. 2.3. other analytical tools as noted, the intertemporal budget constraint is not the only analytical tool available for testing fiscal sustainability. a chain of the literature identifies sustainability with the dynamic stability of the public debt/gdp ratio around a constant steady state (masson, 1985; tobin, 1986; zee, 1988; blanchard et al., 1990). this definition has a lot more intuitive appeal than the solvency requirement if paths of the public debt/gdp ratios are ruled out. nevertheless, the dynamic stability approach was criticized because of its simplicity. in its simplest form it implies that any constant path of the public debt/gdp ratio is sustainable, be it at high or at low levels. 2.4. fiscal reaction functions bohn (2007) proposes a fiscal reaction function approach as favourable to measure fiscal sustainability. he asserted that this was backed by economic intuition pointing to studies that follow a fiscal reaction function. several other studies have used this specification to establish a systematic relationship between the primary surplus and public debt in the us economy. bohn (1998) used a multiple regression technique and found that the fiscal authorities responded to positive debt dynamics with increases in primary deficit. bohn (1998) found a positive and statistically significant coefficient for the usa in the 20 th century and concludes that policy-makers eventually reacted to the accumulation of large debt positions over this period of time. employing the same methodology, wyplosz (2006), staehr (2008) using european datasets found some evidence of a positive feedback from the debt stock to the primary balance. piergallini and postigliola (2012) find that the primary balance in italy has exhibited a positive reaction to the debt stock and argue that this suggests that politicians have taken corrective measures to ensure the sustainability of public finances in italy. furthermore, estimating a fiscal reaction function for brazil using monthly data, de mello (2008) finds that the primary balance reacts positively and strongly to the lagged debt stock. estimating a fiscal reaction function for greece, stoica and leonte (2011) asserted that business cycle and public debt affect fiscal policy variables in a economy, 2015, 2(1): 16-20 18 statistically insignificant manner. they concluded that fiscal policy conduct is a cause of the difficult macroeconomic situation facing greece. 3. theoretical framework and methodology 3.1. theoretical framework fiscal reaction functions can be estimated using historical data, linking primary balance to the stock of debt in the previous period, business cycles and random shocks. the resulting feedback parameter is typically of order of magnitude of the real rate of interest. following bohn (1998), gali and perotti (2003), the specification of fiscal reaction function is based on the government's intertemporal budget constraint: deficit g t b m     (1) ( , )pb f debt controls (2) ( ,inf ,exchange rate )pb f debt lation (3) where inflation and nominal exchange rate are the control variables. the primary balance denoted by pb is used to represent the deficit. this is to capture the real effects of the deficit. in econometric specification, the fiscal reaction function can therefore be estimated by regressing the primary balance on the public debt, both defined in percent of gdp while controlling for other determinants of fiscal stance. this leads to equation (4) as (4) where pb is primary balance, alpha pb(-1) is the inertia, debtt-1 is previous years debt, and inflt is inflation and exct is exchange rate and t is the error term. 3.2. data and methodology 3.2.1. description and sources of data the data used for this study consisted of annual observations. this study will focus on fiscal and macro indicators to address national solvency issues. the study considers a period of thirty-two (32) years. the period of study will span from 1980 – 2012. data was gathered from bank of ghana, international finance statistics (ifs), and ministry of finance and economic planning. 3.2.2. estimation technique the time series property of ghanaian fiscal variables was examined concentrating on unit root and stationary tests. the eviews 7 software was used. this employs the augmented dickey-fuller tests. the ordinary least squares (ols) technique was also used for the research. 4. results and discussion 4.1. summary characteristics of variables a survey of the data used indicates that the an average and maximum of debt of 75 percent and 186 percent respectively. primary deficit averaged about 9 percent for the study period. this is shown in table 1. table-1. summary characteristics of variables exr inf debt pb mean 4855.863 29.55606 75.77576 -9.193076 median 1740.400 24.00000 59.20000 -8.702520 maximum 18800.00 123.0000 186.2000 0.600000 minimum 2.750000 8.720000 22.10000 -22.72368 std. dev. 5697.718 26.58079 41.49915 6.591897 source: authors’ construct the economy of ghana continued to incur debt from the period of this study with the highest debt incurred in the year 2000. this shown in figure 1 of panel a. the primary balance is expressed as a percentage of gdp to show the portion of government net borrowing on its gdp. from the period of this study, government has had a positive primary balance in 2000. the highest negative primary balance was 2008 and lowest being 2010. this is shown in figure 2 of panel a. panel a. trend of debt and primary balance as percentage of gdp figure-1. trend of debt as percentage of gdp source: author’s construct 0 1 2 1 3 4( 1)t t t t tpb pb debt infl exc            economy, 2015, 2(1): 16-20 19 figure-2. trend of primary balance as percentage of gdp source: authors’ constuct 4.2. stationarity characteristics of the variables the output of the unit characteristics using the three tests for stationarity of the variables shows that a good number of the variables are non-stationary with intercept capturing the nonzero mean under the null hypothesis. all variables are i(1), i.e. first difference stationary. the end result from this is that the variables require differencing for non spurious regression results. these are shown in table 2. table-2. results of unit root tests level first difference variable constant constant+trend constant constant+trend adf test constant pb(-1) debt infl exc -0.203538 -.539703** -4.1809* -2.706472 -3.34828** -2.615013 -5.771691** -2.8272 -2.452627 -1.019061 -4.923343* -8.861007* 5.3568* -4.283916* -3.3876** -5.015405* -8.720161* -6.5331* -4.936339* -4.597623* phillipsperron test constant pb(-1) debt infl exc 0.417881 -.546394** -4.4138** -4.745990* -6.018198* -2.529251 -6.109341** -2.835 -0.762661 -0.619586 -5.032743* -25.85766* -5.3415* -4.271993* -3.37753** -5.317066* -26.00035* -10.008* -5.213958* -4.575915* kpss test constant pb(-1) debt infl exc 0.638315* 0.235414* 0.7302* 0.740422* 0.725868** 0.075237 0.216892* 0.187* 0.180728** 0.190287** 0.169752 0.500000** 0.5883 0.28778 0.493713 0.106743 0.500000** 0.0897 0.206662 0.157376 adf and pp: null hypothesis is that the variable being examined is non-stationary. kpss: null hypothesis is that the variable being examined is stationary. * and ** denotes statistical significance at 1% and 5% levels, respectively source: authors’ construct 4.3. regression results the estimate for the parameter of the lag of the primary balance is 0.546. this is positive and larger than 0.50 and positive. the meaning is that when past primary deficits increase by 1%, primary balance would increase by 0.55 in the current year. in general, these results point to a high degree of inertia present in government behaviour when it sets its primary balance. this finding supports that of stoica and leonte (2011) for the greece economy. also burger et al. (2011) had similar results for south africa. it can also be seen from the table that the primary balance is significant at the one percent level, while the debt is significant at the five percent level. it is revealed that when debt increases by 1%, primary balance would increase by 0.04. this finding agrees with stoica and leonte (2011) in their study for the greece economy who found a similar result. it is also evident that the set of non-fiscal variables in the study have also had a relatively significant impact on economic growth. the results of the estimates are presented in table 3. table-3. ols regression results dependent variable: pb coefficient t-statistic constant 0.039913 (2.477970) 0.016107 pb(-1) 0.546438* (0.152760) 3.577091 debt -0.042474** (0.022170) -1.915813 exc -0.000208 (0.000185) -1.125290 infl 0.006589 (0.035051) 0.187994 adjusted r-squred = 0.54*, and * and ** denote 1% and 5% levels of significance respectively. figure in ( ) indicates standard error. source: authors’ construct economy, 2015, 2(1): 16-20 20 5. conclusion debt increases and debt accumulation has been a major economic issue the government of ghana is dealing with. a bailout package has been sought to salvage ghana’s economic challenges. the study sought to determine the role of budget deficits on the growth of debt. it will also evaluate the current fiscal stance on sustainable economic growth. annual time series data from 1980 to 2012 was used for the research. a fiscal reaction function based on the intertemporal budget constraint was estimated using ols technique. the augmented dickey-fuller method was used to test for the stationarity of the variables. the results suggested a high degree of inertia present in government behaviour when it sets its primary balance. that is, past primary deficits have a positive and significant influence on current primary balance. exsisting studies as indicated in the literature find support for the greece economy in study by stoica and leonte (2011). also burger et al. (2011) researching for the south african economy had similar results for south africa. further, the primary balance is significant at the one percent level, while the debt is significant at the five percent level. it is revealed that when debt increases by 1%, primary balance would increase by 0.04. this finding is also supported by with stoica and leonte (2011) in their study for the greece economy. the study therefore recommended the reduction in the size of government and also to resort to alternative sources of financing expenditures rather than resorting to debt. references balassone, f. and d. franco, 2000. assessing fiscal sustainability: a review of methods with a view to emu. in fiscal sustainability ed. bank of italy: 21-60. bank of ghana, 2013. annual report. available from www.bog.gov.gh/privatecontent/publications/annual_reports/bogannualreports_2013_webquality.pdf [accessed october 10, 2014]. blanchard, o., j.c. chouraqui, r.p. hagemann and n. sarto, 1990. the sustainability of fiscal policy: new answers to old question. oecd economic studies, 15(autumn): 7-36. blanchard, o.j., 1990. suggestions for a new set of fiscal indicators. oecd economics department working paper no. 79. bohn, h., 1998. the behaviour of us debt and deficits. quarterly journal of economics, 113(3): 949-963. bohn, h., 2007. are stationarity and cointegration restrictions really necessary for the intertemporal budget constraint. journal of monetary economics, 54(7): 1837-1847. buiter, w.h., 1985. a guide to public debt and deficits. economic policy, 1(november): 13-79. burger, p., i. stuart, c. jooste and a. cuevas, 2011. fiscal sustainability and fiscal reaction function for south africa. imf working paper no. wp/1169. buti, m. and g. giudice, 2002. maastricht’s fiscal rules at ten: an assessment. journal of common market studies, 40(5): 823-848. de mello, l., 2008. estimating a fiscal reaction function: the case of debt sustainability in brazil. applied economics, 40(3): 271-284. drazen, a., 2004. fiscal rules from a political economy perspective in g. kopits (eds). rules-based fiscal policy in emerging markets: background, analysis and prospects. united kingdom: palgrave (macmillan), houndmills. gali, j. and r. perotti, 2003. fiscal policy and monetary integration in europe. cepr discussion paper no. 3933, centre for economic policy research, london. indermit, g. and p. brian, 2005. public debt in developing countries: has the marketbased model worked? world bank policy res. working paper no. 3674. kell, m., 2001. an assessment of fiscal rules in the united kingdom. imf working papers no. 01/91. washington, dc: international monetary fund. kopits, g., 2004. overview of fiscal policy rules in emerging markets in g. kopits (eds). rules-based fiscal policy in emerging markets: background, analysis and prospects. united kingdom: palgrave (macmillan), houndmills. kopits, g. and s.a. symansky, 1998. fiscal policy rules. imf occasional paper no. 162. washington, dc: international monetary fund. masson, p., 1985. the sustainability of fiscal deficits. imf staff papers, 32(4): 577-605. milesi-ferretti, g.m., 2003. good, bad or ugly? on the effects of fiscal rules with creative accounting. journal of public economics, 88(1-2): 377-394. piergallini, a. and m. postigliola, 2012. fiscal policy and public debt dynamics in italy, 1861-2009. ceis research paper. no. 248, tor vergata university, ceis. siebrits, f.k. and e. calitz, 2004. should south africa adopt numerical fiscal rules? south african journal of economics, 72(4): 759-783. staehr, k., 2008. fiscal policies and business cycles in an enlarged euro area. economic systems, 32(1): 46-69. stoica, t. and a. leonte, 2011. estimating a fiscal reaction function for greece. international conference on financial management and economics, ipedr vol.11, iacsit press, singapore. tobin, j., 1986. the monetary-fiscal mix: long-run implications. american economic review papers and proceedings, 76(2): 213-218. wyplosz, c., 2006. european monetary union: the dark sides of a major success. economic policy, 21(46): 207-261. zee, h.h., 1988. the sustainability and optimality of government debt. imf staff papers, palgrave macmillan, 34(4): 658-685. views and opinions expressed in this article are the views and opinions of the authors, economy shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. http://www.bog.gov.gh/privatecontent/publications/annual_reports/bogannualreports_2013_webquality.pdf economy issn: 2313-8181 vol. 1, no. 2, 32-36, 2014 www.asianonlinejournals.com/index.php/economy 32 basic food and health security: a cross country look william r. dipietro 1 1 professor of economics daemen college usa abstract this work is licensed under a creative commons attribution 3.0 license asian online journal publishing group 1. introduction for human beings, as well as other life forms, nothing is more important than survival. the physical bodies in which are souls dwell are very vulnerable and extremely demanding. they are readily subject to disease and illness, to life changing accidents and attacks from others, and constantly require food and water for operation and maintenance. before higher level needs come into play, and individuals can differentiate themselves to live meaningful and productive lives and become truly human, they must have real security with regard to attainment of their basic and fundamental needs. the purpose of this paper is to consider some of the reasons that may account for differences in food security, health security, and general social security across countries. it is hypothesized that the main drivers of basic security attainment in a country are the level of economic development and the amount of actual democracy. the paper is divided into five sections. the first section reviews some of the recent articles on basic human needs security. the second section provides a little model of basic human needs security. the third section identifies the sources of the variables that are used in the regression analysis. the fourth section presents, discusses, and analyzes the results of cross country regressions that look at food security, health security, and overall social security. the final section wraps-up the article and provides a few policy suggestions. 1.1. some recent literature minkler and sweeney maintain that human rights are essentially interdependent and indivisible (minkler and shawna, 2011). in their article, they provide a comprehensive literature review of the empirical studies of the determinants of human rights and develop a composite human rights index based on both subsistence and security rights. they use the index as a dependent variable in regressions on a sample of developing countries for cross section and pooled cross section data for the years 1997 to 2005. in the regressions, after adjusting for population size, and for internal and international conflict, they consider wealth, legal origins, democracy, globalization, and endorsement of international covenants as potential drivers of basic human rights. they find that gdp per capita is a strong predictor of human rights, that different measures of democracy are relevant, that trade openness matters, but not foreign direct investment, and that endorsement of international covenants may have some bearing. assuming, in line with the united nations, that governments truly have food security as a goal, adeyemi, ljaiya, ljaiya, and ljaiya discuss various ways in which national governments can increase food security (adyemi et al., 2009). among others, they feel that these should include the creation of an environment in which individuals are able to provide for their own food needs, and for the provision of food in emergencies. the authors also consider potential determinants of food security by running a single regression for food security on a large number of regressors (fourteen) for forty eight countries in sub-saharan africa for 2003. surprisingly, their regression indicates that higher population leads to greater access to food, and, using a dummy variable for the presence of democratic values, that democratic values seem to have a negative effect on food access. this paper uses cross country regression analysis to see whether the level of economic development and the extent of democracy are prime determinants of basic food, health, and general social security. it also considers whether the size of government and globalization matter, and, if so, whether positively or negatively, for the fundamental security needs of people. the findings of the paper indicate that both development and democracy are positive forces for the fulfillment of basic human security needs. keywords: food security, heath security, overall social security, level of economic development, democracy, productivity growth. http://creativecommons.org/licenses/by/3.0/ economy, 2014, 1(2): 32-36 33 misselhorn does a meta-analysis on forty-nine local household case studies for southern africa (misselhorn, 2004). her study not only tries to identify food security drivers, but also the extent a driver's impact is on food access versus production, and whether a driver is short-term as opposed to long-term or chronic . she finds that environmental conditions and poverty are the two most frequently cited direct drivers of food insecurity in the case studies, that seventeen drivers account for the eighty percent of the total direct driver citations in the case studies, and that poverty, environmental conditions, and social conflict are important indirect drivers of food insecurity. with regard to health security, headey focuses on socioeconomic variables to explain changes in malnutrition in countries over time (headey, 2012). employing a •cross section of countries that treats each indian state as a country, and using the change in stunting over a five year period as the dependent variable .in his regressions, his empirical analysis shows that economic growth, growth in food production, asset accumulation, greater female education, and reduced fertility appear to be statistically significant factors for reducing stunting. de muro and burchi hypothesize a relationship between food security of rural people in poor countries, the category of people most vulnerable to food insecurity, and the extent of their education (de muro and francesco, 2007). they create two indices of food security based on different weighting of survival, nutritional, and female malnutrition status, and use household survey data on forty eight developing countries, from surveys conducted for different years for different countries from 1995 to 2004, for their statistical analysis. in their regressions they find that primary education, school attendance of rural children aged six to ten, is a key determinant of rural food security for rural people in poor countries, and that, two of their control variables, assets and sanitation are also important. akramov, yu, and fan test the notions that mountain countries, mountainous environments, are more subject to food insecurity, and that food security in mountains countries is more sensitive to external shocks (akramov et al., 2010). in their empirical analysis using an unbalance panel consisting of one hundred thirty two developing countries, they employ daily per capita calorie intake as a measure of food insecurity, and find support for both propositions. their regressions show that a whole host of variables, road density, income per capita, population, arable land per capita, and percentage of trade to gdp have a positive and significant effect on food security, but that ethnic fractionalization has a negative effect. their chow tests on the parameters of the various explanatory variables indicate that, in general, mountainous countries food security is more responsive to individual determinants of food security than non-mountainous countries . sekhampu uses binary logistic regression on survey data for an individual township in south africa from a survey he conducts in 2012, and finds that household size has a negative effect on food security, household income, age of head of household, and gender (female head of household) have positive effects, and that education does not seem to matter (sekhampu, 2013). jeanty and hitzhusen concentrate their efforts on estimating the potential effect of civil wars and conflicts on food security (jeanty and fred, 2006). their regressions of battle deaths per thousand (their measure of conflict) on food security on a panel of seventy three countries from 1970 through 2002 show a negative and significant effect of conflict on food security when using instrumental variables to account for simultaneity bias. 2. a model for basic security satisfaction the model consists of an individual equation with the same functional form for each basic security. the equation is as follows. s = f(e,d, c) δs/δ e>o, δs/ δ d>o in the equation, s designates a basic security such as food security, health security, or overall social security, e stands for the level of economic development, d is the amount of democracy, and c for a set of control variables. in words, the model simply states that the fulfillment of a basic security need depends on the level of economic development, the extent of democracy, and a set of control variables, and that security in a need is positively related to level of economic development and the extent of democracy . two things are likely to be vital for determining the extent that basic security needs are met in a country. the first is the ability of a country to provide for the needs of its citizens. the second is the will or desire of those having command over resources in a country (those who are in power) to provide these needs. countries with higher levels of economic development have a greater productive capacity, and therefore a greater ability to care for their peoples. thus it is expected that higher levels of economic development, ceteris paribus, lead to greater food and health security. the form of government, on the other hand, is what really matters with regard to country leaders making decisions that are in line with the needs of ordinary people in a country. the more democratic a country is, the greater the influence of the people on their leaders through democratic processes such as voting, criticism, and legitimate protest, and the more sensitive and responsive leaders with be (must be if they want to stay in office) to the desires of the people. thus, it is anticipated that there is a positive relationship between the satisfaction of basic security needs and the extent of democracy in a country. three variables are considered as control variables. they are productivity growth, the size of government, and the extent of globalization. productivity growth is expected to be a positive force for satisfying security needs. improvement in a countries ability to produce places a country in a better position to satisfy needs of its citizens. an increase in output due to productivity growth has multiple uses, one of which is greater basic need fulfillment. the two other variables, the size of the government and the extent of globalization are added as control variables because their signs are of special interest and have major policy implications. most everyone would like to know whether or not bigger government leads to greater fulfillment of basic human needs and whether or not globalization is or is not harmful to human need security. economy, 2014, 1(2): 32-36 34 3. sources for variables the measure of food security is the food security index from the 2010 human security index data set (human security index, 2010). similarly, health security is captured by using the health security index from the same source, and, a measure of overall social security, by using their social fabric index . for the 232 countries for which the data is available, the food security index ranges from 0 to .960, the health security index from .157 to .905, and the social fabric index from .172 to .793. the social fabric index is a fairly comprehensive measure of human security in the social arena as it based not just on the food security and the health security, but also on indexes for diversity, peacefulness, information empowerment, and quality of governance. the variable employed to measure the level of economic development is real gdp per capita in 2000 u.s. dollars for the year 2005 . the data source for the variable is the world bank (world bank, 2011). democracy is quantified with the economist democracy index for 2008 of the economist's intelligence unit (the economist, 2008). the index has a potential value between zero and ten. productivity growth is the percentage change in real gdp per worker from the year 2000 to 2010 in which real gdp per worker is defined as purchasing power parity converted gdp chain per worker at 2005 constant prices. the data for real gdp per worker for each of the years comes from the heston, summers, and aten's penn world data set (heston et al., 2012). the percentage share of government consumption to gdp for 2005 is used to measure government size and the percentage of trade to gdp for 2005 to quantify globalization. the numbers for both variables are from the world bank (world bank, 2011). 4. regressions for food security, health security, and total social security table i shows the results of cross country regressions on the level of economic development, democracy, and other variables. table-1.cross country regressions of food security index on the level of development and other variables (1) ( 2) (3) (4) (5) constant .3989 .2107 .1550 .0558 -.0005 ( 22 .93) (4.94) (-.01) * * * development .0000104 .0000089 .0000102 .0000100 .0000090 (8.03) (5.26) (6.16) (6.18) (5.36) * * * * * democracy .0335 .0339 .0287 .0303 (4 .16) (4 .40) (3.72) (3.94) * * * * productivity .0015 .0021 .0020 growth (3.80) (5.11) (4.87) * * * govtiogdp .0074 .0074 ( 2.81) (2 .84) * * tradetogdp .0006 (2 .36) * * rsq .264 .381 .437 .482 .502 n 182 159 158 152 151 the table is set up with the first column listing the potential explanatory variables. the five remaining columns show the outcomes of an individual regression runs. these are numbered in the first row. when a variable enters an equation, the top value in the row for the variable and the equation's column is the estimated coefficient value for the variable in that equation. the individual t-statistic is underneath the estimated coefficient. it is in parenthesis. asterisks under the t-statistics are used to provide quick identification of the level of significance of variables in the equations. fewer asterisks indicate greater level of significance. a single asterisk indicates significance at the one percent level of significance or better, two asterisks, significance at the five percent level of significance or more, and three asterisks, significance at the ten percent level of significance or greater . the r-squared values for the equations can be found in the second to last row of the table. finally, the last row shows the number of countries entering the regressions. table i contains five equations. starting with the first equation which only contains a single explanatory variable, the level of economic development, they each sequentially add, in a cumulative fashion, a single additional explanatory variable, democracy in equation two, productivity growth in equation three, government spending to gdp in equation four, and trade to gdp in equation five. therefore, the fifth equation contains all five of the explanatory variables. the results are very consistent with the hypothesis that greater levels of economic development are favorable for food security, and the hypothesis that greater democracy is a boon to food security. the level of economic development is positive and significant at the one percent level of significance or better in all five equations, and democracy is positive and significant at the one percent level or greater in the four equations that it enters. together, economic development and democracy when used in conjunction with no other explanatory variables explain over thirty eight percent of the cross country variation in the food security index (equation (2)). the statistical evidence also indicates that productivity growth, government size, and globalization are positive for food security. productivity growth is positive and significant at the at the one percent level of significance in the economy, 2014, 1(2): 32-36 35 three equations that it enters (equations (3), (4) & (5)). government expenditure to gdp, the measure of government size, is positive and significant at the one percent level of significance or greater in the two equations that it appears (equations (4) & (5)). lastly, trade to gdp, the measure of globalization, is positive and significant at the five percent level of significance or better in the fifth equation, the only equation that it enters. table ii shows the same set of regressions as table i using the health security index as the dependent variable instead of the of the food security index. the table is set-up in analogous fashion to table i. the results for health security are similar to those for food security. once again, just as for food security, development and democracy are favorable for health security. once again, productivity growth, government size, and globalization are also positive for health security. table-2.cross country regressions of health security index on the level of development and other variables (1) ( 2) (3) (4) (5) constant .6287 .4661 .4522 .4047 .3604 (52.28) (16.13) (14 .75) (10.30) (8.56) * * * * * development .0000084 .0000060 .0000063 .0000059 .0000051 (9.37) (5 .12) (5.36) (5.13) (4.29) * * * * * democracy .0314 .0313 .0289 .0303 (5.78) (5.77) (5.28) (5.57) * * * * productivity .0004 .0007 .0006 growth (1.37) (2.29) ( 2.01) * * ** govtiogdp .0039 .0038 ( 2.06) ( 2.07) * * ** tradetogdp .0005 ( 2.64) * rsq .328 .452 .460 .478 .502 n 182 159 158 152 151 next, the same set of regressions is run using the social fabric index, the overall measure of social security, as the dependent variable in the regressions. the results are presented in table ill. just as in the case when the food security index is employed as the dependent variable, and the case when the heath security index is employed as the dependent variable, when the social fabric index is used as the dependent variable, the level of development, democracy, and the other variables are positive and statistically significant forces for overall social security. table-3.cross country regressions of social fabric index on the level of development and other variables (1) ( 2) (3) (4) (5) constant .5439 .3818 .3616 .3151 .2740 (60.90) (20.70) (18.98) (13.11) (11.00) * * * * * development .0000086 .0000065 .0000070 .0000067 .0000060 (12.92) (8 .89 ) (9.65) (9.57) (8.48) * * * * * democracy .0303 .0304 .0278 .0291 (8.73) (9.02) (8.29) (9.00) * * * * productivity .0006 .0007 .0007 growth (3.15) * (4.23) ( 3.91) * * govtiogdp .0039 .0039 (3.41) ( 3.52) * ** tradetogdp .0004 ( 4.01) * rsq .481 .682 .704 .728 .755 n 182 159 158 152 151 strictly speaking, the index for food security, health security, and overall security, are limited dependent variables, so that the assumption of normality in the error term is violated and there is a problem with the test statistics using ordinary least squares (the errors also tend to be subject to heteroskedasticity). to address these concerns, interpreting each of the three securities indexes as probabilities, regressions of the log of the odds ratio, instead of the indexes themselves, were re-run on the independent variables. the results for the regressions (not shown) of the log of the odds ratio on each of the security indexes in terms of the signs and statistical importance of the various independent variables is similar to the results of the regressions in tables i, ii, and iii. economy, 2014, 1(2): 32-36 36 5. conclusion based on the findings of the paper, it appears that a primary way to improve the basic security needs of people in a country is to promote economic growth and development and to take measures to insure that government is responsive to the needs of its people. it also appears, with regard to satisfying people's fundamental needs, that bigger government is generally better, and that there is little reason to fear globalization , as it seems to be favorable for basic security needs. humans are creatures of hope. as human beings we have the capacity to endure almost any situation as long as there is hope that it will be alleviated. there appears to be hope for higher basic security achievement from greater economic development. the paper shows that higher levels of development are associated with greater satisfaction of fundamental security needs. and, any cursory look at the evidence certainly indicates that it is possible for countries to move from being poorer to being richer. countries that were at low levels of economic development in the recent past such as the asian tigers, china, and india, have already either achieved a high level of development or are well along the path of making a transition to higher levels of economic development. there is also hope with regard to government. human beings ultimately decide the form of government. it may be very difficult, it may even take a revolution, but human beings can change a government to make it more responsive to the basic security needs of the people. references adyemi, s.i., g.t. ljaiya, m.a. ljaiya and b.l. ljaiya, 2009. determinants of the right of access to food in sub-saharan africa . african journal 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[accessed june 20, 2011]. views and opinions expressed in this article are the views and opinions of the authors, economy shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. http://www.bioline.org.br/abstract?id=nd09052 http://www.ifpri.org/sites/default/files/publications/ifpridp00989.pdf ftp://ftp.fao.org/docrep/fao/010/a1434e/a1434e.pdf http://www.humansecurityindex.org/?page_id=28 http://ageconsearch.umn.edu/bitstream/21483/1/sp06je04.pdf http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0cciqfjaa&url=http%3a%2f%2fwww.researchgate.net%2fpublication%2f222814543_what_drives_food_insecurity_in_southern_africa_a_meta-analysis_of_household_economy_studies%2ffile%2f9c96052a75c2b0406c.pdf&ei=k_o_u7wihtcsyasayodqbg&usg=afqjcnfwmioqguplvgjvw1qfmxgcdkeba&bvm=bv.70810081,d.aww 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2. theoretical backgrounds .......................................................................................................................................................... 12 3. empirical analysis .................................................................................................................................................................... 12 4. further analysis ........................................................................................................................................................................ 13 5. conclusions ................................................................................................................................................................................ 14 references ...................................................................................................................................................................................... 15 demand for money has been discussed a lot from the past both in the theoretical and in the empirical fields of economics. in japan, low or almost interest rates has been prevailed and there has been a strong demand for japanese government bond, so there is possibility that money demand has been changed and been apart from traditional one. also, exchange rates against japanese currency and stock prices have fluctuated largely recently due to the introducing unprecedented financial policy from the 2000s. they might have affect macroeconomic variables and money demand function. empirical evidence show that demand for money is affected by real gdp, prices, and exchange rates, and is also stable, however, stock prices have not impacts on demand for money. keywords: demand for money, exchange rate, financial policy, japan, stock. http://creativecommons.org/licenses/by/3.0/ economy, 2015, 2(1): 10-15 11 1. introduction demand for money has been discussed a lot from the past both in the theoretical and in the empirical fields of economics. in japan, low or almost interest rates to combat deflationary pressure has been ongoing from the end of 1990s, also, exchange rates against main foreign currencies and stock prices have fluctuated largely, and there has been a strong demand for japanese government bond, so there is possibility that money demand has been changed dramatically and has been a different one from a traditional one. the bank of japan (boj), as the central bank of japan, conducts financial policy with the goal of keeping price stable from the past. price stability is thought to be important because it is considered to be the foundation of economic activity. the main operating target of the boj’s financial policy changed from the uncollateralized overnight call rate (interbank interest rate) to the outstanding balance of the current account held at the boj as the interest rates in japanese financial markets have been almost zero from the beginning of the 2000s. at the end of 2001, the boj raised the outstanding balance of the current account at the boj. this objective can be perceived from the one that the holding a level of reserves at the boj would transmit into lending capital to the economy and removal of deflationary pressures. under this quantitative easing policy, the boj purchased government bonds to reach its target of current account balances held by financial institutions. the boj, as interest rates were at the lower bound of zero, set a goal to purchase government securities from the financial institutions and to raise the level of cash reserves held by private banks. this was called unconventional financial policy. since then, japanese financial policy has received much attention from the world because this unconventional financial policy was unprecedented all over the world and much drastic. however, only a few studies have examined this policy. one and serious reason is that only a short time has passed since this unprecedented policy was adopted. in april, 2013, the policy board of the boj decided to introduce quantitative and qualitative monetary easing, more aggressive financial policy. the boj decided to achieve the price target of 2% in terms of the year-on-year rate of change in the consumer price. it was said that the boj did a new phase of monetary easing both in terms of quantity and quality. the boj would double the monetary base and the amounts outstanding of japanese government bonds as well as exchange-traded funds (etfs) in two years and would more than double the maturity of japanese government bond purchases. to achieve quantitative monetary easing, the main target of financial policy instruments was changed from the uncollateralized overnight call (interbank interest) rate to the monetary base as mentioned above again. could the demand for money function be affected by economic uncertainty in addition to monetary uncertainty? choi and oh (2013) showed that economic uncertainty can affect public’s decision in allocating their wealth among different assets. they found that output uncertainty had negative effect and monetary uncertainty had positive effect on the money demand in the us. kumari and mahakud (2012) indicated that the long elasticity of demand is sensitive to stock prices, inflation, and economic activity. dogru and recepoglu (2013) examined that the real money demand in turkey is related with income positively and is related with nominal interest rate negatively. khan and hve (2013) demonstrated that gdp and real deposit rate have impact positively the demand for money both in the long-run and in short-run. jiranyakul and opiela (2014) showed that in the short-run, only a change in real gdp affects m1 money holdings. also, in the long-run, both real gdp and an interest rate determine money demand. as many developed countries are under deflationary pressures and people hold holding money instead of investing risky assets, demand for money, which has been very traditional field of economics, should be paid to a lot of attention (bahmani-oskooee and xi, 2011; 2014). japan has monetary sovereignty, which gives the japanese government the ability to finance its debt, and enables the bank of japan to keep jgb’s nominal yields low by ensuring that short-term interest rates are low, and by conducting various other tools of financial policy. debt to gdp in japan is illustrated in figure 1. the ratio is extraordinary high among developed countries. figure-1. japanese public debt to gdp ratio (%) note: data are from international financial statistics (imf) exchange rates have not been paid much attention from the past in analyzing demand for money. craig (1982) found that exchange rate in west germany is related with demand for money. bahmani-oskooee and malixi (1991) indicated that depreciation of domestic currency promotes a decrease in the demand for domestic currency in many less developing countries. bahmani-oskooee et al. (1998) demonstrated that demand for money including the 0 50 100 150 200 250 300 1 9 8 0 1 9 8 1 1 9 8 2 1 9 8 3 1 9 8 4 1 9 8 5 1 9 8 6 1 9 8 7 1 9 8 8 1 9 8 9 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 debt economy, 2015, 2(1): 10-15 12 effective exchange rate were shown to be stable. hueng (1988) showed that changes in the foreign interest rate and exchange rate affect the demand for money in canada. gunnar (2001) argued that shocks to the nominal exchange rate have impacts on domestic prices in the short-run but have no impact on real output, while shocks to money have a temporary impact on real output before causing inflationary. dreger et al. (2007) showed that for new entrants eu member states, against us exchange rate is significantly related with demand for money. tang (2007) demonstrated that real m2 aggregate, real expenditure components, exchange rate, and inflation have cointegration relationship in malaysia, philippines, and singapore. yu (2008) showed that the demand for real m1 in argentina had a positive relationship with real income and peso depreciation in argentine. abdullah et al. (2010) found that depreciation of domestic currency increases the demand for money. arize and nam (2012) showed that increases in the exchange rate, has a significant and positive effect on money demand. abdulkheir (2013) showed the existence of a long-run cointegration relationship between the demand for money and its explanatory variables, namely, real gdp, interest rate, inflation rate, and exchange rate. moreover, along with the changing of economic circumstances, demand for money, which is not necessarily a new topic of economics, has been discussed and examined again recently. this paper examines recent japanese demand for money function. it has been discussed a lot, however, the exchange rate has not been included for empirical analysis in many cases. also, recent japanese economic and financial condition, namely, drastic financial policy and almost zero interest rate could have changed the demand function for money greatly. changing of stock prices is one of them to be examined. this paper is structured as follows. section 2 provides theoretical background for empirical analysis. following this section, section 3 conducts empirical analyses. section 4 reviews the results and performs additional analyses to examine the problems which cause from previous section. finally, this paper ends with a brief summary. 2. theoretical backgrounds few studies have examined the impact of economic and monetary uncertainty on the demand for money of japanese case. this paper firstly examines this equation. ln mt = a + blnrgdpt + cln(pt/pt-1) + dlnexct + εt (1) t means time. m denotes m2 (seasonally adjusted). a measure of economic activity is real income (rgdp), which indicates transaction demand for money. b is an estimate of income elastic and is expected to be positive. the measure of opportunity cost of holding money against financial assets, the inflation rate, namely, ln (pt/pt-1) measures the opportunity cost against real assets. it is expected to be negative. to explain the degree of each currency substitution between domestic and foreign currency, the exchange rate, exc, is included in the regression analysis. this variable has been regarded as unimportant or not affective variable against money supply. the exchange rate is the effective exchange rate. hence, a decline reflects depreciation. since the depreciation of domestic currency promotes domestic currency value of foreign assets held by domestic residents, the demand for money could rise due to perceived increase in wealth arango and ishaq nadiri (1981). however, bahmani-oskooee and pourheydarian (1990) demonstrated that if depreciation of domestic currency causes an increase in expectation of more depreciation, domestic residents have less of domestic currency and more of foreign currency. therefore, an estimate of d could be negative or positive. it would be inconclusive. finally, interest rates are not included in the estimation as they are almost zero, so instead of these variables, exchange rate is estimated for demand for money. for preliminary estimation, interest rates were checked empirically, however, there were not significant. 3. empirical analysis sample period is from 2002q1 to the latest 2014q1. at the end of 2001, the boj raised the outstanding balance of the current account at the boj. it is the beginning of unprecedented financial policy. such policy has been changing, however, basic stances to boost the economy has not been changing. empirical methods are ols (ordinary least squares), gmm (generalized method of monument), and robust estimation. one problem in equations that use the ols method is the existence of unobservable specific effects and also lagged dependent variables. this problem can be overcome with the use of the gmm. this method requires a decision on which variables to use as instrumental variables. j-test is also performed. this test checks whether the models moment contains match the data or not. in a gmm context, when there are more moment conditions than parameters to be estimated, this chi-square test can be used to test the over-identifying restrictions. in this analysis, the lagged values of the dependent variables are used as instrumental variables. robust estimation is a robust estimator, unlike maximum likelihood estimation. ols estimates for regression models are highly sensitive to outliers. outliers are observations which do not follow the pattern of the other observations. this is not a problem if the outlier is simply an extreme observation from the tail of a normal distribution, however, if the outlier are from non-normal measurement error or some other violation of standard ols, it compromises the validity of the regression results if a non-robust regression method is employed. table-1. demand for money in japan ols gmm robust estimation c -1.464*** (-5.391) -1.704** (-3.209) -1.939*** (-8.666) rgdp 2.022*** (35.468) 2.075*** (19.975) 2.108*** (44.909) price 0.328*** (4.750) 0.558*** (4.669) 0.440*** (7.724) continue economy, 2015, 2(1): 10-15 13 exc -0.058* (-1.708) -0.035 (-0.473) -0.015 (-0.584) adj.r2 0.984 0.982 rw-squared 0.994 f-statistic (prob) 2829.440 (0.000) j-statistic(prob) 8.057(0.005) rn-squared (prob) 12067.21(0.000) durbin-watson 0.209 0.257 note: parentheses are t-statistic (ols and gmm) and z-statistic (robust estimation). ***, **, and * denote significant at 1, 5, 10%. almost all the results are clear and expected. however, only the results of exchange rate are not conclusive confirmly. the results of ols could understand that depreciation of domestic currency (minus means depreciation of the yen) promotes domestic currency value of foreign assets held by domestic people, so the demand for money could rise due to perceived increase in wealth, however, it is significant at 10% level and for the cases of other methods, the coefficients are not significant. however, all of the coefficients are minus in spite of the employed empirical methods. to understand the relationship among variables, var (vector autoregression estimation) is employed. stock prices are includes in this analysis. the results are in table 2. table-2. vector autoregression estimation for japanese demand for money ms rgdp price exc stock ms(-1) 1.624*** (22.798) 0.060 (0.334) 0.012 (0.028) 0.150 (0.164) -0.315 (-0.201) ms(-2) -0.609*** (-8.011) 0.018 (0.094) 0.079 (0.162) -0.026 (-0.230) 0.386 (0.237) rgdp(-1) -0.012 (-0.321) 0.858*** (9.371) 0.126 (0.542) -0.327 (-0.704) -0.281 (-0.362) rgdp(-2) -0.039 (-1.132) -0.048 (-0.559) -0.353* (-1.616) 0.368 (0.841) -0.003 (-0.004) price(-1) -0.007 (-0.584) 0.029 (0.907) 1.153*** (14.157) -0.078 (0.476) -0.093 (-0.343) price(-2) 0.008 (0.686) -0.015 (-0.488) -0.378*** (-4.888) 0.073 (0.474) 0.114 (0.442) exc(-1) 0.011 (1.594) 0.008 (0.473) -0.028 (-0.639) 1.191*** (13.633) -0.129 (-0.882) exc(-2) -0.014** (-2.105) -0.010 (-0.600) 0.013 (0.307) -0.285** (-3.245) 0.068 (0.464) stock(-1) 0.002 (0.523) 0.019* (1.839) 0.018 (0.702) 0.002 (0.031) 1.319*** (15.174) stock(-2) 0.001 (0.280) -0.006 (-0.587) -0.036 (-1.332) -0.014 (-0.268) -0.348*** (-3.890) c 0.098** (3.289) 0.221 (2.935) 0.364 (1.910) 0.507 (1.327) 0.813 (1.275) adj.r2 0.999 0.997 0.890 0.976 0.958 f-statistic 147293.3 5331.013 109.036 540.370 303.532 akaike aic -9.887 -8.033 -6.172 -4.781 -3.757 note: parentheses are t-statistic (ols and gmm) and z-statistic (robust estimation). ***, **, and * denote significant at 1, 5, 10%. time lag is selected according to akaike aic. a few results are not conclusive, other results are almost as expected and are not contrary to previous analyses. traditional money demand function (table 1) is rather stable and accountable than the results of this one (table2). in general, setting time lag for explanatory variables is not adequate to explain demand for money except the case of exchange rate. exchange rate plays a role to determine demand for money. 4. further analysis almost all the results conducted in the previous section are as expected. they are very ‘traditional’ results. exchange rates, which are not usually included in the money demand function, have not significantly impacts on money supply at 1% or 5% level, however, significant at 10% level (table 1). on the other hand, japanese economic and financial circumstances have been changing greatly from the beginning of 2000s. the boj continuously has conducted financial policy to boost the economy, the boj did a new phase of monetary easing both in terms of quantity and quality from 2013. the boj decided to increase the monetary base and the amounts outstanding of japanese government bonds as well as etfs. to achieve quantitative monetary easing, the main target of monetary policy instruments was changed from the uncollateralized overnight call (interbank interest) rate to the monetary base. before that, similar policies like quantitative easing policy and zero interest rate policies have been adopted as mentioned before. two more empirical analyses are conducted in this section. first, stock price (indexes data are from ifs) is included in the estimation (1). the estimated equation is as (2). ln mt = a + blnrgdpt + cln(pt/pt-1) + dlnexct + dlnstock + εt (1) economy, 2015, 2(1): 10-15 14 table-3. demand for money in japan, including stock prices ols gmm robust estimation c 0.693 (0.524) 1.828 (0.636) 4.547*** (6.365) rgdp 1.572*** (5.045) 1.257* (1.694) 0.548*** (2.957) price 0.044 (0.579) 0.027 (0.188) -0.032 (0.477) exc -0.176** (-2.100) -0.227 (-1.426) -0.345*** (0.000) stock -0.090 (-1.523) -0.062 (-0.728) -0.003 (-0.082) adj.r2 0.790 0.767 rw-squared 0.931 f-statistic (prob) 47.126(0.000) j-statistic(prob) 6.044(0.014) rn-squared (prob) 402.905(0.000) durbin-watson 0.349 0.252 note: parentheses are t-statistic (ols and gmm) and z-statistic (robust estimation). ***, **, and * denote significant at 1, 5, 10%. in addition, impulse responses are analyzed according to the var analysis in the previous section (table 2). the results are in figure 1. figure-1. impulse responses to demand for money. the results seem to be clear. the results are expected. stock prices do not influence demand for money. however, it should be noted that drastic financial policy has been adopted recently. from 2013, stock prices has been rising greatly, so much more time is needed to analyze the effect. on the other hand, shocks of exchange rates affect demand for money, however, the impact is not so long. the results are seem to be predictable. secondly, the relationship between monetary base and money supply is regressed as follows (3). the results of ols is reported here. ln mt = a + blnmbt + εt (3) mb denotes monetary base (from ifs). the regression method is old. the results are in table 4. table-4. money supply and monetary base c 5.302*** (68.511) mb 0.277*** (7.328) adj.r2 0.518 f-statistic (prob) 53.691(0.000) durbin-watson 0.094 note: parentheses are t-statistic. ***, **, and * denote significant at 1, 5, 10%. the results are very clear. financial policy has been effective to promote the economy although the effect is not so large. so much more time to do research would be necessary as there is some possibility that demand for money function would change. 5. conclusions in japan, low or almost interest rates has been prevailed and there has been a strong demand for japanese government bond, so there is possibility that money demand has been changed. this paper examined recent japanese -.004 -.002 .000 .002 .004 .006 1 2 3 4 5 6 7 8 9 10 response of rgdp to ms -.010 -.005 .000 .005 .010 .015 1 2 3 4 5 6 7 8 9 10 response of price to ms -.02 -.01 .00 .01 .02 .03 .04 1 2 3 4 5 6 7 8 9 10 response of exc to ms -.04 -.02 .00 .02 .04 .06 .08 1 2 3 4 5 6 7 8 9 10 response of stock to ms response to cholesky one s.d. innovations ± 2 s.e. economy, 2015, 2(1): 10-15 15 case. despite recent dramatic changing of the economy, money demand function is very stable and accountable mostly according to the traditional money demand function presented by traditional economic theory. empirical evidence shows that demand for money is affected by real gdp, prices, and exchange rates, however, stock prices have not impacts on demand for money clearly. also, financial policy to combat the deflation and to boost the economy can be judged adequately. it can be said that market participants can believe policies because demand for money is stable and predictable. finally, japanese government not only conducted drastic economic policy but also took measures to strengthen competitiveness and economic growth. these measures included possible policy actions to reform the economic structure, such as concentrating resources on innovative research and development, strengthening the foundation for innovation, performing regulatory and institutional reforms, and changing the tax system. moreover, by strengthening coordination between the boj and the government, the japanese government implements measures to achieve a new fiscal structure to ensure the credibility of the fiscal condition from 2013. this approach is called abenomics. abe is from the name of japan’s current prime minister. so much more time to do research would be necessary as there is some possibility that demand for money function would change. references abdulkheir, a.y., 2013. an analytical study of the demand for money in saudi arabia. international journal of economics and finance, 5(4): 31-38. abdullah, h., j. ali and h. matahir, 2010. re-examining the demand for money in asean-5 countries. asian social science, 6(7): 146-155. arango, s. and m. ishaq nadiri, 1981. demand for money in open economies. journal of monetary economics, 7(1): 69-83. arize, a. and k. nam, 2012. the demand for money in asia: some further evidence. international journal of economics and finance, 4(8): 59-71. bahmani-oskooee, m. and m. malixi, 1991. exchange rate sensitivity of the demand for money in developing countries. 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statistics, 64(4): 681-686. dogru, b. and m. recepoglu, 2013. dynamic analysis of money demand function in turkey. international journal of economics and finance, 5(9): 20-27. dreger, c.r., r. hans-eggert and b. roffia, 2007. long-run money demand in the new eu member states with exchange rate effects. eastern european economics, 45(2): 75-94. gunnar, j., 2001. inflation, money demand, and purchasing power parity in south africa. imf staff papers, 48(2): 243-265. hueng, c.j., 1988. the demand for money in an open economy: some evidence for canada. north american journal of economics and finance, 9(1): 15-31. jiranyakul, k. and t.p. opiela, 2014. instability of money demand: recent evidence for thailand. modern economy, 5(8): 907-913. khan, r.e.a. and q.m.a. hve, 2013. financial liberalization and demand for money: a case of pakistan. the journal of developing areas, 47(2): 175-198. kumari, j. and j. mahakud, 2012. relationship between stock prices, exchange rate and the demand for money in india. economics, management and financial markets, 7(3): 31-52. tang, t.c., 2007. money demand function for southeast asian countries: an empirical view from expenditure components, journal of economic studies, 34(6): 476-496. yu, h., 2008. impacts of the exchange rate and the foreign interest rate on the argentine money demand function. applied economics letter, 15(1): 35-39. views and opinions expressed in this article are the views and opinions of the authors, economy shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. economy issn : 2313-8181 vol. 2, no. 3, 58-63, 2015 www.asianonlinejournals.com/index.php/economy * corresponding author 58 construction externalities: a theoretical insight and the nigerian scenario ugochukwu stanley chukwudi 1* --mbakwe chinwendu christopher 2 --ajator uche 3 1,2,3 department of quantity surveying, nnamdi azikiwe university, awka, anambra state, nigeria. abstract this work is licensed under a creative commons attribution 3.0 license asian online journal publishing group contents 1. introduction ............................................................................................................................................................................... 59 2. problems of construction externalities in nigeria ................................................................................................................ 60 3. purpose of the study ................................................................................................................................................................. 60 4. an overview of the construction industry ............................................................................................................................. 60 5. the nigerian construction industry ....................................................................................................................................... 61 6. construction externalities ........................................................................................................................................................ 61 7. conclusion and recommendations .......................................................................................................................................... 62 references ...................................................................................................................................................................................... 62 very little is known about the subject of construction externalities, especially amongst stakeholders in the nigerian construction industry and built environment, yet its existence and effects are palpable. hence, the study, via relevant literature and personal observations sought to provide; first, a theoretical understanding of the nature of construction externalities; its constituents or composition as well as its effects, and secondly, to point out the level of awareness on the part of stakeholders and the manner or extent to which they have been addressed or considered in nigeria. ultimately, this paper presents as a solution to efficient and balanced allocation of resources, realistic taxation and better economic planning by the nigerian government; the need to apprise the citizenry of the benefits and adverse effects of construction externalities. keywords: built environment, construction externalities, construction industry, construction stakeholders, economic planning, nigeria. http://creativecommons.org/licenses/by/3.0/ economy, 2015, 2(3): 58-63 59 1. introduction the construction industry is one of the most important sectors of the economy (mu‟azu, 2002; nigerian institute of building, 2002) and plays a vital role in meeting the needs of society and enhancing the quality of life. according to ebohon and rwelamila (2002) the construction sector, relative to its level of development accounts for more than 60 percent of gross capital formation in most countries and defines the physical infrastructure upon which effective growth and development is achieved. construction activities extend beyond the erection of houses, hospitals, schools, offices and factories to civil engineering works such as roads, bridges and communication infrastructure. for some time now, this song; of the significant position of the industry, its numerous benefits and contributions to users, beneficiaries and the economy at large has been sung, but little or no cognizance or attention has been paid to the fact that activities of the industry, as well as its products brings with it subtle, hidden and sometimes intangible effects on the social, economic, environmental life (rodrigue, 2013) often termed externalities or neighborhood effects, or spillovers, which affect third parties or non users (friedrich and milton, n.d). the european commission (2005) after an extensive research, opined succinctly, that externalities are related to social welfare and the economy in no small measure. it has also been defined as costs or benefits that result from an activity or venture that affects an otherwise uninvolved third party who did not choose to incur that cost or benefit (externality, 2013). it is also regarded as an action by a person or firm which affects another person or firm and for which the interaction is ignored (externality, n.d). according to zakaree (2012)externalities may be positive (economic externalities) or negative(non-economic externalities). positive externalities or beneficial externalities or external benefits or external economy are benefits enjoyed by a third party as a result of an activity or product. such third parties include any individual, organization or property owner that is indirectly affected (positive externalities, n.d) while individuals who benefit from positive externalities without paying are considered „free riders‟. while positive externalities are the common thread that run through economic consideration of the environment (positive externalities, n.d) negative externalities are cost of economic activities like construction and housing activities that are imposed on others like environmental damages, cost of healthcare incurred as a result of pollution and many more. positive externalities, such as better habitat, population dispersal, improved hygiene, decongestion, increased market value of properties (externality, n.d) which provide considerable benefit to others which they do not pay for, will be in the best interest of the nigerian government to promote. government needs to compensate the initial propagators or construction firms or subsidize the clean and healthiest methods of construction and disposal of waste. this can give impetus to new working and disposal methods and technologies, which will in turn promote a more sustainable environment (european commission, 2005). negative externalities or external costs or external diseconomy are activities or products that impose a negative effect on the third party (externality, 2013).it has also been defined as a cost that is caused by some economic activity but which is not paid for by the entities that are directly involved in the activity (namish, n.d). malpezzi (1996) outlines a number of negative externalities related to both housing and construction such as air, noise, water, soil pollution that cause green house emissions and climatic change which in turn affects humans, existing buildings and materials. others, such as land takes, congestions, accidents, additional demand for civic amenities, falling real estate prices and many more. such negative externalities have taken a huge toll on the nigerian environment, such that adequate attention and consideration needs to be accorded it. worthy of note is that externalities becomes a serious problem when such effects are not internalized or taxed or paid for ,especially when the actual or reasonable monetary cost is unknown or cannot be quantified thus, giving rise to inefficient allocation of overall resources (quantifying environmental externalities, n.d). compounding these problems, especially in the nigerian economy, firstly is that externality issues are relatively unknown to a majority of the populace with little or no action taken when such effects lead to economic, social, health and environmental losses. second, externality is known probably to a limited extent to appropriate public or government authorities, but defaulting construction firms are not charged appropriately with negative externality issues, because they are not included in the current construction tax system. third, externalities are not compensated for or subsidized for compliant firms. undoubtedly, construction consumes a large part of the resources of any nation. considerable amounts of time, money and effort are spent by the nigerian government in this sector. such huge resources may however, not be entirely justified especially when the costs of negative externalities: costs of health, social, economic and environmental damages outweigh the benefits of construction or its products. the primary import of this study therefore, is to establish a theoretical basis for developing a way or ways of striking a fair balance (in economic terms) between the benefits of positive construction externalities and the adverse effects of the negative externalities. the research thus has the following as its focus:  promoting government, public and contractors awareness and providing an understanding on the existence and effects of construction externalities to enable; first, the public to develop confidence to report to the appropriate authorities and secondly, to give the government better knowledge on how such externalities could be charged on defaulting firms and thirdly furnishing construction firms that adopt healthy and safe working methods with more information on the external benefits of their activities and the need to receive compensation or subsidies from the government, thus encouraging them to develop better and cleaner working and disposal methods.  providing a theoretical basis for further research in providing reliable statistics or procedures of quantifying and monetizing construction externalities for use by nigerian tax authorities in making objective decisions in formulating construction tax or tax ceilings. in other words, to advance realistic procedures or methods via which negative construction externalities can be quantified or have monetary values attached with a view to obtaining reliable statistical data for realistic taxation and better economic planning. economy, 2015, 2(3): 58-63 60 2. problems of construction externalities in nigeria in a developing country like nigeria, the subject or issue of construction externalities is one that is relatively unknown to the average citizen, constructor and even the public authorities. this ignorance on the part of third parties have resulted in lack of confidence to report health, financial, environmental losses arising from negative construction externalities to the appropriate authorities. negative construction externalities from the activities, working methods, disposal techniques of construction firms have consistently imposed considerable social, economic and environmental risks on the citizens, ecosystem, materials and the government. for instance, asphalt or bituminous plants, other construction plant or technologies, road stabilization techniques, methods of dumping demolition wastes, have led to innumerable health, emotional, psychological, economic risks and social vices like damage to human health, building fabric, and the ecosystem, squabble for basic civic amenities, accidents, increased crime rate to mention but a few which are not accounted for by contractors or construction entrepreneurs propagating such damages and as such has either not been internalized through penalties or the appropriate financial instruments such as taxation by the federal inland revenue service (firs) or reflected in the taxes already paid by these construction firms. the f.i.r.s and/or other similar authorities have no appropriate statistical data which could serve as a basis upon which charges could be calculated, thus no appropriate quantification or cost allocation of these negative externalities or valuation of the impacts in monetary terms. on the other hand, incentives for construction firms employing clean, healthy and environment friendly methods of working and disposal are either overlooked or inadequately compensated or their costs subsidized by the government. 3. purpose of the study the aim of this paper is to study the nature of construction externalities and how it has been addressed in the nigerian construction environment. this is with a view to providing a theoretical understanding of the subject, as a basis for further research. the specific objectives include: i. to identify, via related literature, the various positive and negative construction externalities in existence, their makeup and effects. ii. to ascertain the drivers or factors that promotes negative externalities and the barriers or factors militating against positive externalities. iii. to examine, via personal observation and experience, the awareness level of construction stakeholders in nigeria on the existence of externalities, its effects on the nigerian built environment and the manner and/or extent which it has been handled by concerned stakeholders. 4. an overview of the construction industry 4.1. definition and scope various attempts have been made to define construction. for instance, kunya et al. (2008) succinctly defined construction as the process whereby the designer‟s plans and specifications are converted into physical structures and facilities. it also involves the organization and coordination of all the resources in order to complete the project on schedule, within the budget and according to specified standards. it has also been defined as that which includes residential, industrial and public buildings, civil engineering construction works and the building materials industry. as a result of its assembly oriented nature, the industry is subdivided into two major groups: building and civil engineering. 4.2. organization the industry is essentially a large industry of small firms (anigbogu, 2011). it embraces a wide range of loosely integrated organization that collectively constructs, alter and repair wide range of different buildings and engineering structures. the industry is a project based one, where firms undertake geographically dispersed projects for a long duration of time. the demand for construction projects is essentially what economists call a „derived‟ demand. it is derived from the need for buildings in which to live (houses), manufacture or store goods) warehouses and industries), study (schools), healthcare (hospitals), operate various services (offices) etc. the government is also the client for a large number if its projects and can thus directly or indirectly use it to control the economy such as reduction in its capital expenditure, deliberate refusal to continue on-going projects, increasing interest rates and taxation (anigbogu, 2011). 4.3. relevance “when the construction industry „sneezes‟, the whole nation catches the cold”. “the construction industry is the barometer with which economic growth is measured”. “the construction industry is the regulator of the nation‟s economy”. these are common expressions used to buttress the fact that the role of the construction industry in economic development cannot be overemphasized. for about three decades, the debate has been on, as to the role of the construction industry in socioeconomic development. a school of thought postulated a causal relationship between construction and economic growth. accordingly, developed countries have a stronger construction industry (which contributes 5-8% to gdp) than less developed countries (where construction contributes 3-5% to gdp).the implication for development policy is that unless the construction industry grew faster than the economy as a whole, it might constrain national development (anigbogu, 2011). kolawole (2002) shares a similar view by surmising that the building industry operations is a unique one, as it provides the environment under which other industries operate. the industry is the largest in nigeria and employs a good proportion of the work force. the construction sector can therefore be said to be strongly related to the state of economy, 2015, 2(3): 58-63 61 health of the economy, since it contributes to national income, employment and economic stabilization. its potential role as an agent for development, modernization, entrepreneurship is widely recognized. 5. the nigerian construction industry the nigerian construction industry still plays an important role despite the fact that it is yet to meet the challenges of adequately providing the much desired social amenities such as educational, health care facilities, decent and affordable housing for its teeming populace. about 69% of the nation‟s fixed capital formation is produced by the construction industry (federal office of statistics, 1998). this implies that the construction industry represents nearly 70% of the capital base of the national economy and is an indication of the significance of the industry within the economy (faniran, 1999). according to olaloku (1987) the industry occupies an important position in the structure of the nigerian economy. the relatively large investment commitment to construction makes the industry an important source of demand generation and this multiplier effect i.e. the great capacity to generate employment, income and expenditure in other sectors of the economy constitutes a major contribution to the economy existing data on the building and construction sector of the nigerian economy are grossly inadequate. however, past statistics revealed that the sector contributed to the growth and development of the economy. from a gdp of 3.8% in 1960.the sector‟s national output rose to 4.22% in 1965, 4.38% in 1970 and 5.70% in 1975 (anyanwu, 1977). this further highlights the fact that the construction industry continues to be a major stimulant in the country‟s economic growth. over the last decade, several changes have occurred in nigeria, which have helped all sectors of the economy, especially the building & construction sector. with double digit growth rates in the last 3 years, the construction industry has outgrown all other sectors of the nigerian economy. however, its contribution to the nigerian gdp and employment of labor are still very low. despite its significant position, the industry was rated poor in its performance .according to world bank statistics the construction industry of developing nations ought to contribute between 3% and 8% to gdp (world bank 1984), the contribution of construction to nigeria‟s gdp has stood steadily at about 2% (fos, 1998).further studies by the world bank (1984) revealed that the contribution of the industry to employment in developing nations averages about 3.2%, but the nigerian construction industry contributes only 1% (fos, 1998). the poor performance of the nigerian construction industry has generally been blamed on the overall state of the economy. 6. construction externalities 6.1. definition and explanation of the concept externalities are side effects or consequences of an industrial or commercial activity that affects other parties without it being reflected in the cost (externality, n.d). a couple of important aspects of this definition are worth explaining. first and foremost, an externality does not necessarily arise whenever there is some interaction between people's activities. what makes the interaction an externality is that the interaction is not internalized, i.e. what makes an externality an externality is that the parties to the externality do not take account of their interaction (externality, n.d). if a construction firm dumps some of its demolition waste on someone else's property, it is not an externality if the firm has negotiated an agreement with the owner of the neighboring property. affecting someone else, and neglecting this effect, is the externality problem. externality (n.d) further explains that externality can occur among people, or among firms, or between people and firms. for instance if one construction firm's training of its workers benefits other firms who might later hire some of those workers, it is an externality between firms. a construction firm's training of workers benefitting some other firms is an example of a positive externality: the more training the first firm undertakes, the higher the profits of the other firms will be. there still is an externality problem when the externality is beneficial: as long as one firm's (or person's) actions affect another firm or person, and these effects are not internalized, then there will be an externality problem, and the overall allocation of resources in the economy will be inefficient. externalities could also be reciprocal: the wastes disposed from firm 1's production might lower the profits of firm 2. reciprocal externalities do not cancel : there will be an externality problem here if these effects are not internalized, even if the damage done by firm 1 to firm 2 is exactly the same magnitude as the damage done by firm 2 to firm 1. a classic example of an externality is pollution. this of course is a negative externality. the effects of the polluting firm's production are a reduction in the utility of people subject to the pollution. if a firm producing a negative externality is not charged for the harm its activities impose on others, then it will undertake those activities at a higher level than is efficient. on the other hand, if a firm producing the positive externality is not paid for the benefits its activities impose on others, then it will undertake those activities at a lower level than is efficient. there are two main theoretical points about externalities: one, there is an efficiency problem, that the competitive equilibrium is not optimal, whether the externality is positive or negative, if it is not internalized properly. two, the problem stems from the fact that the agent producing the externality does not face prices that reflect all the consequences of its actions. 6.2. salient terms and composition in strict economic parlance, externalities are non-market exchange in which one or more parties to the exchange are not compensated and may have little choice in the exchange. externality is a broader term which includes residuals, intangibles, and incommensurables (qee, n.d) which includes the following: (i) residuals: waste products (i.e. pollution) created during the operation processes necessary to deliver goods and service to the consumer or beneficiaries. example, carbon monoxide pollution created by running construction plant and machinery. economy, 2015, 2(3): 58-63 62 (ii) intangibles: a good, service, or effect of an action that cannot be assigned monetary values; cultural or personal values, emotional, psychological, aesthetic effects, which cannot be measured in monetary terms. compensation for destruction of a religious facility or spiritually significant place. an extreme example is loss of human life which is impossible to assign a monetary value. (iii) incommensurable: these are effects of a given action or activity that can, with some effort, be assigned monetary value. example is the cost of monitoring sulfur dioxide, carbon monoxide pollution created by running construction plants and manufacturing raw materials. 6.3. positive externalities walter (1983) clearly provides a common example of road way construction, which is an instance of a positive externality. he argues that any entrepreneur or contractor who constructs a road will have to bear all the costs (of labour, materials, plant, etc.), just as in any business, but since highways are an external economy, he will be unable to reap rewards proportional to the benefits provided. for example, benefits would spill over to those who own land near the highways, in the form of increased value (i.e., the road builder cannot charge the beneficiaries for these gains). other benefits would he enjoyed, for free by people who simply prefer more and more highways. nor could the road owner exclude from increased benefits those who gain from the resulting cheaper transport in the form of lower prices for shipped merchandise. this argument by walter (1983) is sometimes put forth in terms of social and private returns. private returns-the difference between the outlay and revenue which accrue entirely to the individual entrepreneur-are said to be lower than social returns-the difference between the costs and the benefits for society as a whole. in both cases, the contractor must pay the full costs (labour, materials, risks and overheads) of the highway construction, but it is possible only for society as a whole to derive the full benefits. the contractor, being limited to the tolls he can collect, is unable to capture the gains in terms of increased land values, etc., which spill over onto the remainder of the population. given this alleged tendency of the market to under invest in highways, the argument from externalities concludes that it is the government's obligation to correct matters by subsidizing road building, or, more likely, by building roads itself. 6.4. negative externalities according to namish (n.d) a major externality associated with road construction is the pollution that is caused by the use of automobiles. as more roads are built, more cars use them, as more cars use them; more pollution occurs and impacts people who do not use the roads. a similar impact is excessive noise. if for example a large road is built near ones house, one will bear the cost of having to deal with all the extra noise even if one does not use the road. air and noise pollution are the two major negative externalities associate with building of roads. the cause of the increase in air pollution is the fact that a large number of trees may have to be cut when new roads are being laid. the new roads may also have to be built through wooded areas which results in getting wild life disturbed, locals losing ancestral lands and many more. the construction of roads requires raw materials like tar, cement, concrete etc, the production and usage which cause high negative externality of pollution. 7. conclusion and recommendations from the foregoing elaboration of the nature, effects and composition of construction externalities, there is the need for the general public to acquaint themselves with proper understanding of the nature of construction externalities to help them develop confidence in reporting to the appropriate or concerned environmental authorities when such externalities arise. construction or built environment stakeholders should also be knowledgeable in the subject to enable them apply it in their working and disposal methods. lastly, the government, especially the environmental and tax authorities need to take cognizance or be well versed in externality issues to equip them with the necessary expertise in monetizing/taxing realistically and/or quantifying externalities, achieving a balanced and efficient allocation of economic resources and ultimately, better economic planning. references anigbogu, a.i., 2011. construction and economic development. lecture notes: m.sc. construction management class, department of building, university of jos. anyanwu, j.c., 1977. the structure of the nigerian economy. onitsha: joanee educational publishers. pp: 1960 – 1977. ebohon, o.j. and p.d. rwelamila, 2002. sustainable construction in sub saharan africa: relevance, rhetoric and the reality. agenda 21 for sustainable construction in developing countries, 1(1): 116. european commission, 2005. extern e; externalities of energy, methodology update. other impacts: ecosystems and biodiversity. in peter, b. and rainer, f. (eds.). luxembourg: office for official publications of the european communities. pp: 229–237. externality, 2013. in wikipedia, the free encyclopedia. available from en.wikipedia.org/wiki/externality. externality, n.d. available from answers.yahoo.com/question/index. faniran, o.o., 1999. the role of construction project planning in improving project delivery in developing countries: a case study of the nigerian construction industry. australia: deakin university press. federal office of statistics, 1998. review of the nigerian economy. abuja: author. friedrich, h. and f. milton, n.d. externality. in wikipedia, the free encyclopedia. available from en.wikipedia.org/wiki/externality. kolawole, a.m., 2002. the functions of builders in building construction companies. paper presented at the 32nd annual conference/general meeting of the nigerian institute of building on building production management held at maiduguri, borno state. kunya, s.u., i.u. hussaini and m.i. yusufu, 2008. 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environmental externalities, n.d. available from www.externalities.net. rodrigue, j.p., 2013. the environmental impacts of transportation. available from people.hofstra.edu/geotrans/eng/ch8en/conc8en/ch8c1en.html [accessed september 7, 2013]. walter, b., 1983. public goods and externalities: the case of roads. journal libertarian studies, 7(1): 1 – 34. world bank, 1984. the construction industry: issues and strategies for developing countries. washington d.c: author. zakaree, s., 2012. externalities of urban redevelopment: eviction, relocation and compensation in nigeria. international journal of business and social science, 3(5): 272– 278. views and opinions expressed in this article are the views and opinions of the authors, economy shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. http://www.economicsonline.co.uk/ http://www.externalities.net/ economy issn: 2313-8181 vol. 1, no. 1, 8-14, 2014 www.asianonlinejournals.com/index.php/economy 8 economic impact of galma irrigation scheme on the farming community in dakaci, zaria area of nigeria muhammad isma’il 1 --kim idoma 2 --idris dabo ibrahim 3 --zainab dalhatu muhammed 4 --hadiza tanimu ahmed 5 --amina maiwada 6 --inusa musa 7 1,2 department of geography, ahmadu bello university, zaria 3 department of general studies, nuhubamalli polytechnic, zaria 4,5 department of urban and regional planning, nuhu bamalli polytechnic, zaria 6 department of geography, kaduna state university, kaduna 7 department of geography, federal college of education, zaria abstract this work is licensed under a creative commons attribution 3.0 license asian online journal publishing group 1. introduction irrigation is the application of water to the land or soil for the purpose of supplying moisture required for plant growth or for greater crop yield. irrigation is an approach to address inadequate rainfall for agriculture, and the combined effects of variability in the onset and duration of rainfall (ayele, 2011). irrigation farming is a vital aspect of farming system of the sahel and drier regions of the world. it is used in the growing of crops, maintenance of soils in drylands during period of inadequate rainfall. it is also used in suppressing the growth of weed in grain field, and helping to prevent soil consolidation (snyder and melo-abreu, 2005). it is an ancient agricultural practice. basin irrigation was practiced for thousands of years in the nile valley and still plays a significant role in egyptian agriculture. egyptians have depended continuously on nile’s flooding for irrigation on a large scale over a long period of time (ayele, 2011). it is reported that irrigation has been practiced in egypt, china, india and other parts of asia for a long period of time. for example, india and far east have grown rice using irrigation for nearly 5000 years; while the nile valley in egypt, the plain of euphrates and tigris in iraq were under irrigation for 4000 years (zewdie et al., 2007). the first modern irrigation project in africa is believed to have started in gezira (gezira irrigation scheme) in the year 1913 (onward sokoto bulletin, 1983). it is centered on the sudanese state of aljazeera, south-east irrigation scheme is introduced for socioeconomic development of the community where it is based. one of such is the galma irrigation fadama project iii around river galma in zaria local government area of kaduna state, nigeria. the project provides water to surrounding communities for farming. this study was carried out with a view to determine the socioeconomic impact of the irrigation scheme on farming community in dakaci, zaria area of kaduna state. the study used data acquired from questionnaire survey, interviews and other secondary sources. relevant data which include method of land acquisition, sources of capital, size of farmland, source of labor, major crops grown, average annual crop yield and average annual income were collected. the data were analyzed using simple descriptive statistics. the study revealed that the irrigation scheme to a large extent boosted crop yields and agricultural production in the area thereby improving the socioeconomic status of the farmers in the area. it is therefore recommended that more of such projects should be introduced to improve agricultural productivity. moreover, there is the need for timely evaluation and assessment of such projects to maintain their proper functioning. in addition, government should refurbish the canals distributing the water to the farmlands, and also provide credit facilities to the farmers in order to improve their agricultural productivity which would help in ensuring food security for the nation at large. keywords: agriculture, irrigation farming, galma fadama project iii, economic impact. http://creativecommons.org/licenses/by/3.0/ economy, 2014, 1(1): 8-14 9 confluence of the blue and white nile river in the city of khartoum. the economy of sudan was based on irrigation prior to the beginning of oil exploitation in the late 1990s. in sub-saharan africa, irrigation reached the niger river regions by the first or second millennium bc and was based on wet season flooding (snyder and melo-abreu, 2005). there are different types of irrigation which include surface irrigation (above the ground), which is the method generally adopted in all countries; flood irrigation and border irrigation. others are sprinkler irrigation and drip irrigation (ayele, 2011). in the year 2000, member states of the united nation came together to create a more prosperous world. in order to achieve this, the joint declaration set out eight goals, the millennium development goals (mdgs). one of the goals is the eradication of extreme hunger and poverty amongst the member states. the problems of hunger and malnutrition cannot be addressed without paying proper attention to agriculture. in developing countries, most farmers practice rain-fed agriculture which results into low production. to improve agriculture, irrigation farming alongside the use of improved seeds, fertilizer and other relevant inputs become the best alternative. this will help in reducing hunger and malnutrition because there is direct relationship between food productivity, hunger, malnutrition and poverty (strauss, 1986). tekana and oladele (2011) examined the impact of taung irrigation scheme on the household welfare among farmers in the north west province of south africa. the relationship between the household welfare and the independent variables were estimated using an ordinary least square regression estimation procedure. the results of the multiple regression analysis showed that the independent variables relate significantly to knowledge levels of the extension officers. bagson and kuuder (2013) assessed the impact of a small scale irrigation scheme on household food security and leisure time of the people in kokoligu a subsistence-based farming community in the nandom district of ghana. in-depth interview (idi) schedules and observation guides were used to source information on food security situations before and after introducing the irrigation scheme and the effects of the scheme on residents’ leisure during the off farming season. the study revealed that the irrigation scheme enhanced household food security and wellbeing during the dry season but significantly reduced leisure; communal intimacy in addition to degrading the cultural heritage in the study area. according to their study, majority of the farmers irrigated vegetables, for household consumption and sale to complement the significant proportion of staple food crops cultivated during farming season to meet their nutritional needs. nigeria is endowed with vast agricultural land. however, in northern nigeria, areas suitable for irrigation with ground water have not yet been assessed (onward sokoto bulletin, 1983). with increasing population, more food is required to meet the increasing demand of the population. the increasing world population and the growing demand for food necessitate rapid expansion of modern irrigation throughout the world. for instance, irrigation farming in nigeria has increased in recent times. another reason for this is the introduction of the fadama projects jointly funded by the world bank, federal government and state governments to increase the social and economic status of the people, particularly the rural farmers and increase food productivity (hussain and madhusudan, 2009). oruonye (2011) examined the activities of small scale (fadama) farmers in jalingo local government area of taraba state in nigeria using the livelihood conceptual framework. the study employed structured questionnaire and participatory rural appraisal method in obtaining information during field survey. the findings showed that the increasing production of crops such as vegetables, sugarcane and maize in the study area has not only helped the town secure employment and livelihood opportunity for its citizen, but has also enhanced greatly the income of farmers and those involved in their trade. however, the study highlighted inaccessibility to irrigation farmland, fertilizer, capital and pesticides as the greatest challenges confronting farmers in the area. irrigation scheme is introduced for socioeconomic development of the community where it is based. one of such is the galma irrigation fadama project iii around river galma in zaria local government area of kaduna state. the irrigation scheme was introduced to provide water to surrounding communities for agriculture. since the scheme has been going on for over a decade, there is the need to assess its impact on the community in the area with a view to find out whether it has been successful or not. the focus of this study is to examine the impact of the galma irrigation scheme on the farmers in dakaci of zaria local government area of kaduna state.therefore, this study seeks to find out: i. whether farmers benefit from the irrigation scheme in the area? ii. the impact of the irrigation on crop production. iii. socioeconomic impact of the scheme on the farming community in the area. 1.1. the study area dakaci lies in zaria region. zaria is located in kaduna state of nigeria, and lies between latitude 11 0 04’n of the equator and 7 0 42’e of the greenwich meridian as shown in figure 1. it is bounded by funtua local government area (l.g.a.) of katsina in the north, to the south by kachia l.g.a. of kaduna, in the southwestern part by the southern limit of igabi l.g.a., to the west is birningwari l.g.a. while to the east and southeastern part is ikara and lere l.g.as. of kaduna state respectively. zaria region has a tropical continental climate which is characterized by distinct wet and dry seasons. the vegetation in the area is classified under the northern guinea savannah, which is characterized by short scattered trees and stunted grasses. economy, 2014, 1(1): 8-14 10 figure-1.the study area 2. materials and methods the materials used for this study involves data collected from field survey, questionnaires and other secondary sources. a reconnaissance field survey was first conducted to get acquainted with the area, create familiarity with some farmers, as well as estimate the farmers’ population. 2.1. primary data the structured questionnaire employed to obtain primary data comprises of two sections: section ‘a’ was for personal data of the farmers. while section ‘b’ had to do with the activities of the farmers in the irrigation scheme e.g. average crop yield before and after adoption of irrigation farming practices and other activities of farmers before and after adoption of irrigation scheme. other data acquired include the farm size, sources of capital etc. the questionnaires were administered to farmers in dakaci area, zaria local government area. 2.2. sampling technique a total of 150 questionnaires were used for the purpose of the study. this was determined based on krejcie and morgan (1970) sampling method. the questionnaires were used to seek information on the socioeconomic impact of irrigation scheme on the people in the area. the technique used in the sampling of the farmers during the field survey was a combination of stratified and random sampling. 2.3. oral interview oral interview was also conducted with about 50 farmers and 30 inhabitants of the area of study. the farmers were selected purposively based on the type of crops they produce, and the inhabitants were selected randomly to represent those who buy and sell the crops produced in the area. 3. results and discussion in this section, data collected from the field survey were analyzed. the results of the analysis are presented as follows: 3.1 socio-economic characteristics of respondents results from the survey indicated that 38% of the respondents are from galma village and 62% of them originated from bizara village all in dakaci district of zaria. all the respondents for this study were males because they are the only ones who engage in irrigation farming in the area. 3.1.1. age of respondents table 1 below shows the age distribution of the sampled population in the study area. it can be seen that the young age population (15-25 years) constituted about 36%, middle-aged (26-45 years) make up 42% and the aged (46 years and above) constituted about 28%. this implies that majority of the farmers who engage in irrigation farming in the area belong to the middle-aged group who are economically active; followed by the elderly population and then some of the youth. the dominance of middle-aged group in irrigation cannot be unconnected with the fact that that people in this area practice early marriage, hence the need to farm in order to meet their family needs. economy, 2014, 1(1): 8-14 11 table-1.age distribution of respondents age of respondents no. of respondents percentage (100%) 15-25 36 24 26-45 72 48 46 above 42 28 total 150 100 3.1.2. marital status of respondents this study found that majority of the respondents representing about 94% were married and only 6% were single as presented in figure 2 below. fig-2.marital status of respondents table 2 shows that 25% of the respondents have a household size of 0-5 persons; 31% has about 6-10 persons, 24% has 11-15 persons and 20% has up to 16 persons and above. this indicates that most of the respondents tend to have large family, and therefore require extra effort to meet the basic needs and food demand of the family which is achieved through the irrigation farming. table-2.household size of respondents range of household size no. of persons in the household percentage (100%) 0-5 37 25 6-10 47 31 11-15 36 24 16 above 30 20 total 150 100 3.1.3. educational attainment of respondents table 3 indicates the educational level of the respondents. a total of 15% have no formal education, 17% had secondary education, 18% had tertiary education, while 26% had primary education and 24% had qur’an education. it is observed that the literacy level among the people in the area is low which has implication on irrigation farming in the area. table-3.educational attainment of respondents educational attainment no. of respondents percentage (%) none 23 15 primary 39 26 secondary 25 17 tertiary 27 18 qur’an 36 24 total 150 100 3.1.4. other economic activities of the respondents table 4 shows that most of the respondents in this area do not only depend on irrigation farming as their means of livelihood but also engage in other economic activities. findings revealed that only about 17% had no other economic activity apart from farming, 17% are civil servants, while 43% engage in trading and 21% engage in other economic activities like driving, black smiting and building works. this implies that a large proportion of the respondents engage in both farming and other economic activities in the area. table-4.other economic activities of respondents activities no. of respondents percentage (%) none 26 17 civil service 28 19 trading 64 43 others 32 21 total 150 100 94% 6% married single economy, 2014, 1(1): 8-14 12 3.1.5. transport means of respondents table 5 shows that 24% of the respondents own bicycles, 76% had motor cycle and 25% had cars. this implies that most of the respondents use motor cycle as means of transportation to their farms. it was found that the irrigation farming provided the money to purchase bicycles, motor cycles and even cars by some farmers. table-5.transport means of the respondents transport means no. of respondent percentage (%) bicycle 36 24 motor cycle 76 51 car 38 25 truck 0 0 total 150 100 3.2. agricultural activities of the respondents this section acquired information concerning the source of farmland , sources and cost of labor, farm size, source of water for irrigation, types of crop grown before and after the introduction of the scheme and other relevant questions in relation to the farming system. 3.2.1. method of farm land acquisition table 6 illustrates the means of farm acquisition in this area of study. findings revealed that 37% of the farmlands used by the respondents are hired, 23% are purchased, and 40% are being inherited. some of the farmers hired or purchased the farmlands because of the viable gains of the irrigation farming in the area. the survey found that river galma is the only source of water supply for irrigation farming in the area. table-6.method of land acquisitions farm land acquisition no. of respondents percentage (%) hired 56 37 purchased 34 23 inherited 60 40 lease 0 0 total 150 100 3.2.2. surplus farm produce of respondents findings revealed that all the respondents (100%) usually get surplus produce from the farm. some of the surplus is preserved in the store and some is taken to the market and the proceeds are used to meet their pressing needs at that point in time. 3.2.3. major crops grown by the respondents it was found that there is a significant change in the variety of crops grown in the study area after the establishment of the irrigation scheme. results showed that before the introduction of the scheme, tomato was the major crop cultivated in the area, but after the establishment of the scheme, maize and other crops are cultivated in large quantity as shown in table 7. it could be observed form the table that there is significant increase in the number of farmers producing various crops. also, the scheme has made it possible for many farmers to practice mixed cropping and shifting cultivation. table-7.kinds of crops grown before and after the establishment of the scheme crops before percentage (%) after percentage (%) maize 31 62 47 94 tomatoes 44 88 46 92 onion 41 82 40 80 paper 42 84 41 82 okro 23 46 34 68 other vegetables 12 24 26 52 3.2.4. source of capital for farming though land and labor remain the two main inputs in traditional agriculture, but capital is also very important especially at the initial stage as take off grant for purchasing of simple farm implements, buying of fertilizer or renting of pumping machine used for the irrigation etc. the survey found that there is no other source of capital to the farmers apart from their personal savings. 3.2.5. farm sizes before and after the establishment of the scheme farm size is a major element in determining the economic output in agricultural production in the area. the farm sizes of the respondents have increased significantly after the introduction of the scheme as indicated in figure 3. this increase is due to the fact that the irrigation scheme has made water available and easily transported from the source to complement the rain water at the beginning of the project. however, there is presently a serious problem with the canals because most of them are blocked and could not transport water around the area. the farmers had to use generators to pump water thereby increasing the cost of production. economy, 2014, 1(1): 8-14 13 figure-3.distribution of farm sizes of the sampled farmers (in acre) before and after the introduction of the scheme 3.2.6. assessment of crops yield after the establishment of the irrigation results from field survey revealed that there is a significant increase in both the production and yield of the farm produce after the introduction of the project. it is obvious that many factors are responsible for this increase, but the availability and easy water transfer from the main source to the field for the irrigation is the major determinant for this increase. other factors include free land preparation, land expansion and availability of fertilizer which all together have lesser impact. 3.2.7. estimated annual income of the sampled farmers results showed that the farmers’ annual income has increased after the establishment of the scheme. the breakdown of the farmers’ annual income before and after establishment of the scheme is displayed in table 8. table-8.distribution of estimated annual income of the farmers before and after the establishment of the scheme average annual income (in naira) no of respondents before after < 100,000 100 34 100,000-299,000 41 87 300,000-499,000 9 24 500,000 and above 0 5 total 150 150 the remarkable increase in the farmers’ income is basically from the sale of their surplus produce. grains like maize are often sold while still green or fresh in order to realize higher returns. however, the prices of these produce fluctuate as a result of the function of demand and supply from consumers and the rural farmers. for example, the prices of crops like tomatoes and pepper increase during rainy season. this is because they are not readily available in the market compared to dry season when they are cultivated. 3.3. problems encountered by the respondents the basic problem faced by the respondents associated with irrigation farming is inadequate, irregular and poor supply of water from the scheme to the farmland for irrigation purpose. this shortage of water to irrigate the farmlands occurs as a result of the dilapidation of scheme manifesting in the blockage of the canal. therefore, water that is meant to be supplied to farms percolates and infiltrates into the soil instead of performing its primary function. to solve this problem, efficient and effective measures need to be put in place towards the maintenance and rehabilitation of the scheme for better production. other problems encountered by the respondents include: inadequate pumping machines, shortage of fertilizer, and insufficient capital for farming as presented in table 9 below. table-9.problems encountered by respondents encounters no. of respondent percentage (%) poor water supply 54 36 inadequate fertilizer 33 22 shortage of pumping machines 35 23 insufficient capital 28 19 total 150 100 4. conclusions this study examined the economic impact of irrigation scheme on the farming community in dakaci area around river galma, zaria local government area of kaduna state. it was observed that majority of the farming community are found around the galmafadama project because the irrigation scheme provides the ultimate source of water for agriculture in the area. findings revealed that more than 50% of the farmers in the area belong to the productive age group (25-45) thereby providing occupation for the people in the area. although, most of the farmers engage in other economic 0 20 40 60 80 100 120 1 to 2 3 to 4 5 to 6 >6 bfore after economy, 2014, 1(1): 8-14 14 activities such as civil service and petty trading, they testified that the irrigation farming is a very important means of their livelihood as it provides food security and income for their daily activities. in addition, it was found that most of the respondents have relatively large family size, and their demand for food and other basic needs is met through the irrigation farming. moreover, the educational attainments of the respondents as discovered by the study suggest that the farming community is not illiterate as 85% of them have some form of education. this according to them was achieved through the support of the irrigation farming. furthermore, the establishment of the scheme enabled the farmers to have some savings which were used to own motor cycles, cars and build houses. the study discovered that a variety of crops were grown in the irrigation field in dakaci. the major crops grown include maize, rice, pepper, tomatoes, onions, okro, carrot and other leafy vegetable e.g. spinach. irrigation has actually allowed the growing of more than four varieties of some crops such as tomatoes (utc, indian, acre, and tangilo) that wouldn’t have been possible under dry condition. in addition, it was observed that the irrigation scheme has resulted into high yield produce as well as agricultural production throughout the year. the scheme has also made it possible for many farmers to practice mixed cropping and shifting cultivation. besides, the viability of the irrigation farming has made it possible for about 60% of the farmers to either purchase or rent the farmlands. findings revealed that the farm size of the people has increased significantly after the introduction of the scheme in the area. an examination of the trend of average annual crop yield of the farmers as discovered from the interviews suggest that it fluctuates from time to time depending on the forces of demand and supply acting at a given point in time. this has implication on the average annual income of the farmers. generally, high crop yields and high income levels of the farming community have been associated with the irrigation scheme in the study area. it was found that there is significant rise in the average annual income of the farmers after the establishment of the scheme as some of the farmers now earn over half million annually; while the percentage of the farmers with annual income of 300,000-499,000ngn has almost tripled; whereas the percentage of the farmers with annual income of 100,000-299,000ngn more than doubled after the introduction of the project. the major problem encountered by farmers in the area is inadequate, irregular and poor supply of water from the scheme to the farmland for irrigation purposes. this shortage of water occurs as a result of the dilapidation of scheme manifesting in the blockage of the canals as they could not transport water around the area. the farmers had to use generators and pipes to pump water to the farmlands thereby increasing their cost of production. other problems encountered by the farmers include unavailability of pumping machines, shortage of fertilizer, and inadequate capital. 4.1. recommendations the irrigation scheme plays significant role on agricultural activities in the area, it is imperative to give the following recommendations:  efficient and effective measures need to be put in place towards the maintenance and rehabilitation of the scheme for better production.  government should introduce more of these projects to boost agricultural production.  government should provide credit facilities to the irrigation farmers through the bank of agriculture, and it should be made accessible to the farmers.  farmers should be supplied with pumping machines and fertilizers at a subsidized rate to enable them increase their output.  there is the need to involve the farming community in the management of the irrigation scheme. references ayele, g.k., 2011. the impact of selected small-scale irrigation schemes on household income and the likelihood of poverty in the lake tana basin of ethiopia. a project paper presented to the faculty of the graduate school of cornell university. bagson, e. and c.-j.w. kuuder, 2013. assessment of a smallscale irrigation scheme on household food security and leisure in kokoligu, ghana. research on humanities and social sciences, 3(1): 17-26. hussain, i. and b. madhusudan, 2009. comprehensive assessment of water management in agriculture. colombo, sri lanka: international water management institute. krejcie, r.v. and d.w. morgan, 1970. determining sample size for research activities. educational and psychological measurement, 30: 607610. onward sokoto bulletin, 1983. food and agriculture organization land and water bulletin. rome, (4): 4. oruonye, e.d., 2011. an assessment of fadama dry season farming through small scale irrigation system in jalingo lga, taraba state. international research journal of agricultural science and soil science, 1(1): 014-019. snyder, r.l. and j.p. melo-abreu, 2005. forest protection fundamental practices and economics. food and agriculture organization of the united nations, rome. strauss, j., 1986. does better nutrition raise farm productivity? j. pol econ., 94(2): 297-320. tekana, s.s. and o.i. oladele, 2011. impact analysis of taung irrigation scheme on household welfare among farmers in north-west province, south africa. j hum ecol., 36(1): 69-77. zewdie, m., j. moti and g. ascimelis, 2007. assessment of wendo wesha irrigation scheme in awassa zuria. proceddings of research project completion workshop; 2007 feb 1-2; addis abaaba, ethiopia. bibliography dauda, t.o., o.e. asiribo, s.o. akinbode, j.o. saka and b.f. salahu, 2009. an assessment of the role of irrigation farming in the millennium development goals. abeokuta, nigeria. mokhtar, g., 2007. ancient civilization of africa. unesco international scientific committee for the drafting of a general history of africa. pp: 309. views and opinions expressed in this article are the views and opinions of the authors, economy shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. economy issn: 2313-8181 vol. 1, no. 2, 54-60, 2014 www.asianonlinejournals.com/index.php/economy 54 assessment of risks associated with the usage of quantity surveying softwares in nigeria: the case lagos state akinnagbe, femi peter 1 --adelakun, o. johnson 2 1 department of quantity surveying federal university of technology, akure ondo state, nigeria. 2 department of economics, joseph ayo babalola university, osun state, nigeria abstract this work is licensed under a creative commons attribution 3.0 license asian online journal publishing group 1. introduction the explosive growth of the software application has had unquantifiable impact on business systems and processes. the global acceptance and widespread adoption of quantity surveying software has accelerated the dimensions of competition not only among organizations globally but among professions locally. the quantity surveyor‟s ability to avail themselves with the emerging opportunities provided by the advent of ict depends on the adoption of new technologies (castle, 2002). computer software has promised to be a reliable tool in all spheres of human endeavour. rivard et al. (2004) predicts that the evolution of information technology will have a profound impact on how organizations in the architectural, engineering and construction (aec) industry operate. this is already coming to pass. with information technology playing an increasing role in the economy, quantity surveying firms have grown more heavily in nigeria dependent on the successful delivery of information systems. yet, many estimating and tender analysis software results in systems that do not function as intended, are not used, or are never delivered. oluwole (2010) asserts that to achieve appropriate business objectives, estimating practices have to make a lot of risky decisions in choosing what applications will be appropriate for the firm in the short, medium and long term scenarios. apart from these, they also have to decide on choosing appropriate combination of applications for specific tasks as well as decision on their maintenance, technical support and allied supplementation. regrettably, most estimators are not first-hand software expert. at best, they rely on marketing impulses and persuasions to make decisions on what software package to go for, when and how. this portends a lot of risks for any firm even in several researchers have acknowledged the impact of software in quantity surveying practice. however, it is suspected that not all the consulting firms in lagos state are making use of all the quantity surveying softwares. hence, this study identified a set of risk factors associated with the usage of these softwares. the research adopted convenient method of sampling. twenty nine (29) consulting firms were selected out of which twenty six (26) responded appropriately. data collection was through a structured questionnaire that was administered by the researchers using set predetermined questions. the result of the study reveals that all the quantity surveying firms in lagos state work with microsoft excel and microsoft word packages. thirty percent (30%) of the consulting firms work with master bill, qs cad, qs elite, ripac, computer aided taking off (cato) and building information model software etc. it also reveals that changing trends in technology is the major factor that necessitates the usage of softwares in quantity surveying firms in lagos state. furthermore, incompatibility in software packages is the major risk associated with the usage of quantity surveying softwares. this study recommends that quantity surveying firms must ensure that the choice of software packages should be compatible with the existing model in nigeria in terms of interoperability, portability and flexibility. also, most estimators should be trained and given technical support so that they can become first-hand software expert. keywords: risk, softwares usage, quantity surveying, professional practice, relative importance index, severity index, nigeria. http://creativecommons.org/licenses/by/3.0/ economy, 2014, 1(2): 54-60 55 purchasing a less productive software package. paradoxically, there is inadequate knowledge in available resources on how decisions are made on software selection in construction and quantity surveying firms. oyediran and akintola (2011) states that most patronized software packages used for estimating and tender analysis still rely on manual data input in an age when designs are robustly imbedded with metadata. this is not only counter-productive; it increases the risks for errors which will eventually give wrong budget estimate. another problem in the choice of this software packages is the fact that existing models for selecting appropriate software packages are not based on objective frameworks as recommended in iso/iec 25051:2006 and 20282-1: 2006. some of the peculiar challenges in this direction are interoperability, portability and flexibility. at the moment, it is difficult to customize how estimating applications are used, exchange file formats (e.g. quantification to planning and planning to pricing) and enable remote access. the following are the research questions; i. what are the factors that necessitate the usage of quantity surveying software? ii. what are the risks associated with the usage of quantity surveying softwares? iii. what are the perceived impacts of risks associated with the usage of softwares on quantity surveying practice? this study is aimed at assessment of risk associated with the usage of quantity surveying softwares in lagos state. the following objectives are proposed in achieving this aim, they are to; i. assess the factors that necessitate the use of quantity surveying software. ii. assess the risks associated with the use of quantity surveying softwares. iii. identify and assess the perceived impact of risks associated with the usage of softwares on quantity surveying practice. 2. literature review the basic concept behind the information age (computer age) is to create a platform for individuals to transfer and process information with ease and to have instant access to information that would have been difficult or impossible to assess using the traditional methods. this was able to come to fruition through the introduction of computers and the internet. these inventions, over the years have brought about an immeasurable transformation in the affairs of individuals, increasing efficiency and performance right from their business transactions and processes down to their domestic activities. the introduction of computer software application has brought about a stronger sense of will to achieve success, thereby making people more intellectually engaged than ever before. the application of information communication technology techniques in various sectors of a nation‟s economy is by no way exhaustive. the construction industry is so hierarchical and fragmented in nature that some of the major participants do not consider themselves to be part of the same industry (hindle, 2000). according to toole (2003), this requires close coordination among a large number of specialized but interdependent organizations and individuals to achieve the cost, time and quality goals of a construction project. maqsood et al. (2004) state that a major construction process demands heavy exchange of data and information between project participants on daily basis. the construction industry is not left behind in this trend towards computerization. the introduction of software application has improved the efficiency and capability of various aspects involved in project delivery in the construction industry. quantity surveyors are information managers and tend to be concerned about the facilities available to them. this pivotal role requires that they must not lag behind in the adoption of tools that would improve their service delivery (oyediran and odusami, 2005). the impact of information communication technology can be seen in several areas such as in estimating, bill preparation, tender analysis, life cycle costing, value analysis, and valuation. the use of information communication technology in construction has been sporadic and piecemeal (hore, 2006). in an economic environment that is constantly changing, the need and ability to adapt and innovate becomes increasingly important (van der and jeune, 2009). according to musa et al. (2010), quantity surveying in nigeria is experiencing dramatic but significant changes in scope and service delivery. these changes were as a result of the introduction of the usage of softwares and online portals into their service delivery. this became necessary due to the increasing demand for quantity surveying services and complexity in modern constructions. software application can be viewed in two major areas. the first was the use of softwares in creating drawings, making structural analysis, carrying out cost and time calculations. the second was concerned with the use of computers to classify, store and manage the construction information (isikdag, 2006) cited in (isikdag et al., 2009). the connection of these computers to the internet creates a platform for readily exchange of information among firms and professionals across the globe. as a result of application of these information communication technology tools, there tend to be changes in organizational processes, work methods and culture (rukair (2005)) cited in (oladapo, 2006). this brings about a new work order that leads to optimization of resources (musa et al., 2010).there are various adaptable software packages available in the practice of the quantity surveying profession today, and these packages have introduced ways for carrying out the various quantity surveying tasks. according to onyegiri et al. (2011), the construction industry is faced with the on-going challenge of changing and improving current work practices in order to become more client-orientated; more competitive as well as productive through adoption of ict as an integral part of the construction process weippert et al. (2003). much effort has been directed toward improving construction productivity and the use of software in construction and this is an area worth concentrating upon because it can decrease the time for data processing, communicating information and increase overall productivity. modern structural design software applications, such as 3d modelling and building information modelling (bim), provide an example where designing complex structures and organizing the electrical, mechanical, site, structural and quantifying of a project can be achieved in minimum time and increase the efficiency all in one data frame work, whereas in the past this was almost impossible peansupap and walker (2005). economy, 2014, 1(2): 54-60 56 therefore the understanding of information communication technology and its role is important for the realization of improved communications between participating organizations in construction projects. information communication technology in construction can be broken down into different segments for its better understanding and its role in construction. the word information, 462 communication and technology can be understood from different perspectives as well as towards an ict view, as a whole new meaning of its own. adriaanse and voordijk (2005) give explanation from the functionalist (positivistic, „scientific‟) perspective that “information communication technology is a neutral provider of input for decision making”. in this point of view communication is no more than distribution of information. information communication technology may be adopted by specific groups of users within an organization. for example, use of computer aided drafting (cad) by quantity surveyor, architects or estimating software used by engineers or project managers. emmitt and gorse (2006) identify the reality that communication between construction industry participants and organisations are concerned with information exchange, dealings with drawings, specifications; cost data, programmes plus other design and management information. 2.1. various softwares used in quantity surveying practices there are various specialist softwares packages for performing the array of tasks involved in the practices. below is an analysis of some selected softwares and their features; i. autodesk quantity takeoff; winqs; vector; costx; develop; feasibility estimate; cut and fill; digico; ripac; qsplus; qs cad; masterbill; building information model software; microsoft excel. 2.2. factors that necessitates the use of quantity surveying softwares in nigeria spread sheets databases and project management software are used frequently in construction organisations. electronic document management systems and imagine systems are not widespread. past surveys have found that software application are used in quantity surveying firms for functions such as word processing project management, data analysis etc. five factors that necessitate the use of quantity surveying software are: i. increasingly sophisticated clients. ii. increasing collaboration. iii. level of competition. iv. economic policies and v. changing trends in technology. 2.3. risks associated with the usage of quantity surveying softwares despite the fact that quantity surveying softwares make professional job easier, facilitates decision making, improve public image of firms and increased productivity through automated quantities and cost calculations there are risks associated with the usage of software which would be explicitly explained and analysed below: i. proliferation of software application. ii. virus attacks. iii. project information discouragement. iv. lack of first-hand software expert. v. health risks. vi. incompatibility in software packages. vii. lack of management desire and appreciation of software. viii. high rate of obsolescence of software. 3. research methodology specifically, this section consider areas which include research design, study population, sampling frame, sample size, sample techniques, research instrument, data collection procedure and method of analysis. research design addresses the planning of scientific inquiry or designing a strategy for finding out something. the essence of this study is to evaluate the assessment of risks associated with the usage of quantity surveying softwares in lagos state. the study focuses on the assessment of risks associated with the usage of quantity surveying softwares. this study was limited to registered quantity surveying firms (consulting firms) whose head offices are located in lagos state. the sample frame for this study is the registered consulting firm that uses quantity softwares in lagos state. the total number of consulting firms gotten was ninety-five and this will serve as the frame of the study. the sample size for the data was analysed only for registered quantity surveying firms whose head offices are located in lagos state, nigeria. using yamani theory; n = n ------------------------------------equation (1) 1 + n (e) 2 e = 15% where e (level of precision) = 0.15 n = total population n = sample size it is logistically, financially and technically impossible to collect from all the registered quantity surveying firms within the study area; it is therefore desirable to adopt a sampling process that will estimate bias in the choice of respondent for the target population. a simple convenient sampling method was used to obtain the necessary data. economy, 2014, 1(2): 54-60 57 the instrument used for collecting data from the respondent was through a structured questionnaire that was administered by the researcher using set predetermined questions. the questionnaire designed for this research was such that first section dwelled on the background information of the respondents while other section focused on matters relating to the research study. questions inherent in structured questionnaire were asked on a five (5) point linkert scale and it was chosen for ease and uniformity of response. its application implies that most part of the data analysis was based on a scoring system. the schedule contains simple and straight forward questions in chronological order designed in such a way that response to it should not take more than 20minutes considering the busy schedules of the quantity surveyor. tables were employed in this research for data presentations. the analysis of the collected data was carried out using the following descriptive and analytical scientific methods. 3.1. the mean score the mean was employed to calculate the mean year of working experience of respondent and to determine the variance among different professionals response. since a linkert of 5-point scale will be employed for the collection of data, the formula for mean is written as; formulae: where m = ∑ ∑ where is the frequency of each class, is the mid-point of each class interval based on this assertion, microsoft excel, spss and also inferential statistics will be used to analyse the assessment of risk associated with the usage of quantity surveying softwares. similarly, the summation of fx gotten from the multiplication of frequencies of the respondents and the ratio of the range of option between 1-5, fx is been divided by the total number of questionnaires analysed to get the mean factor which was then ranked from the highest to the lowest. mean score equation used for the calculation m = 5(fx5) + 4(fx4) + 3(fx3) + 2(fx2) + (fx1) x5 + x4 + x3 + x2 + x1 where m = mean score x = range 1 – 5 with 5 being the highest and 1 being the lowest f = frequency of respondent in each factor 3.2. relative importance index ∑ a x n (0 < index ≤ 1) where w = weighting given to each factor by the respondents and ranges from 1 to 5 where '1' is 'not significant' and '5' is 'extremely significant', a = highest weight (i.e. 5 in this case), and n = total number of respondents. 3.3. severity index ∑ a x n x 100 where w = weighting given to each factor by the respondents and ranges from 1 to 5 where '1' is 'not significant' and '5' is 'extremely significant', a = highest weight (i.e. 5 in this case), and n = total number of respondents 4. data presentation, analysis and discussion this chapter analyses and discusses the data collected through questionnaires in order to achieve the aim and objective of this study. the data is presented in a tabular form, relevant and necessary information collected through the questionnaires would help to achieve the aim and objective of this research work. 4.1. analyses of data table-4.1. number of questionnaire distributed and retrieved s/n location no. of questionnaire distributed no. of questionnaire retrieved 1 ikeja 8 8 2 ikorodu road 6 4 3 yaba 6 6 4 mushin 1 1 5 obalende 4 3 6 surulere 4 4 total 29 26 source: field survey 2013 economy, 2014, 1(2): 54-60 58 table 4.2 indicates the number of years of firm‟s establishment obtained. the years range of 1996–2000 predominate (33.3%), next is year range of 1985-1990 (26.7%), followed by year range of 1991-1995 (20%), and the year ranges of 1981-1985, 2001-2005 and 2006-2010 have the same percentage representation (6.7%). it can be deemed that most of the firms are well experienced and knowledgeable in construction and their responses to questions on the questionnaire can be relied on. about 11 firms did not thick their years of establishment. table-4.2. number of year‟s of firm establishment years of firm establishment frequency (f) percentage (%) 1981 – 1985 1 6.67 1986 – 1990 4 26.67 1991 – 1995 3 20.00 1996 – 2000 5 33.33 2001 – 2005 1 6.67 2006 – 2010 1 6.67 total 15 100 source: field survey 2013 table-4.3. years of working experience of the respondent years of working experience mid-point (x) frequency (f) percentage (%) 1 – 5 3.0 16 61.54 6 – 9 7.5 3 11.54 10 – 15 12.5 3 11.54 16 – 20 18.0 1 3.85 above 20 22.5 3 11.54 total 26 100 source: field survey 2013 table 4.3reveals the respondents‟ years of working experience, 61.54% have 1-5 years of experience, 11.54% have between 6 – 9 years, 11.54% have between 10 15 years, 11.54% have above 20 years of experience, and 3.85% has 16-20 years working experience. it was also discovered that the mean years of working experience is7.4. therefore, it is evident that the data retrieved from these questionnaires are reliable and good enough to form a basis for this project due to the fact that the respondents are experienced, truthful and honest. it is also obvious from the data that the respondents are experienced enough to give adequate data and correct information on the assessment of risk associated with the usage of quantity surveying softwares. table-4.4. level of usage of quantity surveying software s/n softwares mean score percentage (%) a spread sheet (microsoft excel) 5.00 18.01 b word processor (microsoft word) 5.00 18.01 c ripac 1.46 5.26 d qs cad 2.38 8.59 e qs elite 1.62 5.82 f master bill 2.54 9.14 g win qs 1.27 4.57 h computer aided estimating (cae) 1.27 4.57 i computer aided taking off (cato) 1.42 5.12 j vector 1.15 5.12 k digico 0.92 3.32 l qs plus 1.23 4.43 m building information model software 1.38 4.99 n cost x 1.12 4.02 source: field survey, 2013 table 4.4 present the level of usage of quantity surveying softwares. microsoft excel and microsoft word (18%) have the highest level of usage among quantity surveying firms in nigeria. the likely reason for the high usage of microsoft excel and microsoft word is their availability and universal, low cost, and its application is simple to understand. digico (3.3%) have the lowest level of usage. the likely reason for the low usage of digico is the unawareness of its usage and has some restricted limitation in its usage. table-4.5. factors that necessitate the usage of quantity surveying software s/n factors mean score percentage (%) 1. changing trends in technology 4.85 23.54 2. increasingly sophisticated clients 4.16 20.21 3. level of competition 4.12 20.02 4. increasing collaboration 3.79 18.42 5. economic policies 3.67 17.81 source: field survey 2013 table 4.5 presents the factors necessitating the usage of quantity surveying software. changing trends in technology (23.5%) is rated as the highest factor with mean score of 4.85, increasingly sophisticated clients (20.2%) with mean score of 4.16 and economic policies (17.81%) is rated as the least factor with mean score of 3.67. economy, 2014, 1(2): 54-60 59 table-4.6. the risk associated with the usage of quantity surveying software source: field survey 2013 table 4.6 reveals the relative importance index (rii) calculated for each risk based on overall risk significance in the usage of quantity surveying softwares. the most significant risk is incompatibility in software packages with the relative importance index of 0.73, followed by lack of first hand expert with relative importance index of 0.71, virus attack has relative important index of 0.64 and health risk is of the lowest significance (rii 0.42). table-4.7. perceived impact of risk associated with the usage of softwares in quantity surveying firms s/n impact mean score severity index (s.i) (%) 1. capable of making professionals redundant 2.62 52.40 2. wrong budget estimate 2.42 48.46 3. project failure 1.69 33.85 4. project delay 1.65 33.08 source: field survey 2013 table 4.7 reveals the perceived impact of risk associated with the usage of software in quantity surveying firms in nigeria. the major impact of risk associated with the usage of software on quantity surveying practice is the capability of making professionals redundant(s.i 52.40%).wrong budget estimate has mean score of 2.42 and project delay (s.i 33.1%) has mean score of 1.65. 4.2. discussion of findings 4.2.1. the factors that necessitate the usage of quantity surveying softwares. it was discovered that changing trends in technology (23.5%) with the mean score of 4.85 is the most important factor that necessitates the usage of quantity surveying softwares due to the fact that the introduction of theses softwares is being viewed as an important strategic tool towards making the firm more efficient, profitable and competitive. software application reduces the time for data processing and communicating information, and improves communications for effective decision making and coordination among construction participants to enhance construction productivity. the least of the factors is economic policy (17.8%) with a mean score of 3.67 due to the fact that the privatization policy is gradually increasing the burden of development on the private sector and the nature of construction procurement and management will evolve to meet this privatization trend. 4.2.2. the risks associated with the usage of quantity surveying softwares in lagos state. the analysis reveals that the most significant risk is incompatibility in software packages with the relative importance index of 0.73 due to the fact that the wide range of software used and the incompatibility between many of these systems severely limits the scope for the firms to take advantage of the rapid technological advances surrounding it and also some software components or systems may be compatible in one environment and incompatible in another. lack of first hand expert has the second most significant risk with relative importance index of 0.71 due to the fact that most estimators are not first-hand software expert. at best, they rely on marketing impulses and persuasions to make decisions on what software package to go for, when and how and this portends a lot of risks for any firm even in purchasing a less productive software package. however, it is important to note that health risk is of low significance. it has the lowest risk with relative importance index of 0.42. 4.2.3. the perceived impact of risks associated with the usage of softwares on quantity surveying practice it was discovered that introduction of softwares has rendered professionals redundant due to the fact that quantity surveying in nigeria is experiencing dramatic and significant changes in scope and service delivery. these changes were as a result of the introduction of the usage of softwares and online portals into their service delivery. this became necessary due to the increasing demand for quantity surveying services and complexity in modern constructions musa et al. (2010). software application can be viewed in two major areas. the first was the use of softwares in creating drawings, making structural analysis, carrying out cost and time calculations. the second was concerned with the use of computers to classify, store and manage the construction information (isikdag, 2006) cited in (isikdag et al., 2009). however, availability of this software has caused so many professionals in the field redundant. s/n risk relative importance index rank 1. incompatibility in software packages 0.73 1 2. lack of first hand expert 0.71 2 3. virus attack 0.64 3 4. proliferation of software application 0.59 4 5. lack of management desire and appreciation of software 0.59 4 6. high rate of obsolescence of software 0.56 6 7. capable of making professional redundant 0.52 7 8. project information discouragement 0.50 8 9. low return on investment 0.48 9 10. health risks 0.42 10 economy, 2014, 1(2): 54-60 60 however, the impact of risk will have little or no effect on project delay (s.i 33.1%) and project failure (s.i 33.9%)due to the fact that poor risk management and supervision, work variations are one of the major factors that leads to project delay. 5. conclusion and recommendation 5.1. conclusion this study focuses on the assessment of risk associated with the usage of quantity surveying softwares in nigeria. the assessment of risk associated with the usage of quantity surveying softwares reveals the following conclusions; i. all the quantity surveying firms work with microsoft excel and microsoft word packages. ii. changing trends in technology is the major factor that necessitates the usage of softwares in quantity surveying firms in lagos state. iii. incompatibility in software packages is the major risk associated with the usage of quantity surveying software in lagos state. iv. the major perceived impact of risk associated with the usage of softwares on quantity surveying practice is that it is capable of making professionals redundant. 5.2. recommendation below are some vital recommendations for this research work; i. quantity surveying firms must ensure that the choice of software packages should be compatible with the existing model in nigeria in terms of interoperability, portability and flexibility. ii. estimators should be trained and given technical and financial support so that they can become first hand software expert. iii. original and updated antivirus (e.g. microsoft security essentials) should be installed on computer system so as to avoid the risk of virus attacks. iv. the use of monitor screen guide on computer system will automatically reduce the effect of monitor glare which could cause headaches, a burning sensation in your eyes, temporarily blurred vision. also, constant body exercise will alleviate pains in the spinal cord and pressure on the invertebral discs that cushion impact stress when sitting at your workstation for extended periods. references adriaanse, a. and h. voordijk, 2005. inter-organizational communication and ict in construction projects: a review using met triangulation. construction innovation, 5(3): 159-177. castle, g., 2002. new technology-opportunity or threat? in: d. cartlidge (ed.) new aspects of quantity surveying practice. oxford: butterworth heinemann. pp: 189-220. emmitt, s. and c. gorse, 2006. communication in construction teams, oxford, 15. hindle, b., 2000. construction industry development through intervention: a right and a wrong way. european journal of scientific research, 8(2): 271 275. hore, a., 2006. use of it in managing information and data on construction projects – a perspective of the irish construction industry. journal of information technology in construction project management, 20(2): 35. isikdag, u., j. underwood, m. kuruoglu, j. goulding and u. acikalin, 2009. construction informatics in turkey: strategic role of ict and future research directions. journal of information technology in construction, 14(47): 412-428. maqsood, t., d.h.t. walker and a.d. finegan, 2004. an investigation of information communication and technology diffussion in an australian construction contractor company using ssm. procurement of the joint cib-w107, bangkok, thailand. pp: 17-19. musa, n.a., t.o. oyebisi and m.o. babalola, 2010. a study of the impact of information and communications technology (ict) on the quality of quantity surveying services in nigeria. the electronic. journal on information systems in developing countries (ejisdc), 42(7): 1-9. oladapo, a.a., 2006. the impact of ict professional practice in the nigerian construction industry. the electronic journal on information systems in developing countries, 24(2): 1-19. oluwole, a.o., 2010. virtual reality and estimating practice: a software selection model for estimating. london: e & f.n spon ltd. onyegiri, i., c. nwachukwu and j. onyegiri, 2011. information and communication technology in the construction industry. america journal of scientific and industrial research, ajsir, 2(3): 461-468. oyediran, s.o. and a. akintola, 2011. a survey of the state of the art of e-tendering in nigeria. university of lagos, sos publications pp: 3031. oyediran, s.o. and k.t. odusami, 2005. a study of computer usage by nigerian quantity surveyor. university of lagos, sos publications pp: 38-40. peansupap, v. and d. walker, 2005. factors affecting ict diffusion a case study of three large australian contractors. engineering, construction and architectural management, 12(5): 21-27. rivard, h., t. froese, l.m. waugh, t. el-diraby, r. mora, h. torres, s.m. gill and t. o'reilly, 2004. case studies on the use of information technology in the canadian construction industry. j&tqnexn ltd. canadai tcon, 2(3): 19-34. toole, t.m., 2003. information technology innovation: a view of large contractors, procurement of the asce construction research congress, honolulu, hawaii. pp: 19-21. van der, f.r. and l.k. jeune, 2009. innovation in the south african quantity surveying profession. rics cobra research conference, university of capetown. oxford, 15. weippert, a., s.l. kajewski and p.a. tilley, 2003. the implementation of online information and communication technology (ict) on remote construction projects. logistics information management. european journal of scientific research, 16(6): 327 340. views and opinions expressed in this article are the views and opinions of the authors, economy shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. economy issn: 2313-8181 vol. 3, no. 1, 19-23, 2016 www.asianonlinejournals.com/index.php/economy 19 term structure of interest rates under zero or low bound: the recent japanese case yutaka kurihara1 1 aichi university, department of economics, hirakie nakamura nagoya, japan abstract this article examines the recent term structure of interest rates in japan. no consensus has been reached on whether or not the yield curve can be asymmetric and can be an economic predictor, although much discussion has occurred. in japan, the zero or low-bound interest rate policy and, after that, the quantitative easing policy was conducted to boost the economy since the end of 1990s. recession and deflation have been ongoing for more than 20 years. the term structure of interest rates uses an unusual style compared to the normal structure, especially during zero or low-bound period, as interest rates in general tend not to be negative. using empirical methods, this article shows that the term structure is a nonlinear relationship between shortand long-term rates during the zero or low-bound policy period in japan. for the sensitivity of short-term yields to long-term interests, there is no evidence for symmetric response to positive and negative short-term rate change; however, and only during the zero or lowbound interest rate policy era, there is a symmetric response on longer-term interest rate. moreover, the long-term yield spread is not a good predictor of recessions. keywords: monetary policy, quantitative easing, yield curve, zero or low interest rate. contents 1. introduction ......................................................................................................................................................................... 20 2. theoretical backgrounds ..................................................................................................................................................... 21 3. empirical methods .............................................................................................................................................................. 21 4. empirical results ................................................................................................................................................................. 22 5. conclusions .......................................................................................................................................................................... 22 references ................................................................................................................................................................................ 23 citation | yutaka kurihara (2016). term structure of interest rates under zero or low bound: the recent japanese case. economy, 3(1): 19-23. doi: 10.20448/journal.502/2016.3.1/502.1.19.23 issn(e) : 2313-8181 issn(p) : 2518-0118 licensed: this work is licensed under a creative commons attribution 3.0 license funding: this study received no specific financial support. competing interests: the author declares that there are no conflicts of interests regarding the publication of this paper. transparency: the author confirms that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: history: this study follows all ethical practices during writing. received: 1 september 2015/ revised: 12 december 2016/ accepted: 25 january 2016/ published: 4 february 2016 publisher: asian online journal publishing group http://creativecommons.org/licenses/by/3.0/ http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.1/502.1.19.23 http://search.crossref.org/?q=10.20448/journal.502/2016.3.1/502.1.19.23 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.1/502.1.19.23 http://search.crossref.org/?q=10.20448/journal.502/2016.3.1/502.1.19.23 economy, 2016, 3(1): 19-23 20 1. introduction this paper examines the recent term structure of interest rates in japan and assesses whether or not the slope of the yield curve can be a good predictor of recession. in japan, the zero or low-bound interest rate policy and later, the quantitative easing policy, have been implemented to boost the economy. recession and deflation have been ongoing for more than 20 years. the term structure of interest rates during these times use a style that differs from the normal situation as interest rates in general tend not to be negative. it should be noted that these analyses were conducted during recession. although there has been much discussion about yield curves, no consensus has been reached. japan enjoyed high economic growth during the 1980s. stock and land prices increased enormously starting in the middle of the 1980s. after the signing of the plaza accord with the g5 countries, including japan, in 1985, the japanese yen appreciated sharply. usually appreciation of the yen (i.e., the domestic currency) causes a loss in international competitiveness with foreign countries, decreased exports, and recession in japan; however, exports did not decline and the economy did not shrink. consumer prices did not rise greatly. it was lucky for the japanese economy that oil prices did not increase sharply. however, the bubble economy burst at the end of the 1980s, and the japanese economy experienced recession. in the 1990s, however, the country suffered a recession with very low and sometimes negative growth rates late in the decade and in the beginning of the 2000s. the largest reason for the recession was said to be the country’s weak and fragile financial system and structural problems such as delays in political and economic systems. barriers of deregulation in many areas are typical examples. the bank of japan (boj) introduced a new and unprecedented monetary policy, the zero interest rate policy, in february 1999. the boj judged that japan’s economic indicators had come to a pause, so it adopted a policy of maintaining interest rates at an unprecedented low level. japan’s experience with this quantitative easing policy, more aggressive policy, by the boj dates back to march 2001. following a period of zero interest rate policy (february 1999–august 2000), the boj introduced this quantitative easing policy in march 2001. the main operating target for many market operations changed from the uncollateralized overnight call rate to be the outstanding balance of the current account at the boj. at the end of 2001, the boj raised the outstanding balance of the current account at the boj from around 10 to 15 trillion yen. under this quantitative easing policy, the boj employed purchases of japanese government bonds as the main instrument to reach its target. the boj, with interest rates at their zero or low bound, conceived a goal of purchasing government securities from the banking sector. this aim can be understood as sending money to the economy, promoting increases in asset prices, and removing deflationary pressures. in march 2006, the boj exited quantitative easing amid signs that deflation was ending and the recession had disappeared. on july 14, 2006, the zero interest rate policy ended. after the occurrence of the subprime problems in 2007 and the lehman shock in 2008, a huge amount of capital flowed into the japanese financial markets in spite of the fact that the japanese economy still was not in good condition. the japanese yen appreciated against other currencies, which hit the japanese economy. in october 2010, the boj introduced its comprehensive monetary easing policy to respond to the re-emergence of deflation and a slowing recovery. one key measure was an asset purchase program that involved government bonds as well as private assets. after that, the japanese government changed and more aggressive fiscal policy was strongly demanded. the zero interest rate policy was in effect beginning in october 2010 and continues in force now.  in japan, a drastic new policy, called abenomics (for abe, the prime minister), was adopted in 2013. the japanese government not only implemented drastic fiscal policy but also took measures to strengthen competitiveness and economic growth. japan has been under severe economic conditions, namely, deflation. these measures included possible policy actions to reform the economic structure, such as concentrating resources on innovative research and development, strengthening the foundation for innovation, performing regulatory and institutional reforms, and changing the tax system (increasing the consumption tax and reducing the corporate tax). moreover, by strengthening coordination between the boj and the government, since 2013, the japanese government has implemented measures to achieve a new fiscal structure to ensure the credibility of the fiscal condition. boj introduced abenomics, an unprecedented aggressive monetary policy, in april 2013. kurihara and fukushima (2013) showed that abenomics seems to be effective at present; however, the effects have been limited. most people consider that the recent good performance of the economy actually is mainly a result of abenomics rather than the zero interest rate policy. however, this study shows that the zero interest rate policy has influenced activity for the long-term. thus there is some possibility that the zero interest rate policy has caused the present good situation. it seems necessary to distinguish between the effect of the zero interest rate policy and those of quantitative easing policy or abenomics. much discussion has taken place about the yield spread of interest rates. from the view of monetary policy, bernanke and blinder (1992) showed that monetary tightening results in short-term interest rates that are high relative to long-term interest rates. in turn, high short-term interest rates cause slowing of the economy. kim and singleton (2012) and krippner (2013) noted that the extent to which the shadow rate is below the short-term interest rate is a measure of the degree to which the zero or low bound interest rates are binding. swanson and williams (2014) showed that long-term yields tend to be responsive to economic news for much of the zero or low-bound interest rates period, which implies that monetary policy remains effective by influencing long-term yields using forward guidance and asset purchases. one can safely say that under the zero or low-bound interest rates, some consideration would be necessary. ruge-murcia (2006) showed that when zero low bound is taken into account, the hypothesis of expectations for the yield spread means a nonlinear relationship between changes in short-term interest rates and long-term ones. as the short interest rate becomes zero, the sensitivity of long-term interest rates with respect to short-term interest rates declines. this response becomes asymmetric with short-term rate increases associated with larger absolute long-term interest rate movement rather than decreases in the short-term. the extent to which these nonlinearities exist is informative about the transmission of short-term rates changes to long-term ones (grisse, 2015). ruge-murcia (2006) estimated whether or not the nonlinearities of yield spread exist in japan and found that the sensitivity of yields to economy, 2016, 3(1): 19-23 21 short-term rate movement decreased before the zero or low bound was reached but expanded with the boj’s asset purchases. gürkaynak et al. (2005) and swanson and williams (2014) showed that 1-year and 2-year treasury bond yields were unconstrained, which indicates that monetary and fiscal policy were as effective as usual. grisse (2015) examined whether these effects exist in the us term structure and found no evidence for the expected asymmetric effects of short-term rate increases versus declines. also, whether or not the yield curve can be a predictor for the economy has been examined but no consensus has been reached. mehl (2009) showed that yield curves for the united states and the euro area for emerging economies produces information that may predict future economic growth. this means that monetary policy changes in the united states make international financial linkages strong as a result of interest rate pass-through. this article focuses on the period of recession in japan. mishkin (1990a;1990b) and estrella and hardouvelis (1991) showed that an inversion of the slope of the yield curve indicates a recession back to the 1990s in the united states. ahrens (2002) noted that the term structure is a predictor of recessions in eight oecd countries. karunaratne (2002) showed that stationary variables revealed that the yield curve produces a good forecast of economic activity. on the other hand, plosser and rouwenhorst (1994); bonser-neal and morley (1997); kozicki (1997); estrella and mishkin (1997) and estrella et al. (2003) showed that evidence on the ability of the yield curve to help predict future growth for other countries has so far been difficult and is limited to a few industrialized countries. estrella and mishkin (1996) and estrella and trubin (2006) showed that empirical results depend on macroeconomic variables. also, a variety of non-negative symmetric term structure models lead to various predictions regarding the behavior of longer-term yields around the zero or low bound (kim and singleton, 2012). de (2013) showed that the term structure is not a reliable predictor of economic growth. moreover, mishkin (1990a;1990b;1991) indicated that the slope of the yield curve causes expected inflation changes. greenspan (2005) showed that many factors can influence the yield curve, including the gap between longterm and short-term inflation expectations or the risk premium. vayanos and vila (2009) showed that each maturity of interest rates has its own clientele and substitution across financial instruments maturities is performed by riskaverse arbitrageurs. guibaud et al. (2013) showed that if agents are more risk-averse, an increase in the long-term clientele increases the price and optimal supply of long-term bonds. 2. theoretical backgrounds this article examines the recent term structure of interest rates in japan and whether or not the term structure can be a good predictor for the economy. for the first objective, the following term-structure model is considered (rugemurcia, 2006; grisse, 2015). rt = a +∑ jrt-j +cxt +εt (1) r*t = max (rt, 0) (2) rt = (rt + e(rt+1 | it) +・・・+ e(rt+n-1 | it)) +θt (3) equation (1) means that rt depends on past short-term interest rates and on the m×1 vector of exogenous variables xt; and bt the m×1 vector c are parameters; and εt is a shock. equation (1) imposes the constraint that the short-term interest rate, r*t, is non-negative where rt denotes the shadow rate. equation (3) says that the yield of an nperiod bond rt is determined by this expectation hypothesis, plus a liquidity and term premium θt, which is not correlated with εt. when r*t = 0, the shadow rate is unobserved and expectations of rt can be calculated conditional on the information set, it, which includes variables observed at each period t. ruge-murcia (2006) and grisse (2015) showed that the solution implies a nonlinear relationship between short-term interest rate changes and associated changes in long-term interest rates. this article also examines whether or not the slope of the yield curve is a good predictor of the economy. the period of recession in japan is focused. if empirical results support the relationship between the slope of the yield curve and economic activity, the relationship is positive and reflects the expectations of markets regarding future economic growth. a positive spread between long-term and short-term interest rates, that is, a steep yield curve, is linked to an expectation of an increase in economic activity. on the other hand, negative spread, that is, a flattening or inverted yield curve, is associated with an expectation of a decline in economic growth. 3. empirical methods daily and quarterly data on japanese bond yields of constant maturity were obtained from international financial statistics (imf). daily figures are from january 1999 to july 2015.the total data are divided into two parts. one is to july 13, 2006, and the other is from july 14, 2006. on july 14, 2006, the zero interest rate policy ended. quarterly data are from 1999q1 to 2015q1 and also are divided at 2006q3. the zero interest rate policy was first introduced in japan in 1999. the following regression calculates the effect of changes in short yields ∆yt: ∆yt = a + bplus(∆xt>0) ∆xt + bminus(∆xt<0) ∆xt +εt (4) where plus and minus are the indicator function. this specification is estimated in ruge-murcia (2006) and grisse (2015). the coefficients change using rolling regressions over 2-year periods are estimated as follows: bsize,t = (bplus + bminus)/2 bsign,t = (bnegative bpositive) if the zero low bound is binding, bsize is less than its average value. also, if bsign is less than the average value of that one, the zero bound is binding. also, the recession is regressed by a measure of steepness. the steepness of the yield curve is defined as the difference between long-term and short-term interest rate (estrella and mishkin, 1996; estrella and trubin, 2006; ozturk and felipe, 2013). a measure of the forecast for the economy is calculated as shown in equation (5).the probit model is used for estimation. this model is used to model binary outcome variables. in this model, the standard normal distribution of economy, 2016, 3(1): 19-23 22 the probability is modeled as a linear combination of the predictors. it is a popular specification for a binary response model. recession is defined as occurring if a country reports negative gdp growth. to explain the variable, 1 means recession and 0 means otherwise. recessiont = a + bslope(-1) +εt (5) 4. empirical results the results are shown in tables 1–table 3.tables 1 and 2 show the results of equation (1). the sample period of table 1 is from the beginning of 1999 to july 13, 2006.as explained above, it is mainly during zero or low-bound interest rate policy era. the period of table 2 is from july 14, 2006, to the end of july 2015. this period is also mainly during the quantitative easing era. in both tables 1 and 2 ny means the maturity of bonds. n denotes year and y denotes year. also, nmp and nmm mean maturities of bonds. n means month, p means plus, and m means minus. the results shown tables 1 and 2 are interesting. only the case of zero or the low-bound interest rate policy era and 10-year bond (the longest one) is significant. during that era, the interest rates moved symmetrically. however, except for the case of 1year, the results are not significant. in table 2 all of the coefficients show that interest rates moved asymmetrically. however, none of the coefficients are significant. thus, during zero or the low-bound interest rate policy era, interest rates moved according to the theory for the case of long-term interest rate. for size and sign, high volatility is found during the period of quantitative easing era. it may reflect the boj’s large scale purchases of financial assets. table-1. zero or low-bound interest rate policy era 2y 3y 5y 10y c 2.17e-05 (0.132) 2.38e-05 (0.120) 3.83e-05 (0.150) 0.0005 (0.262) 3mp 6.21e-05 (0.012) 2.96e-05 (0.005) 6.51e-05 (0.008) 0.140** (2.332) 3mm 0.0002 (0.033) 0.0006 (0.074) 0.001 (0.092) 0.225** (2.254) adj.r2 -0.0003 -0.0003 -0.0003 0.0006 f-statistic 0.001 0.005 0.008 3.204 prob (f-statistic) 0.998 0.994 0.991 0.040 durbin-watson 1.844 1.877 1.928 2.929 note: figures in parentheses are t-values. ***, **, and * denote significanceat 1, 5, and 10% respectively. table-2. quantitative easing era 2y 3y 5y 10y c 6.64e-05 (0.135) 7.57e-05 (0.128) 0.0001 (0.160) -0.0005 (-0.889) 3mp -0.002 (-0.043) -0.004 (-0.069) -0.0006 (-0.078) -0.026 (-0.355) 3mm 0.029 (0.313) 0.056 (0.490) 0.089 (0.612) 0.095 (0.744) adj.r2 -0.0008 -0.0008 -0.0007 -0.0006 f-statistic 0.062 1.152 0.240 0.280 prob (f-statistic) 0.939 0.858 0.786 0.755 durbin-watson 1.158 1.208 1.264 2.446 note: figures in parentheses are t-values. ***, **, and * denote significance at 1, 5, and 10% respectively. equation (5) was estimated to evaluate whether or not the long-term yield spread is a good predictor of recessions. the explained variable was the binary variable, recession. the results are shown in table 3. table-3. long-term yield spread and recession c 0.540*** (2.747) 0.549*** (8.261) 0.558*** (2.852) 0.529*** (8.201) 10y(-1)-3m(-1) 0.019 (0.116) -0.012 (-0.078) 2y(-1)-3m(-1) 0.462 (0.797) 0.407 (0.704) gdp(-1) -0.027 (-1.057) -0.028 (-1.121) adj.r2 -0.013 -0.003 -0.015 -0.007 f-statistic 0.561 0.877 0.006 0.495 prob (f-statistic) 0.573 0.420 0.938 0.483 durbin-watson 1.558 1.588 1.598 1.630 note: figures in parentheses are t-values. ***, **, and * denote significance at 1, 5, and 10% respectively. in most cases, the coefficients are positive as expected; however, they are not significant. therefore, the longterm yield spread is not a good predictor of recessions. 5. conclusions this study examined the term structure of interest rates in japan during the era of zero or low interest rate policy and the era of quantitative easing policy. using empirical methods, this article showed that the term structure has a economy, 2016, 3(1): 19-23 23 nonlinear relationship between shortand long-term rates under zero or the low bound in japan. for the sensitivity of short-term yields to long-term interests, there was no evidence of a symmetrical response to positive and negative short-term rate changes in most cases; however, only in the case of zero or low-bound interest rate policy era is there a symmetrical response with longer-term interest rates. moreover, the long-term yield spread is not a good predictor of recessions. the results are not surprising. zero or very low interest rates are a specific case and usually interest rates do not move into the negative. however, it is difficult to judge the case of quantitative easing policy era as it was largely related to the zero interest rate policy. the distinction is quite difficult. also, yield spread is not a good predictor of recessions: however, there is some room for the empirical results as in reality interest rates are strongly related to future economic expectations. further study is needed. it would be meaningful to consider economic or monetary policy. references ahrens, r., 2002. predicting recessions with interest rate spreads: a multi-country regime-switching analysis. journal of international money and finance, 21(4): 519-537. bernanke, b. and a. blinder, 1992. the federal funds rate and the channels of monetary transmission. american economic review, 82(4): 901-921. bonser-neal, c. and t. morley, 1997. does the yield spread predict real economic activity: a 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corresponding author of the article. economy issn: 2313-8181 vol. 2, no. 1, 32-43, 2015 www.asianonlinejournals.com/index.php/economy * corresponding author 32 an econometric investigation of the determinants of fossil fuel consumption: a multivariate approach for ghana samuel yeboah asuamah 1* --joseph ohene-manu 2 1 business school, accra institute of technology (ait), accra, ghana 2 department of economics, kwame nkrumah university of science and technology (knust), kumasi, ghana abstract this work is licensed under a creative commons attribution 3.0 license asian online journal publishing group contents 1. introduction ............................................................................................................................................................................... 33 2. methodology .............................................................................................................................................................................. 34 3. empirical results, discussions, and analysis ......................................................................................................................... 35 4. conclusions ................................................................................................................................................................................ 42 references ...................................................................................................................................................................................... 42 the study examines the long run and short run determinants of fossil fuel consumption in ghana for 1970-2011 period by using autoregressive distributed lad model (ardl). the bound test for cointegration produced no evidence of cointegration among the variables. there are no statistical significant long run and short run parameters for the fossil fuel consumption function for ghana. the results suggest macro variables such as income, price, trade openness, investment, money supply, and government expenditure do not play observable role in fossil fuel consumption. as such, they could not be relied on as a policy tool to manage fossil fuel consumption. future study should consider the issue of structural breaks and the direction of causality. keywords: fossil fuel, consumption determinants, long run and short run elasticities, cointegration link, income, price, ardl bound approach, stability test, non structural break. http://creativecommons.org/licenses/by/3.0/ economy, 2015, 2(1): 32-43 33 1. introduction the examination of the determinants of energy consumption has been discussed widely in energy literature since energy is considered as one of the main engines of economic growth (acaravci and ozturk, 2012). the analysis took prominence in the literature following the empirical works of kraft and kraft (1978) for the united states. fossil fuel consumption impact economic performance at both macro-level and the household level. fossil fuel allows the households, firms and the government to run their activities such as transportation and powering of industrial machines for production. as the economy grows, fossil fuel usage also increases and this has necessitated the examination of factors that influence the consumption of fossil fuel in economies. this is important to avoid energy shortages in an economy such as ghana, which has been experiencing energy shortages resulting in long queues at the filling stations. the examination of the determinants helps in assessing the trends and forecast of fossil fuel consumption, which is difficult to do (doherty, 2012). the empirical examination of the determinants of fossil fuel consumption has not produced consistent results in the literature. the discrepancies in the empirical findings are found in the works han et al. (2000); keii (2000); gately and huntington (2002); wei (2002); cooper (2003); wolde-rufael (2004); griffin and schulman (2005); narayan and wong (2009); zou and chau (2006); dargay et al. (2007); narayan and smyth (2007); skeer and wang (2007); hughes et al. (2008); askari and krichene (2010); dargay and gately (2010); lee and lee (2010); faridul et al. (2011); baumeister and peersman (2012); fawcett and price (2012); and schryder and peersman (2012). various variables (energy price, income, the share of heavy industry output in national income, population, financial development, exchange rate, interest rate, population growth, trade, and total traffic volume) have been reported in the literature to influence fossil fuel consumption. the paper is based on microeconomic theory of demand and the concept of elasticity. the theory of demand suggests that other thing equal, the demand for a product is a function of the price of the product, the price of substitute product, technology and income (mas-colell et al., 2007). governments embark on many forms of growth strategies. one of these strategies is the use of energy as an engine of growth and development (kahsai et al., 2010). policy makers, managers, economists, and energy experts in an economy encourage energy conservation and the use of energy efficient sources in the face of limited energy supply, coupled with the fact that oil, and gas are imported with the limited foreign currency in economies which are not producers of energy. for example, the energy commission, 2010 report for ghana indicated ghana has installed capacity (1960mw) that comprises of hydro and thermal that is not sufficient for the current demand level. it is expected that fossil fuel demand will increase in future from 1.62 million tonnes (2005) to 2.49 million tonnes (2015) (energy commission, 2010). this called for the examination of the factors that affect fossil fuel consumption to help in energy demand management policy formulation. the issue under investigation is to examine empirically the determinants of fossil fuel consumption. the paper contributes to the body of knowledge in literature, by empirically assessing the effect of financial development on fossil fuel consumption with inconsistent results. this according to researchers such as shahbaz et al. (2011) may results from the type of data used, period covered, the level of economic growth of the countries, the econometric estimation models. the current paper adds to the literature in this area. the paper in addition, suggests a conceptual fossil fuel demand model for estimating demand for energy in small but open economy. this paper contributes to theoretical knowledge as it seeks among other things to provide answers to research questions of ‘what’; ‘why’ and ‘how’ as indicated by sutton and staw (1995). explanations are provided for why and how variables are linked and the significance of their relation. reasons are also provided as to why other variables are not related or are not explanatory variables. from the review of the literature, there is no consensus on the effect of financial development on energy consumption and economic growth as well as the direction of causality among the variables. the findings have been mixed. this according to researchers such as shahbaz et al. (2011) may results from the type of data used, period covered, the level of economic growth of the countries, the econometric estimation models. the findings provide policy guide for policies makers on energy demand management to ensure sufficient energy supply. shahbaz et al. (2011) indicated that energy demand projections that do not consider variables such as financial sector development might produce inaccurate forecast that will work against any conservation policy in an economy. the findings serve as reference material for students and researchers in the area of energy economics who are interested in investigating energy demand in small but open economy, such as ghana. the general objective of the paper is to contribute empirically to the general body of knowledge and research work in the area of energy demand in ghana in order to identify and determine policy options that can achieve sufficient energy consumption to spur economic growth. the study contributes to knowledge in energy sufficiency by determining factors influencing energy consumption over the 1970-2011 periods. in order to achieve the general objective, the researcher specifically: (b) examine the unit root properties of the series variables (c) estimate and analyse the determinants of fossil fuel energy consumption using autoregressive distributed lag model (ardl). the paper is based on these research questions: (a) what is the nature of stationarity of the variables? (b) what is the nature of cointegration link among the variables? (c) what are the main determinants of fossil fuel consumption? the main assumption behind the current paper is the claim that in ghana fossil fuel consumption is statistically influenced by macroeconomic variables (such income, price of energy, trade openness, investment, and government expenditure). empirical data are used to test this claim. this study is not without limitations. these limitations do not in any way invalidate the findings of the research. the study is based on secondary data. hence, the study may suffer from error in variable. any error in the data used might not been known by the researcher. hence, the same data from various sources are compared for uniformity in the data set. the review of literature is limited to only sources and references dealing with determinant of energy consumption, the role of financial development in energy consumption and economic growth, at aggregate and disaggregate levels as well as studies base on panel data. economy, 2015, 2(1): 32-43 34 these sources are reviewed since they are related to the focus of the current paper and provide enough information on all sections of the paper such as the statement of the problem, justification, research questions, assumption, theoretical framework, empirical framework, methodology, as well as the significance of the study. the paper does not review articles on the problem of the financial sector energy sector and problems of economic growth, since this is not the focus of the paper and their inclusion will make them irrelevant. the estimated model did not include variables such as education, democracy, and corruption. they are not included since the literature reviewed do not identify these variables and hence do not have theoretical and conceptual basis for inclusion. the ordinary regression analysis (ols) is not used since the series are not stationary and the use of such analysis method produces spurious regression results and produced invalid and unreliable results. the issues of structural breaks are not considered in the current paper in the examination of the unit root properties of the series variables. the issue of the existence of nonlinearities in the energy demand model is not considered. multivariate demand model is considered not bivariate energy demand model. the multivariate analysis is “important because changes in energy use are frequently countered by opposite movements in the employment of other factors, due to substitution, resulting in an insignificant overall impact on output” (stern, 1998). 2. methodology the determinants of the fossil fuel demand model is performed by first examining the unit root properties of the series using the augmented dickey and fuller (1979) (adf) and the kwiatkowski et al. (1992) kpss). second the long run and the short-run links among the variables are examined using the ardl model (pesaran and shin, 1999; pesaran et al., 2001). 2.1. unit root test the unit root test is conducted to determine whether the series in model are stationary or non-stationary in order to determine the order of integration. if the series are non-stationary they are made stationary through differencing before they are used in the estimation. this is done to avoid spurious results. the adf test is based on the null (ho) assumption that there is a unit root or the series are non-stationary in levels. the alternative hypothesis (h1) states that the series are stationary or there is no unit root in the series. the critical values are compared with the calculated values at 5%, 1% and 10% levels of significant. the adf test is as specified in equation (1).     q i ttttttt zzz 1 11 )1.......(.............................. where γ = time trend, z= time series variable in the model, ɛt = error term or stochastic error term. the kpss test serves as a confirmatory test for the adf test. the null assumption (ho) of the kpss is that, the series variables under investigation are stationary against the alternative assumption (h1) that the series are nonstationary (kwiatkowski et al., 1992). given that yt is the series variable under investigation, kwiatkowski et al. (1992) specify an equation as shown in equation (2) to decompose the series into the sum of a deterministic trend (t), a random walk (rt) and a stationary error (ɛt). )2.......(........................................ttt rty   the random walk is specified as in equation (3) )3..(............................................................1 ttt rr   where µt is considered to be iid (0, σ 2 μ). the initial value of rt which is r0 is considered as the fixed and serves the role of an intercept in the model. the stationarity assumption is given as σ 2 μ =0. the series variable under investigation (yt) is trend stationary since the error term is stationary. in model (2), kwiatkowski et al. (1992) set the coefficient ξ=0 where the null assumption that the series variable (yt) is stationary around a level (r0) and not around a deterministic trend. this the authors considered as a special case. the test statistics under the kpss is the lagrange multiplier (lm) statistic under the assumption that σ 2 μ =0, given the assumption that μt is normally distributed and that the error term (ɛt) is iid n(0, σ 2 ɛ ). kwiatkowski et al. (1992) specified a partial sum process of the residuals as in equation (4). )4.(..............................,......... 1    t i it es where t= 1, 2, 3, …, t. following equation (4) the lm statistic is specified by kwiatkowski et al. (1992) as in equation (5). )5.(..............................,.........2/ 1 2     t t tslm in testing for stationarity in the levels of the series, kwiatkowski et al. (1992) without considering the trend, et is considered as the residual from the regression of the series (y) on an intercept only as shown in equation (6). )6.(..............................,.........ytt ye   economy, 2015, 2(1): 32-43 35 2.2. the ardl model the ardl model is used in defining the long run link among the variables. the model is specified as in equation (7).           1 1 1 0 ,1,1 1,1,331,121110 )7..(........................................ ... m i n i tyitkikti tkktttyyt ezy zbzbzbybtccy  equation (7) is an unrestricted error-correction model (ecm). the variable „y’ is regressed on variable „z’. where „z‟ is a vector, that is, z1, z2 …, zk (belke and polleit, 2006). the „b‟s measures the long run effects, and γ and α‟s are the short run parameters which measures the short run effects. the m and n are the order of lags, t is the time trend. according to belke and polleit (2006) „k‟ is the number of “forcing variables in the model under estimation. the null assumption (ho) states that there is no cointegration among the variables in the model against the alternative assumption (h1) that the variables are cointegrated. that is, h0: b1=b2-b3= … =bk =0 against the alternative hypothesis h1: not h0. the rejection /acceptance of the h0 is based on the wald /f tests. the critical value provided by pesaran et al. (2001) for the bound testing approach is used. there are two set of variables for upper limit and lower limit, for series integrated of order one i, (1) and those integrated of order zero i (0). it must be noted that the upper limit values are for series integrated of order one, i(1) where the lower limit values are for series integrated of order zero, i(0). the computed value (fob/wald critical) values are compared with the upper and lower limit values for the bound test at various levels of significance such as 1%, 5% and 10%. in the interpretation of the results, if the computed f-statistics (fob) lies between the upper limit and lower limits the results are considered as inconclusive, and one cannot talk about long run relationship or no long run relationship. in the case where the fob is greater than the upper limit values, the hoare not accepted which indicates significant cointegration relationship and statistical significant long run relationship. when the fob is less than the lower limit values of the bound, the ho is accepted, which means that there is statistical significant cointegration relationship, and possible long run relationship. in the estimation of the ardl model, all the values in the model are used as dependent variables and the analysis is repeated. in the model in which cointegration relationship is identified, the model is estimated for the long run parameters or coefficients. the lag selection is based on information such as akaike (aic), schwarz information criteria (sic). the number of regressions estimated in the ardl model according to pesaran et al. (2001) is given by (n+1) k . where „n‟ is the maximum number of lags use in the model and k is the number of series variables in the model under estimation. in the ardl model, aside the estimation of the long run coefficients, per the ardl model, the error correction representation can also be estimated as in equation (8).         p i s i q k ttktktitit eecmzxyy 1 1 1 111 )8........(.................... equation (8) is used to estimate the short run relationship among the variables. the ardl model estimated is assess for it goodness of fit using various diagnostic tests such as j-b normality test, breusch-godfred lm test, arch lm test, white heteroskedasticity test, ramsey reset. the stability of the model is tested using the cumulative sum of recursive residuals (cusum) and the cumulative sum of squares of recursive residuals (cusum sq). in the use of the two plots, cusum and cusumsq, if the statistics stay within the critical bonds of 5% level of significance, the null hypothesis of all coefficients in the given regression are stable and cannot be rejected. 2.3. empirical model the operation model used for estimating the fossil fuel consumption function is as specified in general form in equation (9), where ff= fossil fuel consumption; p= price; inv= investment; open= trade openness; m2= money supply; y= income and ge= government expenditure. the data for the estimation of the empirical model span from 1970-2011 due to the availability of up to date data for the period. empirical data is taken from world bank database. )9........(..........).........,,2,,,( geymopeninvpffft  3. empirical results, discussions, and analysis 3.1 unit root properties tests 3.1a. time series plot in levels and first differences of variables the time series plot results shown in figure 1 to figure 7 indicate the series are not stationary in levels and achieved stationarity by differencing (figure 8 to figure 13). since the variables are unit root in levels, shock to the variables might have permanent effect and not transitory effects. this calls for scientific investigation of the nature of unit root using the kpss model of unit root. economy, 2015, 2(1): 32-43 36 figure-1. time series plot of y in levels figure-2. time series plot of ge in levels figure-3. time series plot of m2 in levels figure-4. time series plot of inv in levels economy, 2015, 2(1): 32-43 37 figure-5. time series plot of open in levels figure-6. time series plots of in in levels figure-7. time series plot of fossil fuel (ff) use in levels figure-8. time series plot of y in 1st difference figure-9. time series plot of ge in 1st difference economy, 2015, 2(1): 32-43 38 figure-10. time series plot of m2 in 1st difference figure-11. time series plot of inv in 1st difference figure-12. time series plot of open in 1st difference figure-13. time series plot of in in 1st difference economy, 2015, 2(1): 32-43 39 figure-14. time series plot of ff consumption in 1st difference 3.1b. adf test (without structural break) the results on the adf test for unit root test are reported in table 1. the results of the adf test for unit root in levels show that the series are non-stationary in intercept. the null hypothesis of unit root was accepted for all the series. table-1. adf stationarity test results with a constant and trend variables t-statistics adf/p-value results lag length y 4.85154 1.000 not stationary 1 y-1 st dif. -2.08822 0.5519 not stationary 1 ge -2.46708 0.3419 not stationary 1 ge-1 st dif. -5.84979 0.0001062*** stationary 1 m2 -1.62565 0.7652 not stationary 1 m2-1 st dif. -5.98178 7.189e-005*** stationary 1 inv -2.92979 0.1642 not stationary 1 inv-1 st dif. -6.33633 1.653e-007*** stationary 1 open -2.03577 0.5649 not stationary 1 open-1 st dif. -5.43876 0.0003485*** stationary 1 in 6.335 1.000 not stationary 1 in-1 st dif. -3.00133 0.1445 not stationary 1 ff -2.76126 0.2191 not stationary 1 ff-1 st dif. -6.94919 3.485e-009*** stationary 1 source: author‟s computation, 2013/2014: note: *** and ** denote significance at 1% and 5% levels of significance taking the logarithm of the first difference of the series and testing these with intercept and trend makes series stationary. that is, the null hypothesis of unit root was rejected. the results are reported in table 2. these results indicate that the series exhibit unit root processes in levels. table-2. adf stationarity test results with a constant and a time trend variables(1 st dif.) t-statistics adf/p-value results lag length ∆lny -5.5524 0.0001*** stationary 1 ∆lnge -5.07122 0.0009815*** stationary 1 ∆lnm2 -6.27268 2.988e-005*** stationary 1 ∆lninv -6.50775 1.438e-005*** stationary 1 ∆lnopen -4.67444 0.0007281*** stationary 1 ∆lnin -4.7219 0.002565*** stationary 1 ∆ln ec -5.43042 2.366e-005*** stationary 1 ∆lnff -7.24778 4.627e-010*** stationary 1 ∆lnaec -6.78405 6.467e-006*** stationary 1 source: author‟s computation, 2013/2014: note: *** denotes significance at 1% level 3.1c. the kpss test (without structural breaks) the kpss test is based on the null assumption (ho) that the series variables under investigation are stationary (series are not unit root) against the alternative hypothesis (h1) that the series are not stationary (series are unit root). the kpss is a reversed test for unit root. it is used in the current paper for confirmation of the stationarity properties of the series. the results are reported in table 3 and table 4. the series were examined in levels and in first difference (table 3) as were as in their logarithm form (table 4). the results in table 3 indicate mixed results. some series are unit root in levels but become stationary in first difference, indicating that they are integrated of order one, i(1). series variables that are stationary at levels are integrated of other zero, i(0). the levels of significance are 1%; 5% and 10%. some series are stationary at 10% but not at 1% and 5%. the results based on logarithm form indicate the series are stationary in first difference. economy, 2015, 2(1): 32-43 40 table-3. kpss stationarity test results with a constant and a time trend variables t-statistics p-value results lag length y 0.239611 n.a not stationary 3 y-1 st dif. 0.230848 n.a not stationary 3 ge 0.107255 n.a stationary 3 ge-1 st dif. 0.0724631 n.a stationary 3 m2 0.192296 0.023 stationary 3 m2-1 st dif. 0.0694082 n.a stationary 3 inv 0.139794 0.067 stationary 3 inv-1 st dif. 0.147786 0.052 stationary 3 open 0.134766 0.076 stationary 3 open-1 st dif. 0.121051 n.a stationary 3 in 0.272644 n.a not stationary 3 in-1 st dif. 0.256955 n.a not stationary 3 ff 0.230714 n.a not stationary 3 ff-1 st dif. 0.0993028 n.a stationary 3 (author‟s computation, 2013/2014): critical values at 10%, 5% and 1% significant levels are 0.122 0.149 0.212 respectively table-4. kpss stationarity test results with a constant and a time trend variable kpss p-value results lag length ∆ln y 0.105237 stationary 3 ∆lnge 0.0711901 stationary 3 ∆lnm2 0.0759265 stationary 3 ∆lninv 0.127304 stationary 3 ∆lnopen 0.103818 stationary 3 ∆lnin 0.0902278 stationary 3 ∆ff 0.0871667 stationary 3 (author‟s computation, 2013/2014): note: critical values at 10%, 5% and 1% significant levels are 0.122 0.149 0.212 respectively 3.2. the cointegration link, long run, and short run estimates 3.2a. the ardl bound test the results reported in table 5 indicate insignificant cointegration between fossil fuel consumption (ff) and the series variables in all the 7 models since the f-statistics values are less than the critical values of the upper bounds at the 90%, 95% and 99% levels of significance which is an indication of no cointegration among the series variables. the null assumption of no cointegration is not rejected in all the models. table-5. test for cointegration relationship critical bounds of the f -statistic: intercept and trend models 90% level 95% level 99% level (0)i (1)i 2.915 3.695 (0)i (1)i 3.538 4.428 (0)i (1)i 5.155 6.265 computed f -stats decision 1. fff(ff/y, open, ge, in, inv, m2) na na 2. fy(y/ff, open, ge, in, inv, m2) 0.064066 not cointegrated 3. fopen(open/ff, y, ge, in, inv, m2) 0.42434 not cointegrated 4. fge(ge/ff, y, open, in, inv, m2) 0.028877 not cointegrated 5. fin(in/ff, y, open, ge, inv, m2) 0.0024545 not cointegrated 6. finv(inv/ff, y, open, ge, in, m2) 1.0053 not cointegrated 7. fm2(m2/ff, y, open, ge, in, inv) 1.6218 not cointegrated source: author‟s computation, 2013/2014: note: critical values are obtained from pesaran et al. (2001) and narayan (2004). 3.2b. the long-run parametric (elasticities) results of the ardl test the long-run determinant of fossil fuel consumption was estimated with fossil fuel consumption is the dependent variable. the results as reported in table 6 indicate that all the variables are not statistically significant determinants of fossil fuel consumption. in addition, the coefficients, which are essentially elasticity estimates, per the log run representation, are all inelastic. table-6. estimated long-run coefficients. dependent variable is lnff variable coefficient std. error t-ratio p-value constant 1.3322 0.74748 1.7823 0.085* trend 0.033949 0.053678 .63244 0.532 lny -0.085712 0.33863 -.25311 0.802 lnopen 0.072535 0.11135 .65141 0.520 lnge 0.032240 0.18972 .16993 0.866 lnin -0.0086259 0.17411 -.049543 0.961 lninv -0.14873 0.14833 -1.0027 0.324 lnm2 0.34292 0.26928 1.2735 0.212 author‟s computation, 2013/2014: ardl (0) selected based on akaike information criterion. note: * denotes 10% significant level economy, 2015, 2(1): 32-43 41 3.2c. the short-run elasticities of the ardl model the results of short run dynamic equilibrium relationship coefficients estimated with trend, intercept, and error correction term (ecm) are reported in table 7. the values of the short run coefficients are not different from that of the long run values since there is lack of cointegration link among the variables in the estimated model (see table 5). the results indicate that all the variables are not statistically significant determinant of fossil fuel consumption in the short. the coefficient of -1.0000 indicates that, after 1 percent deviation or shock to the system, the long-run equilibrium relationship of fossil fuel consumption is quickly re-established at the rate of about 100% percent per annum. the value indicates a very stronger adjustment rate. table-7. short-run representation of ardl model. ardl (0) selected based on akaike information criterion. dependent variable: ∆lnff variable coefficient standard error t-ratio prob. values constant 1.3322 0.74748 1.7823 0.085* trend 0.033949 0.053678 0.63244 0.532 ∆lnff na na na na ∆lny -0.085712 0.33863 -0.25311 0.802 ∆lnopen 0.072535 0.11135 0.65141 0.520 ∆lnge 0.032240 0.18972 0.16993 0.866 ∆lnin -0.0086259 0.17411 -0.049543 0.961 ∆lninv -0.14873 0.14833 -1.0027 0.324 ∆lnm2 0.34292 0.26928 1.2735 0.213 ecm (-1) -1.0000 0.000 na na ecm = lnff-1.3322c-0.033949t + 0.085712lny-0.072535lnopen-0.032240 lnge + 0.0086259lnin + 0.14873lninv-0.34292lnm2……..(10) r-squared 0.65746 r-bar-squared 0.58011 s.e. of regression 0.13656 f-stat. f(7, 31) 8.5001[0.000] mean of dependent variable 3.0602 s.d. of dependent variable 0.21075 residual sum of squares 0.57813 equation log-likelihood 26.7858 akaike info. criterion 18.7858 schwarz bayesian criterion 12.1316 dw-statistic 1.7463 source: author‟s computation, 2013/2014. note: * denotes statistical significance at the 10% level 3.3. the diagnostic and stability tests results the diagnostic tests of the short-run estimation to examine the reliability of the results of the error correction model are reported in table 8. the model passed only the heteroscadasticity test indicating the variances are constant over time. the r 2 (0.65746) and the adjusted r 2 (0.58011) in table 7 are an indication of a very well behave model. the coefficient indicate approximately 65.75% of the variations in fossil fuel consumption are attributed to the explanatory variable. table-8. short-run diagnostic tests of ardl model test statistics lm version f version a:serial correlation chsq(1)= .47329[.491] f(1, 30)= .36854[.548] b:functional form chsq(1)= 1.9411[.164] f(1, 30)= 1.5713[.220] c:normality chsq(2)= 1.0777[.583] not applicable d:heteroscedasticity chsq(1)= 1.1890[.276] f(1, 37)= 1.1635[.288] a:lagrange multiplier test of residual serial correlation b:ramsey's reset test using the square of the fitted values c:based on a test of skewness and kurtosis of residuals d:based on the regression of squared residuals on squared fitted values source: author‟s computation, 2013/2014. both stability tests (cusum and cusumsq) as shown in figure 15 and 16 revealed that the estimates and the variance were stable as the residuals and the squared residuals fall within the various 5% critical boundaries. the null assumptions are rejected in both tests. figure 15. plot of cumulative sum of recursive residuals (cusum) economy, 2015, 2(1): 32-43 42 figure-16. plot of cumulative sum of squares of recursive residuals (cusumsq) 4. conclusions this paper investigated the long run and short run determinants of fossil fuel consumption in ghana for 19702011 period, by using ardl model. the results show that there is no long run and short-run determinant evidence for fossil fuel. future changes in fossil fuel consumption could not be predicted using the variables in the model. the findings are not in line with the assumption underlying the paper. the findings are expected especially since the estimated model did not consider the issue of structural breaks over time. the findings do not support orthodox microeconomic contention that price and income influence the demand for a product (mas-colell et al., 2007). in addition, empirical findings reported by previous researchers (hughes et al., 2008; askari and krichene, 2010; dargay and gately, 2010; lee and lee, 2010; faridul et al., 2011; baumeister and peersman, 2012; fawcett and price, 2012; narayan and wong, 2012; schryder and peersman, 2012) are not supported. these researchers reported that variables such as energy price, income, financial development, trade, government expenditure, and investment have significant influence on fossil fuel consumption. this is possibly the results of combining both micro and macro variables as regressors. the findings indicate the variables in the model could not be relied on as policy variables to manage fossil fuel consumption in the study area. future 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long-run effects between oil consumption and economic growth in china. energy policy, 34(18): 3644-3655. views and opinions expressed in this article are the views and opinions of the authors, economy shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. http://ssrn.com/abstract=2081281 http://www.ecb.europa.eu/events/pdf/conferences/mopo.../peersman.pdf? economy vol. 4, no. 1, 7-14, 2017 issn(e) 2313-8181 / issn(p) 2518-0118 doi: 10.20448/journal.502.2017.41.7.14 7 policy-making considerations for ethical and sustainable economic development tipakorn senathip1  bahaudin g. mujtaba2 frank j. cavico3 ( corresponding author) 1ramkhamhaeng university, thailand 2,3nova southeastern university, usa abstract leaders of both private and public sector organizations play an important role in bringing about positive and necessary developments in society. this leadership is especially an important consideration for public sector policy-makers to look at the long-term with regards to their policy-making in economic development. citizens of any society, but particularly an agrarian one, tend to depend on the availability of natural and local resources for their survival and independence. furthermore, economic development is important for communities and societies to live in a sustainable manner using local resources in a prudent yet efficacious manner. this study looks at the importance of policy-making for economic progress; the study examines the influences on policy-making; and seeks to ascertain how local leaders can take a developmental role in creating and promoting sustainability approaches for citizens, particularly local farmers and consumers. the study, moreover, examines the role of ethics as a branch of philosophy on leadership and the policy-making decision process. the study treats both government and private sector business leaders. suggestions and recommendations are provided to both types of leaders to help them make effective, moral, and sustainable policy decisions. keywords: policy, policy-making, sustainability, social responsibility, stakeholders, ethics, morality, leadership. citation | tipakorn senathip; bahaudin g. mujtaba; frank j. cavico (2017). policy-making considerations for ethical and sustainable economic development. economy, 4(1): 7-14. history: received: 24 november 2016 revised: 26 december 2016 accepted: 18 april 2017 published: 21 august 2017 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group contribution/acknowledgement: all authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ......................................................................................................................................................................................... 8 2. policy-making and development .................................................................................................................................................... 8 3. ethics, policy-making and economic development ................................................................................................................ 10 4. social responsibility, sustainability, and economic development ...................................................................................... 11 5. future research ............................................................................................................................................................................... 12 6. summary ............................................................................................................................................................................................ 13 references .............................................................................................................................................................................................. 13 bibliography .......................................................................................................................................................................................... 14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ https://orcid.org/orcid-search/quick-search?searchquery=tipakorn senathip https://orcid.org/orcid-search/quick-search?searchquery=bahaudin g. mujtaba https://orcid.org/orcid-search/quick-search?searchquery=frank j. cavico https://orcid.org/orcid-search/quick-search?searchquery=tipakorn senathip https://orcid.org/orcid-search/quick-search?searchquery=bahaudin g. mujtaba https://orcid.org/orcid-search/quick-search?searchquery=frank j. cavico https://orcid.org/orcid-search/quick-search?searchquery=tipakorn senathip https://orcid.org/orcid-search/quick-search?searchquery=bahaudin g. mujtaba https://orcid.org/orcid-search/quick-search?searchquery=frank j. cavico https://orcid.org/orcid-search/quick-search?searchquery=tipakorn senathip https://orcid.org/orcid-search/quick-search?searchquery=bahaudin g. mujtaba https://orcid.org/orcid-search/quick-search?searchquery=frank j. cavico economy, 2017, 4(1): 7-14 8 1. introduction over the past decade, we see many modern researchers focusing on the responsibility of taking care of local communities, societies, and the planet by being “sustainable” in everything we do (mujtaba, 2014). in some cases, we have seen friendly support, yet at times angry protests, when people are not happy with their current living situation; and consequently want positive changes in their lives, work environment, or the physical environment itself (senathip, 2015). fortunately, many people today are now being very socially responsible by voluntarily trying to reduce waste, reuse what they can, recycle as much as possible, renew by planting seeds or trees to replenish natural resources, and by respecting the environment, and thereby striving to keep it “clean and green” (cavico and mujtaba, 2016). the critical question herein is to attempt to determine what role do public and private policies play in making local leaders and citizens aspire to a higher level of sustainability consciousness in order to produce effective economic development in society in a sustainable manner. it makes one wonder if morality, ethics and sustainability are all linked together. in other words, it might be possible that people with higher levels of sustainability consciousness might also have higher level of moral maturity. furthermore, such individuals might be more likely to work in the public sector organizations for the intrinsic reasons (perhaps both “selfish” as well as altruistic) to help people, their communities, and society as whole to develop economically and to prosper. accordingly, focusing on better understanding sustainability is a productive area of research for leadership, policymaking, ethics, as well as operational efficiency and effectiveness, and especially so in a sufficiency economy (utantada et al., 2016). the “good news” is that many policy-makers in government as well as decision-makers in the private sector are now considering not “merely” whether their sound decisions are legal but also whether they are socially responsibility, sustainable, and moral. all the preceding values emerge as critical considerations as for leaders and policy-makers as they establish rules and precepts to govern the behavior of individuals and organizations in promoting sustainable economic development. mujtaba (2015) defines sustainability as “the ability of an organization and its employees to effectively and efficiently manage their core economic responsibilities in maximizing long-term value, while proactively respecting the environment and being accountable to all stakeholders in a transparent and timely manner” (mujtaba et al., 2016). mujtaba’s long-term view of sustainability will be used in this study since highly ethical people are likely to be driven by decisions that respect the environment while enhancing the quality of life for everyone. 2. policy-making and development according to rissmiller (2000) many writers and researchers have analyzed the concept of public policy; and as such they have reflected upon and asked how we can understand the “incredibly complex” process of policy change. of course, there are many models and “answers” which have made important contributions to this understanding, but a good majority of them tend to rely on theory that is general in scope or, conversely, very narrow and specific to a particular agency’s decision-making processes. as such, public policy theories are difficult to apply to all situations and cases. some models are reliant on a single case which may have a limited scope of utility; yet other models are derived from multiple regression or even more sophisticated statistical analysis which disregards dynamic change and situational variables. therefore, some scholars believe that the “scientific approaches to the study of policy-making processes are ill-designed to confront the apparently tremendous influence of personalities and chance events, the unique features of policies, and the unique and diverse range of environments in which policy is made” (rissmiller, 2000). rissmiller and other authors have recommended that the goal of policy theory should be to assist in understanding the role of causal elements in policy development regardless of whether they appear to be irregular and diverse or uniform and predictable. thus, it is recommended that political scientists need to see “holistically” and as a result to utilize “systems-thinking” in their developmental policies. unfortunately, “systems-thinking” and dynamics are not taught in most political science curriculums and programs. however, “systems-thinking” and dynamics have thrived in business applications as a result of the continuing work and commitment by people like peter senge and others at the massachusetts institute of technology's (mit) sloan school of management. theory-building and “systems analysis” have generated considerable interest in political sciences over the past century, notably in 1965, as stimulated by david easton's writings on “a systems analysis of political life.” easton's work has been influential in that systems analysis has been identified as one of a handful of primary approaches to the study of political science and public policy (susser, 1992; anderson, 1997; dye, 1998; rissmiller, 2000). according to researchers and writers (jenkins, 1978) public policy is defined differently by different authors, including the following: 1. public policy is whatever govrnments choose to do or not to do. 2. public policy consists of political decisions for implementing pro-grams to achieve societal goals. 3. public policy is a purposive course of action followed by government in dealing with some topic or mater of public concern. 4. public policy is the authoritative allocation of values for the whole society. in one article, public policy is defined “as a set of interrelated decisions taken by a political actor or group of actors concerning the selection of goals and the means of achieving them within a specified situation where those decisions should, in principle, be within the power of those actors to achieve” (jenkins, 1978). such a definition is not an all-encompassing as it does not build implementation into the policy. as such, one does not always consider how a policy might be implemented. this definition makes clear that a “policy is more than a single decision,” as it can involve many actors, stakeholders, or constituent groups. policy-making often involves a pattern of actions that extend over time and thus it might go through many decisions. nonetheless, some critical points for consideration of such a definition and concomitant model can include the following elements:  it integrates the possibility of inaction (the decision not to move).  it separates policy from ambition.  it links policy decisions to available resources. economy, 2017, 4(1): 7-14 9 all policies tend to have multiple direct and indirect stakeholders. a stakeholder (actor or constituent group) can be any person, group or institution that has an interest in a development activity, project or program. the stakeholder definition includes intended beneficiaries and intermediaries, “winners” or “losers,” and those involved or excluded from the decision-making or policy-making process. stakeholders must have a high level of trust in policies in order to support it ping et al. (2012). therefore, public policy should be considered as much more than simply governmental outputs, because simply focusing on output alone may result in a partial and incomplete view of the dynamics and totality of public policy. policy analysts should deal with the separation of the following: a) policy content – the substance of policy and b) policy process– the given set of methods, strategies, and techniques by which a policy is made (jenkins, 1978). the simplest and most frequently used model was first offered by harold laswell and eventually adopted and used by others is the schematic presentation of process perspective on policy. this simple model had linear steps or stages of initiation, information, consideration, decision, implementation, evaluation, and termination, with some “feedback” between the four initial stages (see figure 1). jenkins (1978) explained that this model operates based on the assumption that policy is created through logical and linear path from initiating the policy, implementing it and then eventually making a decision to proceed with the policy proposal or end it. figure-1. policy-making source: jenkins (1978) some researchers, however, have argued that it might be better to consider the policy process in terms of input-output model of a political system. as such, another model was derived from the work of david easton. the focus of this approach was directed at the dynamics and processes of a political system operating with diverse and changing environments. moreover, according to jenkins (1978) the political system operating in its environment has several major dimensions, including: a) policy demands: demands for action that arise from inside as well as outside the political systems. b) policy decisions: authoritative rather routine decisions made by the political authorities. c) policy outputs: what the system does – it is not restricted to tangible goods and services. d) policy outcomes: consequences (impact) that result from political action and inaction. by differentiating between the major dimensions, it becomes possible to define and explore the process of policy while being aware of its interconnectedness, interdependency, and the impact of policy decisions on various stakeholders at any given time. the ultimate goal, therefore, is the systematic and scientific study of policy for duplication, verification, confirmation, improvement, and knowledge extension purposes. so, there is no one “best way” for policy-making. furthermore, the nature and complexity of the policy problems often require a variety of approaches for effectively solving a problem. each of the models tend to focus attention on “different aspect of politics and policy-making and seems more useful for some purposes or some situations than others.” as such, “one should not permit oneself to be bound too rigidly or too dogmatically to a particular model” (jenkins, 1978). figure-2. policy-making model (jenkins, 1978) source: jenkins (1978) economy, 2017, 4(1): 7-14 10 to explore the policy world, a more detailed conceptual or extended model is required. the extended model (as presented in figure 2), and according to jenkins (1978) the model can act as a useful heuristic map which is useful in alerting researchers and public sector as well as private sector decision-making in areas that need more attention. furthermore, this extended approach can serve as a “bridge” between practice and theory. the focus of policy in this extended model is primarily a systemic one (holistic view). according to jenkins, “public policy is best understood by considering the operation of a political system in its environment and by examining how such a system maintains itself and changes over time” (1978). the environment is not without structure, as it is often made up of people, groups, and organizations operating independently or jointly based on diverse values and interests. the environment surrounds the whole process, influencing anything and everything. of course, what actually passes for the “environment” variables requires careful thought and attention. it is doubtful that the policy process can be captured in any great detail by the simple linear “feedback” model. as such, interactions both across and within systems should be considered. overall, policy analysts should explore the nature of the political system and the relationship between decision processes and outcomes. exploring outcome requires establishing some conceptual grasp of motivation and behavior. as such, “an understanding of the behavior and motivation is central to an understanding of policy outcome and impact” (jenkins, 1978). the extended model is not perfect; it is not an all-encompassing model. as such, it is open to criticism, testing, and improvements. overall, one can summarize that policy-makers should focus on how policies actually govern, and they should ask other questions that relate to why a policy must govern as they consider the ultimate well-being of all people in society (rissmiller, 2000). as part of the policy development process, there can be a market orientation which focuses on privatization, marketization, and contracting out, which hopefully provides competition, thereby making products and services cheaper for consumers. there also should also be a dialogue orientation in order to focus on interaction between government agencies and civic groups. “civic responsibility emphasizes obligations that citizens have to their society, and their government” (unf lecture, 2016). civic responsibility focuses on the relationship of citizens to their government and society, and especially on the obligations of citizens to their society. responsible citizenship has been grossly under-emphasized, both in terms of asserting the importance of this to citizens, and in training policy-makers and public managers on what to do in the face of irresponsible citizenry. 3. ethics, policy-making and economic development a leader today in the public and private sectors in creating and shaping policies and making decisions is expected to do so not “merely” in a practically efficacious and legal manner but also in a moral manner. morality, perforce, brings one into the realm of philosophy, specifically, ethics, which is a branch of philosophy. there are many ethical theories and principles that one can use to ascertain the morality of a policy, decision, or action. for the purposes of this study the authors will discuss two ethical theories: utilitarianism and kantian ethics, both of which are secular-reasoned based western civilization ethical theories. utilitarianism is an ethical theory created by the 18th century english philosophers and social reformers, jeremy bentham and john stuart mill. the theory is a consequentialist ethical theory; that is, morality is determined by focusing in on all the stakeholders (also called “constituent groups) affected by the action. there is a predictive element to this ethical theory; that one must predict consequences as they affect each discrete stakeholder group, including society as a whole. ethical egoism (that is, the “selfish” theory to advance oneself and one’s organization) is of course a consequentialist ethical theory too, but plainly with utilitarianism the scope of analysis is much, much broader than merely oneself. predicting the consequences of an action is obviously a challenging task, but the utilitarians say, first, to use one’s “common storehouse of knowledge” and to use “history as a guide.” second, one needs to look for probabilities of occurrences as well as the reasonably foreseeable consequences of putting an action into effect. finally, one must attempt to measure and weight consequences, first, for each stakeholder group and then among all the stakeholders. accordingly, if there are predominant good consequences the action is a moral action; and conversely, if there are predominant negative consequences the action is an immoral one. the goal of the utilitarians was to seek to promote happiness, satisfaction, pleasure, but note that since the “ends justify the means” there can be some painful consequences produced but overall since there is more good an action can be deemed moral. kantian ethical theory is based on the moral philosophy of the 18th century german philosopher and teacher, immanuel kant. disregard consequences in determining morality, said kant; and rather focus on the application of a formal test which kant called the categorical imperative. “categorical” because, declared kant, this is the supreme and absolute ethical principle; and “imperative” because one must at times command oneself, despite contrary self-interest, to do what the categorical imperative impels one to do; that is, to do the moral action regardless of consequences, even to oneself. by ethical reasoning from the categorical imperative one will logically be able to ascertain the moral course of action (cavico and mujtaba, 2013). of course, one can clearly see the major conflict in secular-based ethics in western civilization since the utilitarians focus on the consequences of an action in determining morality; whereas kant says to disregard consequences and instead apply the categorical imperative. for the utilitarians, the “ends justify the means”; but for kant the means itself must be moral as per the categorical imperative (cavico and mujtaba, 2013). there are two main tests to the categorical imperative. one is called the kingdom of ends test. pursuant to this test an action is moral if it treats people with dignity and respect and as a worthwhile means; as such, if an action is demeaning and disrespectful to people and if it treats them like a thing, tool, instrument, or means, even to a greater good overall, the action is immoral (cavico and mujtaba, 2013). another test of the categorical is called the agent-receiver test. in essence, it is the golden rule (“do unto others what you would have them do unto you.”) made secular by kant. pursuant to this test, an action is moral if one as a rational being and one did not know that one would be the giver, that is, the agent, of the action, or its receiver would be willing to have the action done. and if one would not want to be on the “receiving end” of the action, then it is immoral (cavico and mujtaba, 2013). the ethical challenge for a leader today is to achieve actions that advance self-interest (ethical egoism), are culturally competent (that is, comply with societal moral norms pursuant to ethical relativism), and achieve economy, 2017, 4(1): 7-14 11 greater good (utilitarianism) (strive for “win-win” scenarios for all stakeholders), but do not demean or disrespect stakeholders (kantian ethics) (cavico et al., 2015). the rationale for acting morally is simply ethical egoism, that is, it is in the long-term advancement and self-interest of a person, company, organization, or government entity to act morally. companies, organizations, and government entities led by principled leaders who possess integrity and fulfill their legal and moral responsibilities will establish firms and agencies with a deserved reputation of good character and as a result their firms and agencies should do better financially and practically. however, the role of a leader very well may be to educate people as to their own self-interest; that is, to show the way (to top management, the board of directors, and shareholders or government agency heads, legislators, and taxpayers) that acting morally will benefit the organization in the long-run. the role of a leader, moreover, is to create at one’s company, organization, or government entity a culture of ethics that fosters and supports moral behavior; and the objective is to establish a personal and corporate/organizational reputation for integrity and trust (cavico et al., 2015) because, to cite two business examples, as wells fargo and volkswagen executives learned, once a reputation for trust is lost, it is very difficult to get it back. the role of the leaders at the aforementioned companies would be to try to figure out how to change the organizational cultures to one of honesty, integrity, and ethics. furthermore, the role of a leader is to object if an action is illegal and immoral. that is, a true leader must “stand your ground”; disagree on principled grounds; and have the strength of character, courage, and conviction to do the “right thing” and not do the “wrong thing” (cavico et al., 2015). the leader of a company, organization, or government entity must not only set an example of virtue, integrity, honesty, ethics, and morality but he or she must seek to impart these values to the employees of the company by means of ethics orientations, coursework, seminars, and training, as well as by establishing ethics officers, “hot-lines,” ombudsmen, and other channels for “whistleblowing” (cavico et al., 2015). leadership is obviously an important value in the public and private sector today. in addition to the points previously made by the authors regarding the duties of a leader, another responsibility of a leader is to be aware of his or her organization’s “blind spots”; that is, to be cognizant of and to comprehend the weaknesses as well as strengths of the entity and its policies, procedures, and personnel. these “blind spots” must be identified as well as opportunities, of course. the astute and agile leader, therefore, should not be “blind-sided” by any weaknesses or improprieties in the organization, such as, again in the case of volkswagen and wells fargo, the employees acting in an illegal and immoral manner. the true leader, as emphasized, must make sound decisions and promulgate effective policies which are also legal, moral, and socially responsible. moreover, the leader must be proactive, that is, to act as a “shaper” and not a mere reactor. the true leader must anticipate problems and challenges, and then show the way to solving and overcoming them. the true leader, therefore, must lead the way. yet no one is going to follow a leader, at least not for long, if he or she is not an ethical, honest, and trustworthy person. thus, it is critical for the leader to embrace and demonstrate moral behavior and to establish an organizational culture of morality and ethics. accordingly, the leader today in the private and public sector must be prepared for these issues and challenges; he or she thus must be concerned with not only the practical and legal performance of the company or government entity, but also its moral, socially responsible, and environmentally sound performance. 4. social responsibility, sustainability, and economic development another current societal expectation, and thus a responsibility for leaders, policy-makers, decision-makers as well future leaders, is to create policies that will encourage people to act in a socially responsible manner by being cognizant of the nature and importance of “sustainability” which is a concept tied to the values of law, ethics, and social and environmental responsibility (mujtaba, 2014). the most frequently cited definition of sustainable development was published by the united nations (our common future, chapter 2, report of the world commission on environment and development, 1987, p. 24): “sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” sustainability is a broad and all-encompassing concept since it can be interpreted as a means (typically in the form of beneficial environmental actions, such as “green” buildings and offices, reducing green-house gasses, and otherwise reducing the firm’s “environmental footprint”) and also as an ends (that is, having a sustainable organization, society, as well as a sustainable planet, for future generations) (cavico and mujtaba, 2016). an important challenge for policy-makers is that each person is expected to act in a socially and environmentally responsible manner (cheretis and mujtaba, 2014). this expectation is critically important for leaders and decision-makers in the public and private sectors. the societal expectation of this responsibility is thus above and beyond the law as well as morality/ethics (cavico et al., 2015). business, therefore, is expected to be a “good corporate citizen” (even though there may be no legal obligation to do so); and government leaders are expected to be good “public servants.” social and environmental responsibility is related to sustainability as a goal; that is, if we restore or preserve our natural resources and communities, we will also increase our chances of sustaining ourselves as a business, government entity, or a society. the old concept of seeing the purpose of business as only short-term profit is being increasingly replaced by a broader accounting framework, which includes three dimensions of measurement: “people, planet, profits,” also called the “triple bottom line” economic prosperity, environmental stewardship, and social responsibility (cavico et al., 2015). we all have the responsibility, therefore, to develop leaders in the public and private sectors with a sustainability mindset, who think and act in socially and environmentally responsible ways. for the business leader, who has a fiduciary duty to the owners or shareholders, the challenging objective is to achieve the “right” amount of social responsibility, that is, a prudent and moderate amount. another important challenge for business leaders is to question: what type of social/environmental responsibility is recommended? socially responsible actions and activities can be tied to the image, brand, products, and services of the business. the objective is for people, the community, and the planet to “flourish” (mujtaba, 2015). these are all obviously beneficial actions to society and ones that demonstrate that a company is a “socially responsible” and “sustainable” one; and the actions will benefit these companies too; and a company should not be shy in getting some good publicity to show off their social responsibility and sustainability bona fides. and it is not merely community and government that will be impressed by a company’s “green” efforts, but so will customers, consumers, and the employees. economy, 2017, 4(1): 7-14 12 particularly when addressing the millennials, business leaders have an opportunity to tap into and to heighten their sense of responsibility and forward-looking perspectives. the newly hired employees and future leaders, therefore, can, and should, be early-on introduced to the challenges and opportunities of business today, thereby preparing them for a competitive environment where social responsibility and sustainability are challenges, and mastering them is the result of strategic decision-making, featuring a “360 degree” perspective encompassing all the firm’s stakeholders. the interest of future leaders can be awakened, and their acceptance gained. as such, one must underscore the benefits to the individual, the organization, the community, society, and the planet in which we all live and want to do business in; and also one must inspire future leaders by means of real and current examples of ways to be profitable while “making a difference” in society. the rationale for being socially and environmentally responsible, and one that must be underscored to the future leaders throughout their socialization in the company, is the maximization of their own self-interest along with that of their firms, communities, and society as a whole. that is, the instrumental worth of being a “socially responsible” person and organization, in addition to being a legal and moral one, will be the advancement of one’s own self-interest, the company’s self-interest, and the corresponding benefit to community and society as a whole, as well as the sustainability of the planet for future generations. table 1 presents a few actual recent examples of how employees and organizations can be creative in acting with a sustainability consciousness mindset to keep the environment “clean and green” (mujtaba et al., 2016). table-1. examples of reusing and recycling mujtaba et al. (2016) staples. the first example, from the institute of international studies (iis), is the staple singulars. instead of throwing away the used staples, each staff member competes with others in collecting them for recycling. then we donate all of them to be recycled for producing walkers for people with walking disabilities and the elderly. nearly over one pound of them is just the staples collected from one office over the past six months. just imagine how many staples could be recycled over a 2, 3 years or even a 10-year period. the staff members are also enjoying this activity as it is fun and helps in making the world a better place for us and future generations. printing slips at 7-11. the second example comes from what they do at most of the 7-11 stores in bangkok. they reduced the customer receipt slip size by 1 cm. in order to save paper and the trees from being cut down. in this process, they can save many trees from being used for paper production as they use tens of millions rolls of paper each year since thailand has more than 8,000 branches nationwide. this is an example of good operational management for sustainability and saving the world by reducing their usage of paper by 4,680 km. per year. this length of paper savings is almost 3 times longer than the entire country of thailand. cpf company. the third example is cpf company, which has more than 600 tons of frying product per month, like chicken frying. in other words, they use a lot of oil; therefore, producing the biodiesel is the best choice. using biodiesel means that they can manage their operations with oil usage of only around 90,000 liters per month. it is a good policy to produce biodiesel b100 to replace using diesel. most importantly, this helps in reducing the risk of cancer. it is the project of the late king bhumibol for the renewable energy. selling garbage. the fourth example is lumpini condominiums where they separate the garbage as some parts of can be used for selling. the amount of money that they receive from selling garbage that is thrown out by living residence is used to improve the appearance of the condos, and sometime they donate some of the funds to help the poor. this is an example of what apartment and condo owners can integrate into their operations to make the world a bit more sustainable over time. shoe recycling. the last example is niki company as they collect the old shoes that are no longer needed and they blend the soles of shoes which can be safely used in the playground for children. instead of being thrown out, the soles of these shows are used again to create a safe playground for children in the neighborhood parks. this is an example of what a company can do to make its new and used products more useful for the communities where their customers live. source: cavico et al. (2015) leaders in the private and public sectors can create the best future by planning for it with specific goals, organizing and devoting relevant resources, having measureable milestones, and specifying action plans that can be controlled. leadership is about having a vision, influence and the ability to execute a practical strategy into action; and this ability should be used to make society a little better through our operations in each organization. the authors have emphasized that the business leader today will confront societal expectations that the business will not merely act in a prudent economic and correct legal manner, but also that the business will act in a moral and ethical and socially and environmentally responsible manner. 5. future research ethical maturity and sustainability are critical components and pillars of policy-making and a continually prospering economy. as such, it is important for public and private sector leaders, managers, and employees to act not only ethically in making decisions but also to integrate sustainability into their operations. accordingly, an example of a research question for further study is as follows: is there a statistically significant relationship between the ethical maturity (cognizance) and sustainability consciousness levels of public sector managers compared to those in the private industries? data could be collected using a survey instrument such as the personal business ethics scores survey economy, 2017, 4(1): 7-14 13 (pbes), which is based on a likert scale rating of 1-5, along with a few added questions regarding sustainability consciousness / awareness. future researchers can test to see if gender, age, education, and management experience play a role in the ethical maturity and sustainability consciousness of public sector managers and employees. moreover, and very interesting indeed researchers could try to ascertain whether ethics education and/or training are related to ethical maturity (cognizance) or sustainability consciousness. one would think that there would be a relationship between ethics and sustainability as well as between ethics education/education and morality; but some corroborating data would be most helpful indeed to expanding the body of knowledge in these fields. a review of public administration literature demonstrates that there are no empirical studies focusing on the relationship between the two constructs of ethical maturity and sustainability consciousness with public sector managers. as such, a study will fill the gap in existing literature through empirically testing the relationship between ethical maturity and sustainability consciousness of public sector managers using various demographic variables. the study can conjecture that public sector managers and employees are more likely to have a higher level of ethical maturity and sustainability consciousness with servant leadership mindset as compared to nonpublic sector working adults; as such, their desires for employment are likely to be driven by serving people and their communities rather than selecting professions only for prestige, profit, and power. 6. summary the objective of sustainable global leadership and policy-making is to make sure the processes used for economic developments along with their associated outcomes are more successful, socially and environmentally responsible, and continually sustainable. this “sustainability” mindset is the way to achieve long-term economic success and sustainability; and thus future business leaders must be developed and prepared to do what is the essence of leadership, and that is to “know the way,” “go the way,” and “show the way.” consequently, the challenge for the policy maker today is to have that mindset and thus to fulfill these expectations, meet these challenges, achieve tangible success, and to sustain that success for the business and government entity and all their stakeholders, including society as a whole, the planet, and future generations. this study examined the critical interrelationship among leadership, policyand decision-making, ethics, social responsibility, and sustainability in the context of both the private and public sector. the study focused on policies that would enhance economic development in a sustainable manner. for the public sector, it is important that policy-makers, leaders, managers, and employees have a “servant-leadership” mindset, encompassing higher levels of ethical maturity and sustainability consciousness, in order to bring about progressive economic development for the local community and society as a whole. if public and private sector policy-makers, leaders, managers, and employees do have higher levels of ethical maturity and cognizance as well as social responsibility and sustainability consciousness, then their policies, decisions, and actions will benefit everyone in society, the planet, and future generations. a leader, in particular, must naturally make sound decisions and promulgate good policies, which are legal and achieve results; but the leader must also act and ensure that these decisions and policies are moral, socially responsible, environmentally responsible, and therefore sustainable. in essence, the leader’s “sustainability” mindset in the policy-making process is quite simple and straightforward, that is, to ask, and to answer the following questions: is the policy effective? is it moral? is it socially responsible? is it sustainable as a means (that is, is it environmentally responsible?)? and, finally, and most critically, is it thereby sustainable as an ends? references anderson, j.d., 1997. public policymaking. 3rd edn., new york: houghton mifflin company. cavico, f.j. and b.g. mujtaba, 2013. business ethics: the moral foundation of effective leadership, management, and entrepreneurship. 3rd edn., boston, ma: pearson publishing. cavico, f.j. and b.g. mujtaba, 2016. developing a legal, ethical, and socially responsible mindset for sustainable leadership . florida: ilead academy. cavico, f.j., b.g. mujtaba, g. nonet, i. rimanoczy and m. samuel, 2015. developing a legal, ethical, and socially responsible mindset for business leadership. advances in social sciences research journal, 2(6): 09-26. cheretis, d. and b.g. mujtaba, 2014. maximizing long-term value and conscious capitalism at whole foods. sam advanced management journal, 79(3): 4-16. view at google scholar dye, t., 1998. understanding public policy. upper saddle river, nj: prentice-hall, inc. jenkins, w.i., 1978. policy analysis. a political and organisational perspective. london: martin robertson. pp: 15-25. mujtaba, b.g., 2014. managerial skills and practices for global leadership. florida: ilead academy. mujtaba, b.g., 2015. climate change and sustainability. youtube video. retrieved from https://www.youtube.com/watch?v=yqbcyuxb4c0. mujtaba, b.g., f.j. cavico, t. senathip and s. u-tantada, 2016. sustainable operational management for effective leadership and efficiency in the modern global workplace. international journal of recent advances in organizational behaviour and decision sciences, 2(1) : 673-696. view at google scholar ping, h., b.g. mujtaba, d.a. whetten and y. wei, 2012. leader personality characteristics and upward trust: a study of employeesupervisor dyads in china. journal of applied business research, 28(5): 1001-1016. view at google scholar | view at publisher rissmiller, k., 2000. approaching a model of policy change: a challenge to political science. proceedings of the eighteenth international conference of the system dynamics society. august 6 10, 2000. bergen, norway. senathip, t., 2015. protests in thailand of the book entitled gender, education, and employment developments in south asia: a review of progress in afghanistan and pakistan by b. g. mujtaba. florida: ilead academy. pp: 197-199. susser, b., 1992. approaches to the study of politics. new york: macmillan publishing. u-tantada, s., b.g. mujtaba, m. yolles and a. shoosanuk, 2016. sufficiency economy and sustainability. proceedings of the 2nd multidisciplinary research and innovation for globally sustainable development (mrigsd) valaya alongkorn rajabhat university. journal of thai interdisciplinary research, 2559: 84-94. unf lecture, 2016. paradigms of public administration. university of north florida department of political science; pad 4003 public administration. retrieved from www.unf.edu/~g.candler/pad4003/02.pdf. https://scholar.google.com/scholar?hl=en&q=maximizing%20long-term%20value%20and%20conscious%20capitalism%20at%20whole%20foods http://www.youtube.com/watch?v=yqbcyuxb4c0 https://scholar.google.com/scholar?hl=en&q=sustainable%20operational%20management%20for%20effective%20leadership%20and%20efficiency%20in%20the%20modern%20global%20workplace https://scholar.google.com/scholar?hl=en&q=leader%20personality%20characteristics%20and%20upward%20trust:%20a%20study%20of%20employee-supervisor%20dyads%20in%20china http://dx.doi.org/10.19030/jabr.v28i5.7241 http://www.unf.edu/~g.candler/pad4003/02.pdf economy, 2017, 4(1): 7-14 14 bibliography easton, d., 1965a. a framework for political analysis. englewood cliffs, nj: prentice-hall publishers. easton, d., 1965b. a systems analysis of political life. new york: john wiley and sons. miyakawa, t., 2000. the science of public policy: essential readings in policy sciences ii. new york: routledge, 5(1): 44-52. ventriss, c., 1989. toward a public philosophy of public administration: a civic perspective of the public. public administration review, 49(2): 173-179. view at google scholar | view at publisher world bank, 1982. world development report 1982: international development trends, agriculture and economic development, world development indicators. new york: oxford university press. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. https://scholar.google.com/scholar?hl=en&q=toward%20a%20public%20philosophy%20of%20public%20administration:%20a%20civic%20perspective%20of%20the%20public http://dx.doi.org/10.2307/977339 8 economy vol. 5, no. 1, 8-16, 2018 issn(e) 2313-8181 / issn(p) 2518-0118 doi: 10.20448/journal.502.2018.51.8.16 effect of poultry production on agricultural production in nigeria ewubare, dennis brown1  ozar, vivian2 ( corresponding author) 1,2department of agricultural and applied economics, rivers state university, port harcourt, nigeria abstract this study examined the effects of poultry production on agricultural output in nigeria. specifically, this study is tailored to explore the effects of poultry birds’ production, poultry eggs production and poultry meat production on agricultural output. the period covered by the study spanned from 1975 to 2016. data on the variables of interests were obtained from the food and agricultural organization statistics (faostat) and national bureau of statistics. the analytical techniques comprise ols and error correction model. the phillips-perron unit root test results show that all the variables have unit root at levels test, but become stationary after being differenced once. the cointegration test results indicate that each of the test statistics show evidence of two cointegrating equations. this suggests that in actual fact long run relationship exists among the variables. from the parsimonious ecm, it was revealed that poultry birds production negatively influence agricultural gdp. poultry eggs production has an insignificant effect on agricultural gdp as evidenced in the parsimonious ecm. the result further shows that poultry meat production is associated with a positive and significant coefficient. the implication of this finding is that the production of poultry meats enhances agricultural gdp through its important contribution to the livestock sub-sector. it was discovered from the result that the coefficient (-0.378) of error correction has the intended theoretical negative sign and also satisfies the statistical condition at 1 percent level. it is clear from this finding that any short run disequilibrium in the system can be corrected in the long run at 39 percent. thus, this study recommends amongst others that governments at all levels should evolve measures that promote huge commitment to infrastructural development in agricultural sector in order to boost poultry output and promote self-sufficiency in poultry farming. keywords: poultry production, agricultural output, livestock. citation | ewubare, dennis brown; ozar, vivian (2018). effect of poultry production on agricultural production in nigeria. economy, 5(1): 8-16. history: received: 16 april 2018 revised: 28 may 2018 accepted: 31 may 2018 published: 4 june 2018 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group contribution/acknowledgement: both authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ......................................................................................................................................................................................... 9 2. literature review ............................................................................................................................................................................... 9 3. research methodology ................................................................................................................................................................... 11 4. data analysis and discussion of results .................................................................................................................................... 13 5. conclusion and policy recommendation .................................................................................................................................... 15 references .............................................................................................................................................................................................. 16 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2018.51.8.16&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ https://orcid.org/orcid-search/quick-search?searchquery=ewubare, dennis brown https://orcid.org/orcid-search/quick-search?searchquery=ozar, vivian https://orcid.org/orcid-search/quick-search?searchquery=ewubare, dennis brown https://orcid.org/orcid-search/quick-search?searchquery=ozar, vivian https://orcid.org/orcid-search/quick-search?searchquery=ewubare, dennis brown https://orcid.org/orcid-search/quick-search?searchquery=ozar, vivian economy, 2018, 5(1): 8-16 9 1. introduction in africa, agriculture has remained at the forefront of economic activities, thus, accounting for 30 percent of the national income (heise et al., 2015) and large proportion of the overall exports. for this reason, both public and private concerns in the agricultural sector continue to increase. according to connolly (2014), about three-quarters of the total population in africa depend on agriculture for livelihood and the demand for various agriculture products has continued to increase in recent years. with the increase in the disposable income of the population, the demand for agricultural produce especially poultry products (eggs and meat) has continued to increase across the african continent. the popularity of poultry birds in nigeria is noteworthy and can be attributed to the numerous benefits associated with poultry production and other value chain. heise et al. (2015) argue that poultry birds are good sources of protein either used as eggs or meat. they further explained that the production of poultry birds is relatively cost effective, thus, making it possible for low income farmers to start up the business. more so, the return on poultry investment is relatively high compared to other livestock production and the high level of acceptability of the poultry meat across diverse ethnic backgrounds and religious beliefs broadens the market share and makes the business very viable. in addition to the benefits created by the poultry meat, ojo (2003) and aboki et al. (2013) remarked that poultry eggs are more affordable for low income earners compared to other sources of protein. this adds to the relative importance of poultry to agriculture. the distribution of poultry production across the six geo-political zones in nigeria as provided by the presidential committee on livestock (pcol) (2003) include 17.8million birds, 15.8 million birds and 22.6million birds in the northwest, northeast and north central zones respectively while the south-east, south-south and southwest geo-political zones have 16.0million birds, 15.2million birds and 24.3million birds respectively. the production estimates of poultry birds on report indicate that between 1998 and 2003, 179,667 metric tonnes of meat was produced while 434,000 metric tonnes of eggs was produced in nigeria. in spite of the positive spill-over effects associated with poultry production, the output hardly meets the growing demand. this is because consumption increases rapidly than output. rotschild (2002) posits that the domestic production shortfall is estimated at 25,000 metric toones. thus, increasing importation undermines exchange rate stability and external reserve build-up. the shortfall in poultry production amidst the growing demand has remained key challenges as it reduces the net-marginal contribution of this livestock segment to the agricultural output. this lag in poultry production has remained major source of worry to the government and other relevant stakeholders in the agricultural sector. the current level of food insecurity calls for well-defined approaches in meeting the desired objectives. one of the generally adopted approaches is increased production and productivity of the poultry sub-sector. increasing productivity and efficiency within the agricultural sector, particularly among small-scale poultry egg producers require a good knowledge of the current efficiency or inefficiency inherent in the subsector as well as factors responsible for this level of efficiency or inefficiency. this is because despite the growth in egg and meat production industry since year 2000 in nigeria (tijjani et al., 2006), growing local demand has not matched the fluctuating local supply. it therefore, becomes imperative to gain more insight into the challenges and problems confronting poultry production and how poultry production contributes to agricultural gdp in nigeria. it is against this backdrop that this study explored the effects of poultry production on agricultural output in nigeria over the period of 42 years (1975-2016). 2. literature review 2.1. theoretical framework 2.1.1. input-output theory the input-output theory is credited to leontief (1951). the theory focused on inter-industry relations and interrelationship in the economy wide aggregate as the input of one industry is the output of another industry. the theory was originally developed to analyze and measure the connection that exists between key sectors of an economy. the theory has been extended to include smaller systems of the economy, and on the broader scale, the economic relationship between countries. the theory argues that, the various sectors of the economy are interdependent as the output of a particular sector forms the input of another sector. the substructure of the inputoutput (i-o) analysis incorporates input-output tables. each table showcases the supply chain of inputs as expressed in rows and columns. the input-output model is instrumental in estimating three important type of impacts: direct, indirect and induced. by employing the i-0 model, poultry farmers could be able to estimate adjustment or changes in inputs used by them due to a change in output in one or more specific sector. the direct consequence of this would be the adjustment in money balance expended by them. the secondary consequence of this relates to the number of labour hired by the suppliers of input utilized by the poultry farmer. the induced impact comes from the workers or suppliers purchasing more goods and services. the input-output theory has been criticized on the grounds of its rigidity as it fails to reflect certain phenomena such as increasing costs, bottlenecks, etc. also, the lack of mechanism for price adjustments in the model makes it unrealistic. 2.1.2. theory of production the production theory concerns itself with the economic process that describes how certain specific inputs are jointly combined to produce a given level of output. the production theory has its footing in the works of the neoclassical economists. the neoclassicals argued that the economy comprises of two important agents – the consumer and producer. the former engages in consumption activities whilst the latter undertakes production activities. these decisions or activities taken by the aforementioned agents are considered inseparable owing to the fact that the decision bothering on consumption, labour supply, and production are looked at simultaneously through the behavioural lens of three key agents: consumers, workers, and producers (mankiw, 2015). economy, 2018, 5(1): 8-16 10 the cradle of this theory kicks starts from the poultry farmer making decisions on the number of labour to be utilized or employed in the course of his/her poultry farming activities; whether or not to utilize purchased labour or make do with self labour; the amount of capital to be invested into the poultry business; the source of capital (personal savings or loans from deposit money banks); the skills, talents and creativity inherent in the owner of the enterprise or the labour to be employed or currently employed, among others. these decisions shape the configuration of inputs to be utilized and quantum of output to be realized. what this exhumes is that, the poultry farmer can vary the level and composition of his or her farm inputs and outputs. in practical sense, poultry farmers tend to have a variety of goals ranging from income instability, ensuring household food security, achieving certain consumption preferences and giving back to his or her community. in achieving these, poultry farmers must produce the highest number of output given available or devoted resources as revenue depends on the level of output and the unit price of the output. however, the achievement of the highest level of output is limited by certain constraints that engulfs availability of capital, land being fixed in supply, the composition of labour in terms of quality, price, and availability. the behaviour of the poultry farmer as it borders on how resources can be best allocated so as to ensure the achievement of the highest level of output can be best scripted using the theory of cost minimization and output maximization. farmers venturing into or engaged in poultry farming, like any other entrepreneur, are assumed to maximize total output, minimize production cost, or engage in both. in other to achieve any or both of the stated objectives (maximization or minimization), the poultry farmer sets out to maximize a set of utility subject to certain input constraints as defined by the set of utility subject to certain input constraints as defined by the production function. the poultry farmer derives satisfaction from the quantities of output (from instance broilers, layers, poultry-egg) produced subject to the input combination, with the latter dependent on each input’s price, the prices of other inputs, and other sets of socio-economic variables. 2.2. conceptual framework poultry are chickens, ducks, geese, guinea fowls, turkeys and other related birds kept for meat and egg. in nigeria, the poultry population is estimated to be 140 million (ocholi et al., 2006). they are the most commonly kept livestock and over 70% of those keeping livestock are reported to keep chickens (amar-klemesu and maxwell, 2000). chickens have its scientific name to be gallus domestics and it is one type of poultry. it belongs to the family phasiendae and it is estimated to be about 69% of the total number of birds kept in nigeria (sonaiya, 1990). commercial poultry systems are industrialized and, therefore, based on large, dense, uniform stocks of modern poultry hybrids. however, most of the poultry is still kept in rural production systems, which are characterized by insufficient hygiene management. even though many farmers would like to stock hybrids, which gain weight more quickly and are more disease resistant, their high mortality rates make hybrid production less profitable (esiobu et al., 2014). additionally, farm and flock size correlates significantly to the output of poultry farms. large farm size increases productivity as well as technical, allocative, and resource use efficiency (esiobu et al., 2014). many poultry farmers still work at a subsistence, small, or medium-sized level mainly due to limited financial resources (aboki et al., 2013). 2.3. empirical literature hamid et al. (2017) examined the performance of the poultry industry in bangladesh focusing on the contribution of private sector for the development and marketing of poultry products. the study also investigated the problems and constraints of poultry industry and the scope and opportunity cost of poultry industry. this investigation is mirrored through various programs designed and implemented by private enterprises in the poultry industry. the method of analysis dwelled on descriptive statistics with a focus on frequency distribution and simple percentage. the result shows that the availability of meat and egg is much lower than the demand, thus a creating a condition of deficit in the market system. specifically, the study revealed that the contribution of poultry meat to the total meat products is about 35.2 percent whereas egg production is 63.65 percent of the total domestic demand. in comparative terms, the study showed that the per capita poultry meat consumption is much lower compare to other asian countries as it averaged 1.9 kilogram. based on the findings, the study recommended for synergy between private sector and the government as well as foreign investment in order to boost production in the livestock industry. bamiro (2008) analyzed the economic importance of poultry production in some sampled local government areas in oyo state, nigeria. the sampling technique employed by the study in selecting the study area and 71 respondents is purposive in nature. the method of analysis involved combinations of descriptive statistics and multiple regressions. it was uncovered from the result that the profitability of poultry farmers depends largely on enterprise combinations and extent of production. it was evident from the budgetary analysis that enterprises that operate in a large scale have highest turnover compared to those that operate relatively on low scale. the descriptive analysis also show that poultry farmers engaged in eggs production have highest gross margin compared to those engaged in broiler production. thus, egg production contributes more to agricultural gdp. the result of regression analysis revealed that poultry birds, feed and labour size are key drivers of productivity in the poultry sub-sector and by extension the overall agricultural sector. owing to the findings, the study recommends that poultry farmers should focus more on egg production in order to boost the contribution of the poultry industry to agricultural gdp. yusuf et al. (2016) used primary data collected through the instrumentality of questionnaire in exploring the economics of poultry production in kwara state, nigeria. they made use of the budgetary and profit index analysis. a structured questionnaire was administered to 80 registered poultry farmers selected using the systematic random sampling technique. obtained data were analyzed using descriptive statistics, benefit cost ratio, ordinary least squares regression and the budgetary analysis. empirical findings of the study disclosed that, commercial poultry farmers in kwara state are well educated, highly experienced and young with a keen interest in the business of poultry farming. upon analyzing the costs and returns, the findings showed that poultry farming is profitable in the study area as the gross income and net income for egg production were computed to be economy, 2018, 5(1): 8-16 11 n4,062,422 and n1,255,965 respectively, whilst that of broiler productions were found to be n1,683,209 and n499,187 respectively. the outcome of the regression analysis carried out disclosed that, labour, equipment, feed, and stock capacity are significant facts that affects poultry farming in the study area. ayieko et al. (2014) sort to calculate the profit of indigenous chicken in makueni county and to determine the association that exists amongst certain socio-economic factors and profit from ic. the multistage sampling was used and this gave birth to a sample size of 130 households to which structured questionnaires were administered to. with the growing usage of software applications in the analysis of data, stata 11 was employed in carrying out both budgetary analysis and multiple regression analysis. the empirical findings of the study divulged that, the profit from the production of ic in makueni was ksh. 5347 per 100 birds. on the socio-economic factors that has significant association with profit, the factors identified by the study includes: flock size, age, access to credit, education, and price and year in farmer group. ezeh et al. (2012) measured the technical efficiency and its determinants in the production of broilers in umuahia capital territory of abia state, nigeria. using a multistage sampling technique, the sample size for the study is 60 poultry farmers. the study employed a stochastic production function. the employed production function brought to bear feed intake, stock-size, and labour input as critical variables that influences the output of farmers. the farm level technical efficiency, it was discovered, ranged from 87% to 97% with an average of 75%. the determinants of the farm level technical efficiency were household size, extension contact, age and the level of education. assessed constraints to increased layers production among small-scale poultry farmers in ibadan area of oyo state, nigeria. the study made use of a multistage sampling technique which gave rise to 120 small scale poultry farmers to which structured questionnaires were administered to. the instrument for data analysis is pairwise correlation coefficient. empirical findings of the study divulged that, disease and pest attack ranked top as constraints faced by the sampled farmers in carrying out their productive activities and these was accompanied by difficulty in the procurement of credit and loan. the results of the correlation analysis revealed a significant association between number of birds raised, income from sale of egg, and constraints to increased layers production among farmers involved in small-scale poultry farming. hinging on the discoveries of the study, it was proposed that government tackle the problems associated with the procurement of credits and loans, and ensuring stability in price. emokaro et al. (2016) carried out a study to analyze the economics of backyard poultry farming in benin city. the sampling technique adopted for their work was the snowball sampling technique which produced the ninetysix (96) backyard poultry farmers that formed the sample size for the study. primary data were employed for the study with the needed data obtained through the issuance of a structured questionnaire. descriptive statistics, profitability measures and multiple regression analysis were used in analyzing the obtained data gotten from responses as captured by the issued questionnaire. the empirical findings of the study points to the dominance of layers poultry production in the business of backyard poultry farming with it (layers) attracting 70% of all poultry business. the profitability analysis divulged the poultry business is a profitable one in benin city averaging a positive gross margin of n573,346.01 yearly. results of the regression analysis conducted lay bare the positive contribution of family size and farming experience to net returns from engaging in backyard farming. conversely, the age of respondents was uncovered to negatively influence a farmers’ net income. on soliciting for hurdles or constraints faced by farmers, insufficient finance and high cost of feed were thrown into the open as limiting factors. ume et al. (2016) examined the economics of broiler production among rural women in imo state. the study area focused on ahiazu mbaise local government area. a sample size of 200 rural women engaged in broiler farming was selected using a combination of both purposive and multi-stage sampling technique. a structured questionnaire was employed in soliciting for responses that formed the data relied upon and used for the study. in ensuring the achievement of outlined objectives, the gross margin analysis and percentage response techniques were used in analyzing obtained data. the outcome of the analysis carried out disclosed that, the gross margin for broiler production was n212,875, the total revenue realized was n925,000, with the aggregate variable cost standing at n712,125; whilst the benefit cost ratio was computed to be n1:1.2. in order of priority, the sampled farmers identified poor marketing price, expensive labour wage, poor access to credit, and pest and disease as constraining factors to their broiler production. nwandu et al. (2016) applied descriptive statistics in appraising the potentiality of poultry production as a means of livelihood and poverty alleviation among its farmers in nigeria. as part of the objectives, the study examined the profitability approaches for successful operation of poultry business. the findings revealed that poultry production business in its entire ramification is undoubtedly one of the viable farming enterprises providing the much needed animal protein sources, especially egg and meat in order to provide solution to food crisis in nigeria in terms of protein deficiency. in view of the findings, the study therefore, recommended that the government should prioritize poultry production business as a means of empowering the teeming population of the youths in order to check the growing rate of unemployment and boost agricultural productivity. 3. research methodology 3.1. research design in view of the nature of this study, ex-facto research design was employed for this study. this is because this study is based on existing data which were documented over the past 42 years (1975-2016). 3.2. types and sources of data collection this study focused mainly on secondary data. the data were collected on annual basis from 1975 to 2016 and the source for the indicators of poultry production is food and agricultural organization statistics (faostat). in addition to this, data on agricultural output over the sampled period were collected from the national bureau of statistics. economy, 2018, 5(1): 8-16 12 3.3. method of data analysis this study relied on the ols techniques for estimating the effects of the underlying indicators of poultry production on agricultural output in the long run. the choice of this method stems from its attribute as the best linear unbiased estimator (blue). as the best estimator, the ols estimates are preferred to estimates from other econometrics methods. more importantly, the error correction model (ecm) is applied to estimate the short-run behaviors of the measures of poultry production and the speed at which the model adjusts to equilibrium in the long run. before estimating the long run and short behaviors of the variables, the data were be subjected to unit root and cointegration tests. again, the estimated model was subjected to some diagnostics tests which focused mainly on higher order serial correlation test, heteroscedasticity test and normality test amongst others. each of these tests is discussed below: 3.3.1. pre-estimation tests i. unit root test: the time series characteristics of the variables were ascertained via stationarity test process. specifically, this test is applied to ensure that each of the variables does not enter the model in an explosive manner (non-stationary status). the phillips and perron (1988) method, an alternative procedure to the popular augmented (dickey and fuller, 1981) approach was adopted for the unit root test. the null hypothesis of a unit root (non-stationarity) was tested against the alternative hypothesis of no unit root (stationarity) at 5 percent level. the model for the unit root test is formalized below: ∑ where: qt = variables included in the model, and βi = parameter estimates, k = length of lag, ∆= first difference operator, λt = random disturbance term it is expected that each of the series be integrated of order zero [i(0)] for the ols to be efficient and unbiased. however, a deviation from the expected stationarity process may yield a spurious result. ii. cointegration test before estimating the error correction model, the series was subjected to cointegration test to determine whether their linear combinations lead to long run relationship. evidence of long run among the underlying series shall prompt the estimation of the error correction coefficient in order to capture the speed of adjustment. owing to its robustness, the johansen system of cointegration test for multivariate models proposed by johansen and juselius (1990) is applied in ascertaining the presence of a long-run relationship among the variables. the algebraic formalization of the johansen-juselius cointegration model based on the required test statistics is as follows: (3.2) (3.3) where j = estimated values of the characteristics roots of the trace statistics estimated from the cointegrating vector. k = estimated values of the characteristics root of the maximum-eigen statistics estimated from the cointegrating vector t = number of observations. for the trace test, the null that the number of distinct cointegrating vectors is equal to or less than r is tested at 5 percent level. on the other hand, the max-eigen statistic shall test the null hypothesis that the number of cointegrating vectors is r, against the alternative of that it is r +1. the critical values for each of these test statistics as provided by johansen and juselius (1990) shall be compared with the computed values at 5 percent critical value. evidence of at least one cointegrating equation at selected 5 percent level of test implies that long run relationship exists among the series. 3.4. model specification this study developed and estimated a single multivariate model to capture the production-output relationship between the indicators of poultry production and growth of agricultural sector. the functional specification of the relationship between agricultural output (apo) and the measures of poultry production such as stock of poultry birds (pob), eggs production (epo) and poultry meat production (pmp) is as follows: apo = f (pob, epo, pmp) (3.4) where: apo = agricultural output pob = stock of poultry birds epo = eggs production pmp = poultry meat production the linear and non-linear econometric models of equation (3.4) are provided as: apot = n0 + n1pobt + n2epot + n3pmpt + u1t (3.5) inapot = m0 + m1inpobt + m2inepot + m3inpmpt + u2t (3.6) where: apo, pob, epo and pmp are as explained in equation (3.4). n0 and m0 = intercepts or constant parameters n1 – n 3and m1 – m3 = slope parameters in = natural log notation u1t – u2t = stochastic term equations (3.5) and (3.6) respectively depict the linear and non-linear econometric models.             n ri itrace intrj 1 1            111,max rintrrk  economy, 2018, 5(1): 8-16 13 the a priori expectations require that the coefficients of each of the poultry products should have a positive sign. this is because increase in poultry production is expected to boost agricultural output and thus, increase its share of gdp. based on this premise, the expected signs of the coefficients of the explanatory variables are expressed algebraically as: n1>0, n2>0, n3>0,, m1>0,m2>0, and m3>0. the short run dynamic behaviors of the explanatory variables are captured using an error correction model (ecm) and the model is expressed as: 3.7 where: = constant parameter, = short-run dynamic coefficients of the regressors, y = length of lag, ecm = error correction term lagged for one period, = error correction coefficient lagged for one period,e1t = random disturbance term. 3.5. description of variables in the model a. dependent variable i. agricultural output (apo): this refers to crops, livestock, fisheries and forestry products produced in nigeria over a period of time usually per annum. it excludes all kinds of agricultural produce and allied products imported to nigeria from the rest of the world. the output of agricultural sector in the nigerian economy between 1975 and 2015 as reported by the national bureau of statistics shall serve as the dependent variable for this study. b. explanatory variables i. stock of poultry birds (pob): these comprise domestic fowls such as chickens, turkeys, ducks, geese, pigeons and recently ostriches reared with the primary objective of producing meat and eggs. they are important sources of protein and play key roles in boosting food security. increase in the sock of poultry birds is expected to stimulate agricultural output. ii. eggs production (epo): this involves the raising of chickens, especially layers for eggs production which important source of protein. it is expected that increase in eggs production will increase agricultural gdp. iii. poultry meat production (pmp): this refers to broilers and other types of poultry meat produced domestically for meeting consumption and in some instances export needs. it is expected that increase in the production of poultry meat will contribute positively to agricultural output. data on the total number of poultry produced over the sampled period shall be sourced from the fao statistics. 4. data analysis and discussion of results 4.1. descriptive statistics as part of efforts to provide more information on the distribution of each of the series over the period covered, the descriptive statistics of the series are reported in table 4.1. table-4.1. descriptive statistics for the series apo pob epo pmp mean 19378590 121776.4 384362.0 171631.9 median 930328.1 124310.0 393500.0 169500.0 maximum 2.54e+08 192313.0 660000.0 273000.0 minimum 6028.330 64380.00 150000.0 82000.00 std. dev. 51719054 31592.73 156520.0 46397.60 observations 42 42 42 42 source: compiled by the author as computed from e-views software the average values of apo, pob, epo and pmp as observed from the descriptive statistics are ₦19378590 million, 121776.4 tonnes, 384362.0 tonnes and 171631.9 tonnes respectively. from the respective standard deviation of the series, it was found that the observations for the variables do not converge around their mean values. this inference is based on the fact the respective standard deviations for the variables are more than the associated mean values. 4.2. ordinary least squares based static model the static regression model estimated using ols as showed in table 4.2 the regression model was estimated using ols as reported in table 4.2 reveals that poultry eggs production is positive related to changes in agricultural output. 10 percent increase in poultry eggs production generates 68.9 percent increase in agricultural output, indicating that poultry eggs production is a source of increasing returns to scale in agricultural gdp. however, stocks of poultry birds and poultry meat production are not significant in explaining changes in agricultural output. however, the entire model shows evidence of statistical significance, thus indicating that the regressors are jointly significant. although the r-squared (0.875) attests to the high explanatory power of the regressors, the durbin-watson statistics (0.753) shows that there is serial correlation in the model. this econometric problem of serial correlation observed in the model can be as a result of unit root in the series, thus constraining any long term prediction based on the regression outcome. this provoked the test for unit root in the series           y i t y i t y i t y i tt inpmpinepoinpobinapoinapo 1 14 1 13 1 12 1 110  tt y i t eecminsoc     1 1 15  economy, 2018, 5(1): 8-16 14 table-4.2. ols based regression result dependent variable: log(apo) method: least squares variable coefficient std. error t-statistic prob. in(pob) -1.012 4.519 -0.224 0.823 in(epo) 6.899 1.155 5.969 0.000 in(pmp) 0.647 4.156 0.155 0.877 c -70.735 9.388 -7.534 0.000 r-squared 0.875 adjusted r-squared 0.865 durbin-watson stat 0.753 f-statistic 89.09 prob(f-statistic) 0.000 source: compiled by the author as computed from e-views software nb: in denotes log natural transformation 4.3. unit root test the philips-perron (pp) procedure to stationarity was applied in testing whether or not the variables are stationary or not at 5 percent level. the results are displayed table 4.3. table-4.3. philips-perron (pp) test results variable pp levels test results pp 1st difference test results order of integration adjusted t-stat. 5% critical value adjusted t-stat. 5% critical value in(apo) 0.780 -2.935 -13.763 -2.936 i (1) in(pob) -2.332 -2.935 -6.876 -2.936 i (1) in(epo) -2.086 -2.935 -6.648 -2.936 i (1) in(pmp) -2.740 -2.935 -6.988 -2.936 i (1) source: compiled by the author as computed from e-views software nb: in denotes natural log transformation the results as showed in table 4.3 revealed that none of the variables is stationary at levels. this is because their adjusted t-statistics are less than their associated critical values at 5 percent level. following the nonstationarity of the variables at levels, transformation of the variables via 1st differencing was carried out. the result shows evidence of stationarity upon 1st differencing. the implication of this finding is that all the variables are integrated of order one. this makes the johansen cointegration variety appropriate for testing if the variables show any evidence of long run relationship. 4.4. cointegration test the cointegration test proposed by johansen and juselius was applied in examining if long run relationship exists among the series or not. the results are reported in table 4.4. table-4.4. results of cointegration test series: in(apo) in(pob) in(epo) in(pmp) lags interval (in first differences): 1 to 2 hypothesized no. of ce(s) eigenvalue trace statistic 0.05 critical value prob.** none * 0.579 66.960 47.856 0.000 at most 1 * 0.430 33.166 29.797 0.019 at most 2 0.182 11.234 15.494 0.197 at most 3 0.083 3.382 3.841 0.065 hypothesized no. of ce(s) eigenvalue max-eigen statistic 0.05 critical value prob.** none * 0.579 33.794 27.584 0.007 at most 1 * 0.430 21.932 21.131 0.038 at most 2 0.182 7.851 14.264 0.394 at most 3 0.083 3.382 3.841 0.065 source: compiled by the author as computed from e-views software * and in respectively implies rejection of the hypothesis at the 0.05 level and natural log transformation. in compliance with the econometric requirements for verifying the stationarity properties of the series and estimating the error correction model, cointegration test was undertaken at 5 percent level. the results indicate that both the trace and maximum eigenvalue statistics confirm that two cointegrating equations exist in the model. in other words, the variables are cointegrated and the dynamic relationship among them can be represented as an ecm. 4.5. error correction model the error correction model was estimated to provide better information on the dynamic relationship between the dependent and the predictor variables. the result of its parsimonious representation is reported in table 4.5. economy, 2018, 5(1): 8-16 15 table-4.5. parsimonious ecm dependent variable: dlog(apo) method: least squares variable coefficient std. error t-statistic prob. ecm(-1) -0.378 0.076 -4.979 0.000 c 0.522 0.073 7.072 0.000 din(apo(-1)) 0.116 0.113 1.019 0.318 din(apo(-2)) -0.442 0.091 -4.862 0.000 din(pob) -1.048 1.093 -0.958 0.347 din(pob(-1)) -3.098 0.699 -4.426 0.000 din(pob(-2)) -3.975 0.747 -5.318 0.000 din(pob(-3)) 2.299 1.232 1.865 0.074 din(epo) -0.231 0.401 -0.577 0.569 din(epo(-1)) -2.422 0.588 -4.114 0.000 din(epo(-2)) -1.785 0.500 -3.569 0.001 din(epo(-3)) -2.042 0.525 -3.888 0.000 din(pmp) 2.119 0.986 2.147 0.042 din(pmp(-3)) 1.792 1.169 1.532 0.138 r-squared 0.865 f-statistic 11.921 prob(f-statistic) 0.000 source: compiled by the author as computed from e-views software it was discovered from the result that the coefficient (-0.378) of error correction has the intended theoretical negative sign and also satisfies the statistical condition at 1 percent level. it is clear from this finding that any short run disequilibrium in the system can be corrected in the long run at a speed of 39 percent. the results show that the dynamic coefficients of stocks of poultry birds are negative and significant. this implies that increasing stocks of poultry birds by 10 percent at lag 1 and 2 would respectively contract agricultural gdp by 31 percent and 39 percent. again, poultry eggs production lagged for one, two and three periods are negatively related to agricultural output. however, it was found that poultry meat production is associated with a positive and significant coefficient. the implication of this finding is that the production of poultry meats enhances agricultural gdp through its contribution to the livestock sub-sector. both the r-squared (0.865) and f-statistic (11.92) reveal that the model well is fitted and satisfies the statistical condition. thus, with r-squared (0.865) exceeding the benchmark of 0.50, it implies that the explanatory variables collectively explained 87 percent variations in agricultural gdp over the period covered. 4.5.1. post-estimation tests the estimation of the parsimonious ecm is followed by post-estimation tests. these tests particularly focused on higher order test for serial correlation and heteroskedastic test for constant variance of the residuals. the results are showed in table 4.5.1a and 4.5.1b. table-4.5.1a. breusch-godfrey serial correlation lm test result breusch-godfrey serial correlation lm test: f-statistic 1.378 prob. f(3,21) 0.2768 obs*r-squared 6.251 prob. chi-square(3) 0.1000 source: compiled by the author as computed from e-views software table-4.5.1b. harvey heteroskedastic test result f-statistic 0.958 prob. f(13,24) 0.5149 obs*r-squared 12.985 prob. chi-square(13) 0.4489 scaled explained ss 11.091 prob. chi-square(13) 0.6031 source: compiled by the author as computed from e-views software in furtherance of the efforts to determine if the estimated regression parsimonious ecm model satisfies important econometrics conditions, some post-estimation tests, especially tests for serial correlation and homoscedasticity was carried out at 5 percent level. it was discovered from the test results that the model (parsimonious ecm) is not serially correlated and free of the problem of heteroskedastic. the implication of this finding is that reliable and efficient forecast can be achieved based on the outcome of the model. 5. conclusion and policy recommendation this study examined 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http://dx.doi.org/10.2307/2336182 http://dx.doi.org/10.2307/2336182 https://scholar.google.com/scholar?hl=en&q=profit%20efficiency%20among%20nigerian%20poultry%20egg%20farmers:%20a%20case%20study%20of%20aiyedoto%20farm%20settlement,%20nigeria http://dx.doi.org/10.9734/arja/2016/27428 https://scholar.google.com/scholar?hl=en&q=financial%20analysis%20of%20poultry%20production%20in%20kwara%20state http://dx.doi.org/10.5897/ajar2015.10690 economy issn : 2313-8181 vol. 2, no. 3, 49-57, 2015 www.asianonlinejournals.com/index.php/economy * corresponding author 49 the relative impact of money supply and government expenditure on economic growth in nigeria peter siyan 1 --adewale emmanuel adegoriola 2* 1,2 department of economics, university of abuja, nigeria abstract this work is licensed under a creative commons attribution 3.0 license asian online journal publishing group contents 1. introduction ............................................................................................................................................................................... 50 2. empirical literature ................................................................................................................................................................. 50 3. theoretical framework ............................................................................................................................................................ 52 4. model specification and data analysis ................................................................................................................................... 53 5. estimation technique ............................................................................................................................................................... 54 6. empirical results ...................................................................................................................................................................... 54 7. policy recommendations .......................................................................................................................................................... 55 references ...................................................................................................................................................................................... 55 appendix ........................................................................................................................................................................................ 56 this study investigates the relative impact of money supply and government expenditure on economic growth in nigeria. in order to achieve the objectives, we proposed and specified models with parameters, which were estimated and used to test the hypothesis on relative impact of money supply vis-à-vis government expenditure. the beta coefficients techniques and two stage least square were employed to analyze the data. the empirical result showed that the government expenditure is relatively more effective compared with money supply on economic activities. government expenditure as a fiscal policy instrument is greater, more reliable (predictable) and faster than the use of money supply as a monetary policy instrument in stabilizing the economy. since both government expenditure and money supply are policy instruments use to stabilize the economy, government should rely more on government expenditure than money supply. however, the combination and harmonization of both money supply and government expenditure are highly recommended. keywords: money supply, government expenditure, economic growth, beta coefficient, nigeria http://creativecommons.org/licenses/by/3.0/ economy, 2015, 2(3): 49-57 50 1. introduction macroeconomic policy management in nigeria is dominated by monetary and fiscal policies. other policies include income, prices, employment, trade, industrial etc. money supply and government expenditure are two cardinal tools of monetary and fiscal policies respectively. generally, both monetary and fiscal policies seek to achieve relative macroeconomic stability. the objectives of monetary and fiscal policies in nigeria are wide-ranging. these include increase in gross domestic product (sustainable growth), reduction in the rate of inflation and unemployment, improvement in the balance of payment, accumulation of financial saving and external reserves as well as stability in exchange rate. sustainable economic growth and development is undoubtedly one of the most challenging development issues in third world countries today. even from the days of father of economics, (adams, 1992) the main focus of macroeconomic thinkers and policy makers is how to attain macroeconomic stability. in nigeria, especially before the introduction of structural adjustment programme (sap), there had been an undue emphasis on the use of fiscal policy at the expense of monetary policy which is frequently breached. it was in 1987, after sap, that emphasis shifted to monetary policy following the deregulation of money market which prevents money becoming a major source of disturbance in the nigeria economy. today, fiscal and monetary policies are inextricably linked in macroeconomic management as development in one sector directly affects development in the other. moreover, there is consensus among economists that monetary and fiscal policies jointly and individually affect the level of economic activities. the degree and relative superiority of one instrument over the other in achieving macroeconomic objectives has been subject of debates and controversies among policy makers and economists; tentative resolutions are attempted empirically for different countries and different periods and circumstances. the debates have been mainly between the monetarists and keynesians. the monetarists led by milton friedman believed that money supply exerts greater impact on economic activities while the keynesians economics led by john maynard keynes believed that government expenditure rather than money supply exerts greater influence on economic activities (adefeso and mobolaji, 2010). money supply which affects output, income and prices as well as the balance of payments is therefore, the central piece of monetary tools and intermediate target of monetary policy. in theoretical terms, it is denoted as m1 or m2, narrow and broad definition of money respectively. government expenditure is the main tool of fiscal policy. it can be financed from direct and indirect taxes, monetization of foreign exchange earnings, and domestic credit from the banking system including ways and means of advances by the central bank and borrowing from non-bank public. on the user’s side, disbursement of these funds could be informed by current or capital expenditure which is broken down further into smaller subheads. since the late 1970s, fiscal policy has become a major instrument in nigeria. the reason for this is the dominant role of the public sector in major economic activities in nigeria. this can be traced to several factors among which is oil boom in early 1970s; the need for reconstruction after the civil war; the industrialization strategy adopted at the time (import substitution industrialization policy) and the militarization of governance. the other reason for the increasing dominance of fiscal policy in the management of the economy is the fall in the international price of oil in the late 1980s. furthermore, the persistent fiscal deficit since the early 1970s and role of underwriting central bank of nigeria (cbn) treasury securities to commercial agents as also influenced the dominance of fiscal actions. government subsequently opted for discount houses which specialized agency focusing mainly on this function. another cause of the declining local capacity utilization has the fierce competition from foreign firms under the spirit of liberalization which is a cardinal principle of sap. poor physical and economic infrastructure, despite the huge oil revenue the country has earned thus far, has made it difficult for indigenous firms to complete globally. most indigenous firms are required to make capital investments in basic infrastructure like roads, securities, water and electricity. the result of such huge outlay is that the indigenous firms are greatly disadvantaged when competing in global markets. 2. empirical literature several studies have examined the effectiveness that fiscal policy and monetary policy. the argument about fiscal policy can be dated back to keynesian times, which predicts that expansionary fiscal policy (increasing government expenditure or decreasing tax) will increase disposable income, and raise the private consumption. however, investment will be partially crowded out because of the increase in interest rate. most of the empirical studies support this idea. blanchard and perotti (2002); fatas and mihov (2001) confirm the positive effect of government expenditure and revenue on consumption and output. however, many studies also show that fiscal policy can have non-keynesian effects. government expenditure increase may lead to increase aggregate demand because government expenditure increase means tax cut, and people will expect increase in future income, thus, increase current consumption and aggregate demand. giavazzi and pagano (1990) provided empirical supports for this idea. according to the study of denmark (1983-1986) and ireland (1987-1989), they found that contractionary fiscal policy may have expansionary result. many empirical studies examined the arguments; however they do not reach consensus result. hutchison et al. (2010) showed that tightening monetary policy will significantly cause the reduction of output, and monetary expansion has no discernable effect. goderis and ioannidou (2008) and kraay (2003) took some other factors into account. they studied the relationship between interest rate and exchange rate during currency crisis, controlling for national fundamental factor, short term bond yields, balance sheet and so on. they found that the most important factor is short term bond yield. when the short term bond yield level of a country is low, increasing interest rate will help defense exchange rate, this effect will decrease with the increasing short term bond yield. keran (1970) cross-selected time series study based on data from seven developed countries outside usa. keran found that money supply exert more influence on gdp than changes in government expenditure. teigen (1973) applied the methodology to data from three scandinavia countries, namely, denmark, finland and norway to determine the relative effectiveness of money supply and government expenditure. in all the three countries studied, economy, 2015, 2(3): 49-57 51 it is observed that government expenditure dominates economic activities, even after transforming the data and used beta and elasticity coefficients. the results contradicted the earlier conclusions by anderson and jordan which was collaborated by that of keran. in lybeck and teigen (1975) used swedish data, the anderson and jordan methodology, quarterly changes in normal gdp were regressed on quarterly changes in money supply and government expenditure. unlike the earlier results from the data on denmark, finland and norway by teigen, the findings with swedish data showed inconclusive evidence as to which of the two policy instruments had stronger influence on gdp. the inconclusive of the result was linked to conflicting on the exogenous variables and autocorrelation. friedman (1977) extended the original data of (1933-1968) used in the study of anderson and jordan (1968) to 1976, his empirical research found that government expenditure becomes significant. though, carlson (1978) was of the opinion that friedman (1977) was suffering from the problem of heteroscedastcity and suggested that the regression should be estimated in percentage first difference form. batten and hafer (1983) in an attempt to resolve the controversy on the impact of fiscal and monetary actions, they carried out empirical study outside united states on five developed countries namely: japan, canada, united kingdom, france and germany using st. lious equation and found that monetary policy exert greater impact on economic growth in these countries than the fiscal policy and equally that st. louis can be applied to a variety of other countries. for example, the result of this study cannot be generalized for the developing countries since they have significantly different economic and political structures. darrat (1984) investigates the relative influence of fiscal and monetary actions with in a modified st. louis single-equation in 5 latin american countries. the annual time series data was taken during the time period from 1950 to 1981 of gross national product, money stock, government spending and exports are used. the results suggested that fiscal policy significantly lead monetary policy in explaining changes in nominal income. chowdhury (1986) in his study of monetary and fiscal impact on economic activity in bangladesh, he also made use of the ordinary least square (ols) technique in his empirical investigation. he adopted st. louis equation in estimating the monetary and fiscal variables; he was also of the opinion that fiscal rather than monetary actions had greater influence on economic activities. as goldfajn and gupta (1999) mentioned, when the economy encounters currency crisis together with banking crisis, the policy is not effective. many banking crises, especially those in countries with fixed exchange rate turn out to be twin crises since currency depreciation exacerbating banking sector through foreign currency exposure of borrowers or banks. kaminsky and reinhart (1999) find that banking crises often precede balance-of-payment and the collapse of the currency deepens the banking crisis, activating a vicious spiral. peso crisis in 1994 and asian financial crisis are the examples of twin crisis. taylor (2000) suggested that this may be due to the fed executing a more aggressive and successful monetary policy since the 1980s, which may reduce the need for fiscal policy. to be sure, the data used contained few experiences with discretionary fiscal policy explicitly aimed at stabilizing the macro economy. consequently, the results are only suggestive and should not be interpreted as an outright dismissal of fiscal policy. furthermore, they emphasized the other important goals of tax and expenditure policy, namely to improve general equity and efficiency in the economy. and it would be most fortunate if fiscal policy could achieve these primary goals while also serving to stimulate a weak economy as a side effect. in terms of quick, easy-to-implement policies aimed at taming macroeconomic fluctuations, though, it appears that monetary policy reigns supreme. snyder and bruce (2005) used new evidence regarding the relative importance of monetary and fiscal policy for taming business cycles in the u.s. using quarterly data from 1966 to 2000, estimated a series of error correction vector auto regressions to determine the predictive power of changes in tax rates, government spending, m2, and ffr in explaining movements in consumption, investment and gdp. forecast error variance decompositions and impulse response functions support the relative importance of monetary policy. ali et al. (2008) examined the effects of fiscal and monetary policies on economic growth by using annual time series data from 1990 to 2007 in case of south asian countries. autoregressive distributed lag (ardl) model has been used. results indicated that money supply has significant and positive effect on economic growth in both short run as well as in long run, while fiscal policy has insignificant effect on economic growth both in the short run and long run. they concluded that monetary policy is a more powerful tool than fiscal policy enhancing the economic growth in case of south asian countries. yucel (2009) analysed the relationship among financial development, trade openness and economic growth in turkish economy by using the monthly data from january 1989 to november 2007. the authors applied johansen and juselius technique to check the long run relationship between variables while employed granger causality test to find the evidences of causality. the study found that trade openness is positively related with economic growth while financial development is negatively related with economic growth. granger test found the evidences of bi-literal causality between financial development, trade openness and economic growth. mohammad et al. (2009) examined the long run relationship among m2, inflation, government expenditure and economic growth in pakistan by using annual time series data from 1977 to 2007. co-integration results show that public expenditure and inflation has significant and negative effect while m2 has significant and positive effect on economic growth in the long run. jawaid et al. (2010) investigated the comparative effect of fiscal and monetary policy on economic growth in pakistan using annual time series data from 1981 to 2009. co-integration test confirms positive long run relationship between monetary and fiscal policy with economic growth. however, monetary policy is found to be more effective than fiscal policy in enhancing the economic growth of pakistan. they suggested that policy makers should focus more on monetary policy than fiscal policy to ensure economic growth however; the short run relationship should also have been checked. khosravi and karimi (2010) investigated the relationship between monetary, fiscal policy and economic growth in iran. the annual time series data was taken from 1960 to 2006. gross domestic product, narrow money (m1), economy, 2015, 2(3): 49-57 52 government expenditures, exchange rates and consumer price index have been considered. bound testing (ardl) approach and co-integration were used. results confirm that there exists co-integration relation between growth, monetary and fiscal policy. the results identify the effect of inflation and exchange rates on growth are negative, government expenditures have significant and positive effect on economic growth. it is suggested that the policy makers must have to diminish inflation rate and exchange rates to find the stability in the future. taban (2010) re-investigated the government spending-economic growth nexus for the turkish economy using bounds testing approach and mwald granger causality test by using the quarterly data from 1987:q1 to 2006:q4. results show that share of total government spending and the share of government investment to gdp have significant and negative effect on growth of real per capita in the long run. on the other hand, government consumption spending to gdp ratio has insignificant effect on per capita output growth. results also show that there is bi-directional causality between government spending and economic growth, uni-directional relationship running from per capita output growth to government investment to gdp ratio. jie and tang (2010) studied the effectiveness of fiscal and monetary policy responses to 72 episodes of twin crisis during 1977 to 2010. it found that monetary expansion measures contribute to reduce the output losses associated with twin crises. however, expansionary and contractionary policies have no discernable effects on twin crises, neither is contractionary monetary policy. comparing with the policy effectiveness on single crisis, banking crisis and currency crisis separately, it was found only monetary expansion help reduce the output losses associated with banking crisis. monetary policy has no discernable effect on currency crisis. and fiscal policy, expansionary or contractionary, has no effect on banking and currency crisis either. looking at specific studies on the relative effectiveness of both monetary and fiscal policy in nigeria, for example, ajayi (1974) maintained that much reliance have been placed on the use of fiscal policy rather than monetary policy. he used data from 1960-1970 in nigeria. in his study, he estimated the variables of fiscal and monetary policies using ordinary least square technique. his result was in line with that of anderson and jordan (1968) which revealed that monetary actions are much larger and more predicable than fiscal action. this result was confirmed with the use of beta coefficients that changes in monetary action were greater than that of fiscal action. in essence, greater reliance should be placed on monetary actions. ubogu (1985) used 15 african countries including nigeria. in his study, three variables were involved: gdp was regressed on differences of money supply (m1) and total government expenditure (g). time series data spanning 17 years were obtained from them; first and second differences were calculated and applied to obtained regression estimates like in the early studies, beta coefficients of the monetary and fiscal instruments were computed for direct comparison of the impact coefficients. the result indicated non-existence of serial correlation in the data. moreover, chow test confirms the structural stability of the model. on the basics of findings, ubogu recommended the need for policy tool for purpose of selecting the correct stabilization instruments. olaloye and ikhide (1995) in their study of the role of fiscal and monetary policies in a depressed economy, a case study of nigeria estimated a slightly modified form of st. louis equation. data from 1986-1991 was employed, the analysis of their results showed that fiscal policy exerts more influence on the economy than monetary policy. the result, therefore, suggests that fiscal policy have been more effective in nigeria at least in the period of depression. they are however, of the opinion that government expenditure will be an appropriate measure of fiscal policy. asogu (1998) adopted the modified version of the st. louis equation as in batten and hafer (1983) and provided estimates based on first differences and percentages changes of the data. the results also include the respective t– ratios, beta elasticity coefficient to facilitate direct comparisons. the result of the estimate showed that coefficients of money supply were statistically significant while those of government expenditure were not significant. this agreed with the hypothesis that monetary actions are more potent than fiscal policy. however, coefficient of export is not significant and this confirmed earlier results by ubogu (1985) such that exclusion of export variable in the earlier studies in nigeria and that emphasis on fiscal action of the government has led to greater distortion in the economy. however, the study recommends that both policies should be complementary. ajisafe and folorunso (2002) investigated the relative effectiveness of monetary and fiscal policy on economic growth in the context of nigeria using annual time series data during the year 1970 to 1998. m1 and m2 were used as proxies of money supply and government revenue, government expenditure and budget deficit as the proxies of fiscal policy. result indicated that monetary policy has significant effect on economic growth rather than fiscal policy. however, the study recommended that both policies should be complementary. adefeso and mobolaji (2010) empirically examined the relative effectiveness of fiscal and monetary policy on economic growth in nigeria. annual time series data from 1970 – 2007 was employed. error correction mechanism and co-integration technique was also used in the study. gross domestic product, broad money, government expenditure and degree of openness have been used in the study. results indicate that the effect of monetary policy on economic growth in nigeria is much stronger than fiscal policy. they recommended that policy makers should emphasize on monetary policy for the purpose of economic stabilization in nigeria. ogunmuyiwa and ekone (2010) investigated the relationship between money supply and economic growth in nigeria by using the data for the period 1980-2006. the study employed ols and error correction mechanism in order to check the relationship while granger causality test for checking the causality. the study found that economic growth is influenced by the level of money supply in the economy. 3. theoretical framework the question of whether an expansion monetary policy (mp) or fiscal policy (fp) will help to raise output starts from the basic keynesian model. in general, an increase in government expenditure or an increase in money supply will lead to an increase in output. nevertheless, for many years, and to some extent and even now, there is the view that keynesians ascribe that only fiscal policy (fp) can affect income and output, while monetarists believe that only monetary policy (mp) can have such an effect. it turns out, therefore, that in certain special cases, only fp works and economy, 2015, 2(3): 49-57 53 in another special case, only mp works. it has, however, been observed that only fp will work, and mp will not have any effect, if one of the links between changes in money supply and changes in investment is broken. the accounts of keynesian theory concentrate on the liquidity trap as the extreme keynesian special case. the important implication of the liquidity trap is that once the rate of interest has fallen to the level at which the liquidity trap occurs an increase in the money supply will not reduce the interest rate any further. therefore if the level of investment which could occur at this minimum rate of interest is still not great enough to provide expenditure equal to full employment output, then mp will not be able to increase investment and thereby restore full employment and income by this route. however, in a liquidity trap, an increase in government expenditure will still increase output. in fact, as long as we remain in liquidity trap, an increase in government expenditure will have the full effect on income because interest rates do not rise at all and there is no crowding out of private investment to offset any of the effects of the increase in government expenditure. hence, the support for the fiscal action of the government is to boost output. it follows therefore that the general theoretical framework accepted by keynesians indicated that provided that the economy was not in a liquidity trap and provided that there was some sensitivity of investment to interest rates, monetary policy would affect output. this view is now accepted as the empirically relevant case. the converse case in which monetary policy can affect income while fiscal policy is powerless will also not occur in the general keynesian model. this view referred to as the monetarists’ view is expressed by making reference to the "quantity theory of money” as in equation 1 below: mv=py ……………………………………………………………… 1 where m stands for money stock; v, velocity of circulation; p, an index of the price level and y, the income. the right-hand side of equation 2 is the value of nominal income. it tells us that there is a one-to-one relationship between changes in the stock of money and changes in the values of national income. m=kpy ……………………………………………………………… 2 if, in addition, as in the present context of our discussion of monetary and fiscal policy, we keep the price level (p) fixed, then the only way that y can change is if m changes. the implication is that any other change, such as a change in government expenditure will not affect the level of real income. hence fiscal policy must be powerless while monetary policy will affect real output. considering equation 2 as a demand for money which is not dependent at all on interest rates, one has the idea that there is one, and only one, level of national income which would lead to a demand for money balance which is equal to the exogenously given money supply. this suggests that if there is an increase in one of the component of desired expenditure, such as government expenditure, what will happen is that there will be an access demand for funds which will drive up the interest rate in the finance markets. the process will only stop when enough investment has been crowded out by the rise interest rates so as to leave total expenditure back to its old level. the end result of the dynamic process is however clear from the model in equation 3 below: y = c + i + g ………………………………………….3 an increase in government expenditure will lead to drop in private investment of exactly the same magnitude leaving total expenditure and output unchanged. in terms of equation (3), the increase in g will be matched by a fall in i, and there is full crowding out. hence fiscal policy cannot have any effect in the special case where the demand for money is completely insensitive to interest rate. given the above discussion, the tendency now is for the monetarists to say that keynesian believes only in fiscal policy (government expenditure) and for keynesians to accuse monetarists of believing only monetary policy (money supply). the issue now is to determine which view is more relevant to the nigerian economy. from the above theoretical framework, it is important to note that jie and tang (2010) theoretical framework will be applied in the model, using ordinary least square (ols) and beta coefficients technique. gross domestic product (gdp), money supply and government expenditure will serve as variables respectively. 4. model specification and data analysis on the basis of empirical studies, the model to examine will be divided into four. they are: the simultaneous equation model derived from dike (1977) monetary block (model), fiscal block (model) and monetary and fiscal block (model) combined together. the simultaneous equation model is used to verify the stabilization effect of monetary and fiscal policy on output. the monetary block is a model used to test the effect of monetary indicators like money supply and interest rate on gross domestic product, while the fiscal block is the model used to test the impact of fiscal indicators like government expenditure, tax revenue and budget deficit on gross domestic product. monetary and fiscal block is used to test which of the policy instruments, money supply or government expenditure is more potent in nigeria. following dike (1977) the changes in output is a function of multiplicity of factors including changes in aggregate government spending, government taxing actions, government monetary actions and changes in other variables that exogenously determined such as war spending, strikes, and whether, among others. also borrowed from jie and tang (2010) “monetary and fiscal models in twin crises”, general empirical models of three blocks showing the impact of monetary variables (money supply and interest rate), impact of fiscal variables (government expenditure, tax revenue and budget deficit) and impact of money supply and government expenditure on gross domestic product (gdp) were used. 4.1. econometric models 4.1.1. simultaneous model gdp = f (e, r, m, z) ……………………………………………………..4 where: gdp = gross domestic product e = aggregate government expenditure r = aggregate government taxing actions m = aggregate government monetary actions economy, 2015, 2(3): 49-57 54 z = other factors (export revenue has been used for this study) gdp = f e, r, m, z)……………………………………………5 in empirical terms, the following model was considered: gdp = l1 e + l2 r + l3 m + l4 z + ut…………………………….6 where ut is the error term of the model. note that l1l4 is estimated through the regression of the observed value of gdp on the values of e, r, m and z. and, z = a1 e + a2 r + a3 m + ut……………………………………..7 equation four embodies the indirect effects partly in a1,a2, and a3 of the observed values of the independent variables on that of the dependent variable, while both the direct and the indirect effects are embodied in l1,l2 and l3. using m for example, the expression (b3 + a3 l4) is an estimate of l3, the total response of gdp to m. the direct response is b3, and the indirect response is a3 l4. consequently, the equation estimated and reported in from the application of two-stage least square is: gdp = (b1 + a1 l4) e + (b2 + a2 l4) r + (b3 + a3 l4) m + ut……………..8 4.1.2. monetary model gdp = α0 + α1m2 + α2int + ut……………………………………….......9 gdp = gross domestic product m2 = broad money supply int = interest rate α0,α1 & α2 = parameters ut = error term 4.1.3. fiscal model gdp = β0 + β1gex + β2tr + β3bdf + ut………………………………10 gex = government expenditure tr = tax revenue bdf = budget deficit β0,β1, β2 & β3 = parameters ut = error term 4.1.4. monetary and fiscal model gdp = ɵ0 + ɵ1gex + ɵ2m2 +ut ………………………………………….11 ɵ0,ɵ1,ɵ2,ɵ3 &ɵ4 = parameters ut = error term the rest of the variables have already been defined. 5. estimation technique in other to find the relative impact of money supply and government expenditure on economic growth in nigeria, beta coefficients were used. the data were tested for unit root (non-stationary by using augmented dickey fuller adf test. we analyzed the ols regression results from the postulated models. based on this, we tried the models specified and discovered that the double log (log-log) specification suits the data more in terms of tolerable level of multi co-linearity. 6. empirical results table 1 below presents summary of unit root test on the selected variables. gross domestic product (gdp), government expenditure (gex), and money supply (ms) are stationary after second difference while interest rate (int), tax revenue (tr) and budget deficit (bdf) are stationary after first difference. to adjudge whether a variable is stationary or not, the estimated augmented dickey-fuller statistic is compared with its corresponding critical value at one percent level of significance. table-1. summary of unit root test variable adf-statistic critical value order of integration gdp -9.284776 -3.632900 d (2) gex -5.635828 -3.661661 d (2) ms -4.032535 -36389 d (2) tr -5.453102 -3.6171 d (1) int -6.038279 -3.6171 d (1) bdf -14.44609 -3.615588 d (1) source: author’s computation table-2. beta coefficient: relative impact of money supply and government expenditure on economic growth. dependent variable: gdp source: spss 17. economy, 2015, 2(3): 49-57 55 findings from the two stage least squared estimates showed all the variables of the model got the right signs. government spending has both positive direct and indirect effects on output. the effects of monetary policy and tax revenue on output are mixed. whereas monetary policy has a positive indirect effect on output, its direct effect is negative on output. for tax revenue, negative effect indirectly runs on output, while direct effect on output is positive. while export though has positive impact but has insignificant influence on output. monetary policy has more destabilizing effect on output than government expenditure because of the mixed effects of the former. therefore, for stabilization purposes, fiscal policy (government expenditure) is greater, more reliable and faster than monetary policy (money supply). when only monetary policy is used to fine tune economic activities, broad money supply and interest rate do exact, separately, positive influence on the aggregate level of economic performance. however, broad money supply induces significant domestic economic progress than the interest rate variable. when these monetary variables are removed out of the equation of monetary policy, it implies absence of monetary policy in the management of the nigerian economy. the general level of domestic economic performance will reduce, although insignificantly. findings from the monetary policy model reveals that changes in the general level of domestic performance is significantly accounted for by changes in the level of monetary management. findings from the fiscal policy model also reveals that the instrument of this policy are important determinants of the general level of domestic economic performance, as lack of fiscal policy measure in terms of budget implementation, and revenue generation leads to poor economic performance in nigeria. on the separate effects of the variables, government expenditure and tax revenue positively influence the direction and level of the general domestic economic performance, while budget deficit on the other hand exact negative influence on economic growth. apparently, only government expenditure appears to pass the test of statistical significance out of the three fiscal policy variables used. however, changes in gdp significantly affect changes in the entire fiscal policy variables used. this implies that budget policy and tax revenue can be combined with government expenditure to predict the part of growth of the economy. plausibly, when both money supply and government expenditure are isolated from the equation of the domestic economic progress, positive growth could be recorded going by the findings of the combined fiscal and monetary policies model. aggregate government expenditure and broad money supply exact the desired and expected positive effect on the growth of the economy taken the entire period of observation. over the entire period of consideration, using beta coefficients to test the relative impact of money supply and government expenditure on economic growth in nigeria; government expenditure is more statistically significant than money supply. this finding supports the overwhelming role of money in an economy in facilitating both direct and indirect production activities and exchange. other findings in the study revealed that reduction in interest rate does not enhance growth; increase in government spending does enhance growth while government expenditure exacts greater influence on the nigerian economy than the money supply. 7. policy recommendations from the findings of this study, the following recommendations became imperative: since revenue generation does not translate into growth by itself, fiscal policy measures aim at stimulating economic growth by the government should be directed at increasing the level of government expenditure since this factor represents the actual production (and consumption) activities that the government is engaged in. this does not however suggest that budget deficit should be increased in excess of actual revenue generation as increasing budget deficit does not lead to growth in nigeria as indicated or revealed by this study. coordination of money supply and government expenditure imply, among others, fiat monetary restraint which should be matched with lower deficit spending. where deficits must be, they should be strictly applied to productive ventures and not financed by central bank. this means tilting the deficit budgeting to surplus budgeting or at worst balanced budget. this can be achieved through evolving an effective tax policy, adequate to beat tax evasions, avoidance and inequity. the growth rate of broad money supply should be appropriately managed by the central bank of nigeria to induce sustainable economic growth, in order to prevent the negative consequences of a continues increase in the growth rate of broad money stock arising from inflation and exchange rate volatility. since both money supply and government expenditure are used to fine tune the economy to the desired part of growth, government should rely more on government expenditure than money supply in order to achieve rapid and sustainable economic growth. in the event of deficient aggregate demand that may be arising from financial debacle or turmoil, government should rely on fiscal measures to bring back the economy into the desired part of boom. this implies that government should rely on government expenditure during recession than its money supply counterpart. the role of budget 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norway.the swedish journal of economics, 77(2): 149-164. ubogu, r.e., 1985. potency of monetary and fiscal policy instruments on economic activities of african countries. finafrica: savings and development, 9(4): 440 – 457. yucel, f., 2009. causal relationships between financial development, trade openness and economic growth: the case of turkey. journal of social sciences, 5(1): 33-42. appendix table-3. regression result for monetary policy block dependent variable: gdp method: least squares date: 03/20/14 time: 06:20 sample: 1970 – 2012 included observations: 43 variable coefficient std. error t-statistic prob. ms 2.756915 0.114104 24.16138 0.0000 int 82851.07 47501.44 1.744180 0.0892 c -352.7321 751.8096 -0.469177 0.6416 r-squared 0.943496 mean dependent var 4519.625 adjusted r-squared 0.940522 s.d. dependent var 7962.210 s.e. of regression 1941.831 akaike info criterion 18.05101 sum squared resid 1.43e+08 schwarz criterion 18.17639 log likelihood -367.0456 hannan-quinn criter. 18.09666 f-statistic 317.2594 durbin-watson stat 0.388169 prob(f-statistic) 0.000000 economy, 2015, 2(3): 49-57 57 table-4. regression result for fiscal policy block dependent variable: gdp method: least squares date: 03/20/14 time: 06:18 sample (adjusted): 1970 – 2012 included observations: 43 variable coefficient std. error t-statistic prob. gex 6.903259 1.667351 4.140256 0.0002 tr 0.991074 3.547034 0.279409 0.7815 bdf -0.333890 0.394487 -0.846390 0.4029 c -179.8998 230.7853 -0.779511 0.4408 r-squared 0.978711 mean dependent var 4632.483 adjusted r-squared 0.976937 s.d. dependent var 8030.364 s.e. of regression 1219.533 akaike info criterion 17.14496 sum squared resid 53541392 schwarz criterion 17.31385 log likelihood -338.8993 hannan-quinn criter. 17.20603 f-statistic 551.6722 durbin-watson stat 1.035235 prob(f-statistic) 0.000000 table-5. regression result for monetary and fiscal policy block dependent variable: gdp method: least squares date: 03/20/14 time: 06:25 sample: 1970 – 2012 included observations: 43 variable coefficient std. error t-statistic prob. gex 0.340634 0.808994 0.421059 0.6762 ms 4.508708 0.476768 9.456827 0.0000 dgex 12.02537 1.924542 6.248434 0.0000 dms -6.375405 0.804468 -7.924994 0.0000 c 3.290192 124.9286 0.026337 0.9791 r-squared 0.994347 mean dependent var 4519.625 adjusted r-squared 0.993718 s.d. dependent var 7962.210 s.e. of regression 631.0527 akaike info criterion 15.84650 sum squared resid 14336188 schwarz criterion 16.05548 log likelihood -319.8534 hannan-quinn criter. 15.92260 f-statistic 1582.975 durbin-watson stat 1.237483 prob(f-statistic) 0.000000 table-6. unit root test null hypothesis: d(bdf) has a unit root exogenous: constant lag length: 0 (automatic based on sic, maxlag=9) t-statistic prob.* augmented dickey-fuller test statistic -14.44609 0.0000 test critical values: 1% level -3.615588 5% level -2.941145 10% level -2.609066 *mackinnon (1996) one-sided p-values. table-7. augmented dickey-fuller test equation dependent variable: d(bdf,2) method: least squares date: 04/30/12 time: 03:33 sample (adjusted): 1972 – 2011 included observations: 39 after adjustments variable coefficient std. error t-statistic prob. d(bdf(-1)) -1.740419 0.120477 -14.44609 0.0000 c 51.21001 120.1112 0.426355 0.6724 r-squared 0.852875 mean dependent var 38.92632 adjusted r-squared 0.848788 s.d. dependent var 1904.019 s.e. of regression 740.3966 akaike info criterion 16.10344 sum squared resid 19734735 schwarz criterion 16.18963 log likelihood -303.9655 hannan-quinn criter. 16.13411 f-statistic 208.6896 durbin-watson stat 2.198061 prob(f-statistic) 0.000000 views and opinions expressed in this article are the views and opinions of the authors, economy shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. economy issn : 2313-8181 vol. 2, no. 1, 21-31, 2015 www.asianonlinejournals.com/index.php/economy 21 the effect of macroeconomic variables on the inflow of remittance in bangladesh naheem mahtab 1 1 school of business independent university, bangladesh abstract this work is licensed under a creative commons attribution 3.0 license asian online journal publishing group contents 1. introduction ............................................................................................................................................................................... 22 2. literature review ...................................................................................................................................................................... 22 3. conceptual framework ............................................................................................................................................................ 25 4. research design ........................................................................................................................................................................ 26 5. sampling .................................................................................................................................................................................... 26 6. instrument design ..................................................................................................................................................................... 27 7. data collection .......................................................................................................................................................................... 27 8. data analysis ............................................................................................................................................................................. 27 spearman’s correlation ............................................................................................................................................................... 29 pearson’s correlation ................................................................................................................................................................... 29 8.1. regression analysis ................................................................................................................................................................ 29 9. findings ...................................................................................................................................................................................... 29 10. conclusion ................................................................................................................................................................................ 30 references ...................................................................................................................................................................................... 30 bangladesh is one of the biggest remittances receiving country in this world and maintains this status from several years. this amount is about 12% of gdp and more than half of total export earnings. according to a world bank report bangladesh is amongst the top ten nations which receive huge amount of remittances from abroad and for this bangladesh‟s foreign exchange reserve has significantly gone up in 2013.in the last several years, bangladesh‟s foreign exchange reserve continued to puff up crossing the $16-billion mark. furthermore, if the total amount of money that is remitted through informal channels is also taken into account, the total amount of remittance that is received in bangladesh will soar up to higher magnitudes. the major source of remittance inflow in bangladesh is the from the middle eastern countries. as noted by an official associated with labor migration, "remittances have been causing a silent economic revolution in bangladesh.” the country is expected to receive $15.05 billion in 2014, enough to retain theeighth position it held last year, says the wb's migration and remittance unit. keywords: exchange rate, interest rate, inflation rate, developing country, inflow of remittance, interest rate movements, exchange rate movements. http://creativecommons.org/licenses/by/3.0/ economy, 2015, 2(1): 21-31 22 1. introduction in the recent past, there have been large flows of bangladeshi migrant workers especially to middle east particularly to malaysia and singapore, as well to united kingdom and to united states. bangladesh received its highest-ever annual remittance of about us$14.5bn in 2013 fiscal year as expatriate bangladeshis sent home hardearned money through formal channels. the remittance grew by 12% over the same period last fiscal year when it was $12.8bn, registering 10% growth from $11.6bn of fiscal 2010-11. “it‟s the highest amount received in a year,” said general manager afm asaduzzaman, bangladesh bank spokesperson. it is really very important especially for the countries like bangladesh, to analyze the trends and various other aspects of workers' migration and remittances in bangladesh. it further discusses the impacts of exchange rate movements and socio-economic variable specially the impact of festivals time on remittances, the basic factors that affect the inflow of remittances. remittance is one of the most important and current economic issue which is being discussed everywhere as it impacts any country‟s balance of payments, increases foreign exchange reserves and thus has a positive impact on the overall economy of the country. there are few studies that examine or discuss the effects of exchange rate movement; inflation and interest rate these factors which are influencing mostly the inward remittance. 1.1. problem statement macroeconomic variables have an important effect on the inflow of remittance. inflow of remittance from the host country is indicate that the home country future development. remittance is most important part in the developing countries. it‟s a great issue for a country economy. most of the developing country economist is concern about that because it increases the country economic development. bangladesh is a one of the biggest remittance earners country in this world. remittances have been playing a very significant role in bangladesh economy. in recent times bangladesh has been one of the key receivers of remittances amongst other countries of the world. this study will show the relationship with changing behavior of transactions that are sending by overseas along with the movements of foreign exchange rate, differences in interest rates between host and home country and the inflation. the problem statement is “to investigate the effects of exchange rate and related implications of interest rate and inflation on the inflow of remittance”. 1.2. purpose of the study the prime objectives of this research paper is of „exchange rate, interest rate and inflation are affecting mostly the overall time to time changing behaviors of the money sent from the foreign country‟. immigrant people sending money intention from the host country (foreign country) easily can identified from this research. this research can be very effective tool that a country can use to experience higher economic development.  to identify the impacts of exchange rate movements by inflow of remittance.  to understand the characteristics of exchange rate movements by inflow of remittance.  to determine the overall impacts of exchange rate movements by inflow of remittance.  to identify the impacts of interest rate movements by inflow of remittance.  to understand the characteristics of interest rate movements by inflow of remittance.  to determine the overall impacts of interest rate movements by inflow of remittance.  to identify the impacts of inflation movements by inflow of remittance.  to understand the characteristics of inflation movements by inflow of remittance.  to determine the overall impacts of inflation movements by inflow of remittance.  to identify the most influencing factor on inflow of remittance. there have been only a few studies that use to examine the economic effects of remittance in bangladesh and hardly any work that systematically investigate the overall impacts of exchange rate, interest rate and inflation by the inflow of remittance of bangladesh. however, studies for other countries have shown that these remittance flows could have been significant macroeconomic consequences. 2. literature review 2.1. exchange rate exchange rate misalignment, defined as deviations from purchasing power parity, which is assumed to negatively affect the inflow of remittances. as the degree of misalignment increases, migrants will remit less and adjust their targets. since remittances are exchanged into domestic currency, migrants may hold their savings in foreign currencies or time their remittances with exchange rate corrections. bilateral exchange rate between host and home country plays an important role in workers‟ motive to remit. two opposing effects may arise as a result of exchange rate depreciation; namely, wealth effect and substitution effect (bouhga-hagbe, 2004). on the other hand, the remitter is better-off as her income increases in the domestic currency, thereby encouraging her to buy more goods (including real estate‟s) and services in home country. bouhga-hagbe (2004) points out that even though depreciation may temporarily increase the flow of workers‟ remittances in the home country, in the long run, it might undermine remitters‟ confidence in the economy. mandelman (2011), for instance, examines the stabilization role and welfare implications of monetary and exchange rate policies in a small open economy that is subject to remittances fluctuations. the study shows that a fixed exchange regime provides a better outcome for households facing rising trend in remittances, while a flexible regime does better when unanticipated shocks over the business cycle are considered.yang (2008) the shock is the sudden change in exchange rates during the asian crisis. comparing household surveys of june 2007 and october 2008 the study observes that a 10 per cent depreciation of the peso was followed by a 6 per cent increase in peso remittances. saadi-sedik and petri (2006) also obtained very modest results for jordan by using similar methodology and longer time period (1964-2005). most of empirical economy, 2015, 2(1): 21-31 23 studies that have explored the rise in exchange rate in countries that have experienced increases of remittances seem to prove my hypothesis. most research has found that the nominal exchange rate is a significant explanatory variable of migrant remittances. lowell and de la garza (2005) found this to be the case with remittances sent from the united states to latin america and the caribbean as did lianos (1997) with remittances sent to greece from immigrants living in germany, belgium and sweden. lianos found that greek migrants adjust their remittances to exchange rate changes so that the same value in terms of drachmas is sent back home (lianos, 1997).20 in contrast, orozco concluded that exchange rate fluctuations do not affect remittance transfers to the dominican republic (orozco, 2004). the behavior of the exchange rate depends also on the impact of emigration on domestic output, which again would tend to offset the effect of remittances on the exchange rate. in addition to these considerations, it is important to include the behavior of other variables, such as domestic policies, international developments (like changes in risk assessments of emerging economies), and the relative importance of remittances in total economic activity and in the external sector. this suggests the need to deal with a more complex general equilibrium model, to determine the exact link between remittances and the exchange rate. researchers have found that large remittance inflows can cause an appreciation of the real exchange rate and render the production of tradable goods less profitable. this is confirmed by the econometric results in this study. amuedo-dorantes and pozo found that when workers‟ remittances doubled, the real exchange rate appreciated by about 22 percent in a selection of 13 latin american and caribbean countries (amuedo-dorantes and pozo, 2004). rajan and subramanian found that remittances do not lead to a loss of competitiveness because they seem to dry up if the exchange rate becomes overvalued. therefore countries that have sound macroeconomic policies to keep the real exchange rate competitive are able to continually attract remittances (rajan and subramanian, 2005). actually, this illustrates a different point the effect of the exchange rate on remittances. in summary, the possible relationship between the exchange rate and remittances is far from simple, and cannot be predicted without specific assumptions about the behavior of remitters, receiving families, and the rest of the economy. box 1 further elaborates on the matter. however, it is clear that increased remittances tend to lead to an appreciation of the exchange rate. exchange rate depreciations (caused by other factors) in turn tend to increase remittances and vice versa for appreciations. 2.2. relationship between exchange rate and inflow of remittance recently, also using fixed effect panel estimation techniques higgins et al. (2004) found that exchange rate uncertainty (a measure of risk) is an important determinant of remittances. their results also show that unemployment in the host country and the exchange rate are significant determinants of remittances. el-sakka and mcnabb (1999) analyze the determinants of remittances inflows into egypt between 1967 and 1991. they find that remittances are positively affected by host country‟s income and negatively affected by the differential between the official and black market exchange rates (as migrants divert their remittances towards the black market when differentials increase). it was also found that exchange rate differentials between official and black markets have a negative impact on the inflow of remittances through official channels. higgins et al. (2004) investigate the effect of real exchange rate depreciation on remittances, using fixed effect panel estimation techniques. they find that the real exchange rate depreciation of the home currency has a positive effect on remittances. they also find that the home country income is negatively related to remittances, indicating the behavior of altruism in the remittances received countries. moreover, their results show that unemployment in the host country and the exchange rate are significantly and negatively related to remittances. singh et al. (2009) examined the determinants and macroeconomic impact of migrants‟ remittances, using panel data for 36 sub-saharan african countries over the period 1990-2005. they found that the remittances are positively affected by the number of expatriates, financial deepening, the host country income and institutional quality. their results also argue that remittances flow vary counter cyclically with the variations in gdp per capita, supporting the hypothesis that the inflow of remittances can help mitigate economic shocks. moreover, they found that the real exchange rate appreciation reduce the flow of remittances. more recently, lin (2011) studied the factors that affecting the flow of remittances into tonga, employing the quarterly data over the period 1994 -2009. the study finds that the macroeconomic conditions in the host countries and the exchange rate fluctuations are the most important factors influencing the remittance flow. he found that the remittances flow declines when the tongan currency appreciates, but increases with higher real gdp growth and lower unemployment in remitting countries. moreover, his analysis investigates the impact of remittances on exchange rates and the result does not find evidence on the incidence of the dutch disease in tonga, concluded that most of remittances are used for consumption purpose. 2.3. interest rate interest rate differentialis defined as the difference between foreign and domestic interest rates. this is expected to negatively impact the inflow of remittances, since low domestic interest rates compared with interest rates in the host or other countries encourage remitters to withhold their savings in countries where interest rates are higher. there is a parallel between the effect of interest rates on remittances and that of exchange rates. an increase in the interest differential (interest rate in the receiving country less that of the host country) can be expected to accelerate flows, to the extent that the funds go into the financial system. however, these flows will be conditioned on the expected behavior of the exchange rate. as with any financial flow, remittances will depend on the real interest rate, or more accurately on the interest differential adjusted for exchange rate expectations.22 then again, the behavior of remittances will depend on the degree of financial sophistication of the recipient family/community. to the extent that higher interest rates reflect higher inflationary expectations or increased country risk, remittances may not react positively to increased interest rates. accordingly it is difficult to establish clearly how remittances will do a priori unless initial conditions are well defined.many studies show that the increase in interest rates abroad lowers the flow of remittances. lowell found that an increase in the interest costs of lending in the remitting country lowers remittance flows. he suggests that this is consistent with the possibility that remitters and receiving households save or invest a portion of remittance flows for economic activity in the country of origin (lowell and de la garza, 2005). economy, 2015, 2(1): 21-31 24 in contrast, bouhgahagbe found that “an increase in the interest rate differential in favor of morocco will not increase the long-run amount of deposits held in morocco by moroccans living abroad,” suggesting that interest rate fluctuation does not impact remittances (bouhga-hagbe, 2004)23.el-sakka and mcnabb (1999) support the idea that interest differentials at home and abroad have a negative impact on the inflow of remittances through the official channels.the amount of remittances in home country can be negatively correlated with the host country real interest rate or positively correlated with the home country real interest rate. increase in real interest rate differential between home and host country should have effect on the level of remittances, assuming equal market risk in both countries.el-sakka and mcnabb‟s research, the egyptian interest rate was pegged, thus creating a widening difference between domestic and foreign interest rates. the interest rate differential is important variable explaining migrant remittance behavior to greece from germany, belgium and sweden, although the elasticity is rather small in absolute terms (lianos, 1997). alleyne (2008) find a positive impact of the interest differential (defined as the difference between domestic and foreign interest rate), but bouhga-hagbe (2004) finds a negative relationship. the rise in the interest rate differential may invite even more remittances or private capital flows.swamy (1981), straubhaar (1986) and glytsos nicolas (1988) all argue that neither interest rate differentials between the host nor home countries nor variation in exchange rates have any effect on remittance flows. in contrast, katseli and glytsos (1986) find per capita remittances to be related to the foreign interest rate.to which extend remittances are affected by the origin country‟s currency policies and the interest rate differentials compared with the host country, is another issue for the ongoing debates. using more recent data (1993‐ 2003) on turkey, concludes that remittances are positively affected by the interest and currency rates on the long‐term and negatively affected on the short term.aydas et al. (2005) study reveals that remittances are positively related to the differences between domestic and foreign interest rates, indicating that more appealing investment opportunities in the home country attract larger remittance flows. 2.4. relationship between interest rate and inflow of remittance gupta (2005) analyzed the determinants of remittances to india and their impact on economic growth. he found that remittances are positively influenced by the economic environment in the source countries. his result revealed that remittances flow is countercyclical to the growth of the home income; that is, it‟s higher during the periods of low economic growth and lower in the periods of high income in india. moreover, none of the remaining economic or political variables considered in his paper, including political uncertainty, interest rates, or exchange rate depreciation, are found to affect remittances significantly. wahba (1991) indicates that black market premium, interest rate differentials, political stability, consistency in government policies and financial intermediation all significantly affect the flow of remittances. however, while el-sakka and mcnabb (1999) and elbadawi and rocha (1992) agree on the negative effect of the black market premium, they disagree on the effects of differential interest rate and domestic inflation. according to elbadawi and rocha (1992), differential between domestic and foreign interest rates has no significant effect on remittances, while el-sakka and mcnabb (1999) argue that it negatively affect the remittances. moreover, both katseli and glytsos (1986) and elbadawi and rocha (1992) find significant negative effect of inflation on wr flows, while el-sakka and mcnabb (1999) argue that it has a positive effect. some countries, if not most, intervene in the foreign exchange market to achieve certain level of exchange for their currencies (blanchard et al., 2010). however, this traditional form of intervention has declined in recent years, giving way to the use of interest rate policy to influence capital flows and thus the exchange rate (calvo and reinhart, 2002). a trend within the literature looks at international reserves from the optimality perspective. frenkel and jovanovic (1981) showed that higher volatility in international reserves leads to a higher optimal level of reserves, effect that was later corroborated by flood and marion (2002). however, the use of their robust reserve volatility measure rendered the opportunity cost of holding reserves (interest rates) statistically insignificant. ball and reyes (2011) more recently reestablished the negative effect of the opportunity cost of holding reserves on the optimal reserves level using an exchange rate regime indicator. according to elbadawi and rocha (1992) differential between domestic and foreign interest rates has no significant effect on remittances, while el-sakka and mcnabb (1999) argue that it negatively affect the remittances. many studies show that the increase in interest rates abroad lowers the flow of remittances. lowell found that an increase in the interest costs of lending in the remitting country lowers remittance flows. he suggests that this is consistent with the possibility that remitters and receiving households save or invest a portion of remittance flows for economic activity in the country of origin (lowell and de la garza, 2005). in contrast, bouhgahagbe found that “an increase in the interest rate differential in favor of morocco will not increase the long-run amount of deposits held in morocco by moroccans living abroad,” suggesting that interest rate fluctuation does not impact remittances (bouhga-hagbe, 2004). 2.5. inflation higher inflation in the home country relative to host country can increase or decrease the flow of remittances. higher inflation at home, which reduces the purchasing power of migrants‟ family, can induce migrants to send more remittances. on the other hand, it also represents more risk and uncertainty in the home country relative to host country, thereby discouraging them to send more remittances. inflation differential is constructed by using the difference between annual percentage change in the consumer price index of home and the host country. the increased money supply through the inflow of remittance stimulates the demand for goods and services, and increases consumption expenditure on goods and services. the increase in demand puts upward pressure on prices and results in demand pull inflation (iqbal and abdus, 2005) and nishat and nighat (1991). it also investigated the link between remittances and consumption and postulated the resultant effect for inflation. his study showed that remittances increase the level of consumption followed by the increase in aggregate demand through monetary expansion and result in demand pull inflation. similarly, zarate-hoyos (2004) in their study revealed that with the increment in household income in the form of remittances, consumer expenditures (on housing, furniture, medical care) or investment in productive activities (like education, manufacturing, farming) increases. resultantly, the economy, 2015, 2(1): 21-31 25 demand for such items increases relatively more than for other items. these shifts in demand combined with price elasticity of supply may result in disproportionate changes in relative prices and overall inflation. balderas and hiranya (2005) examined the direct effect of remittances on the distribution of relative price changes and inflation in mexico for the time period from 1988-2005. the results were obtained through generalized impulse responses derived from the estimation of vector autoregressive model. the results indicated that remittances have a significant and positive impact on inflation and relative price variability since 1995. the evidence suggested that most of the remitted funds are spent on consumption, which through the channel of aggregate demand puts upward pressure on the prices of consumer goods and services. this fact is also supported for pakistan as amjad (1986) showed that in pakistan a major portion of remittances is spent on consumption which is 63.3% of total remitted fund. aydas, neyapti and metin-ozcan (undated) argue on the basis of their empirical study for the 1965-93 periods that in turkey black market premium, inflation and military regime influence remittances negatively. the reaction of remittances to inflation will depend also on the expectation about the exchange rate. if there is an expectation of a major depreciation, remitters will retain remittances abroad and conversely under the expectation of an appreciation. aydas et al. (2005) find a negative impact of domestic inflation on remittances. their explanation of this result is that although a high inflation rate erodes households‟ purchasing power and therefore, encourages altruistic emigrants to send more money to their families, it also signals the increased uncertainty in the home country and thereby, discourages those remittance inflows that are guided by investment motives. 2.6. relationship between inflation and inflow of remittance the inflation rate at the origin country is another macroeconomic determinant of migrants‟ remittances. as high inflation affects the left‐behind family‟s income level negatively, remittances may increase because of the altruism motive explained above. however, high inflation may be interpreted as a signal of instability as well and therefore generates a decrease in remittances (glytsos nicolas, 1988; elbadawi and rocha, 1992; aydas et al., 2004) corroborated that the strength of relationship between remittances and inflation depends on the choice of exchange rate regime of the economy el-sakka and mcnabb suggest that migrants might remit more during periods of inflation to secure the “purchase of real assets, such as land and jewelry, the real value of which may be constant or actually rising in times of inflation” (el-sakka and mcnabb, 1999). he found that remittances were positively related to economic growth in the host countries and inflation in the home country. elbadawi and rocha (1992) examine the determinants of migrants‟ remittances for six labor-exporting countries in north africa and europe. their results show that the length of stay and macroeconomic variables play an important role in determining remittance flows. they found that the real income in the host country positively affect the flow of remittances, while inflation and black market premium in the home country are found to be negatively influence the variation in workers‟ remittances. recently shahbaz and aamir (2009) estimated a macro model of migrants‟ remittances flows to pakistan. the inflation rate and home income are found to be positively correlated with the flows of migrants‟ remittances to their families in the home country. elbadawi and rocha (1992) argue that domestic inflation negatively affect the remittance flow, while el-sakka and mcnabb (1999) argue that it positively affect the remittances. the study suggested that capital inflows have finally contributed to the asset price appreciation in this region, while capital inflow shocks describe a relatively small part of asset price fluctuations. the same study says capital inflow need not lead toward inflation and by strong inflow into emerging markets including the philippines could still be absorbed by the domestic economy without encouraging up inflation. elbadawi and rocha (1992) argue that a high inflation should lead to lower official remittances since it reflect increased risk and uncertainty. they also note that since the premium is directly related to the market for remittances, it should have a greater impact on remittances than domestic inflation. katseli and glytsos (1986) also argue that remittances are negatively related to inflation rates in the home country. durand found that the likelihood of mexican migrants returning with savings is greater during periods of high inflation (durand et al., 1996). 3. conceptual framework figure-1. research framework economy, 2015, 2(1): 21-31 26 3.1. research question q1. is there any relationship between the exchange rate movements and inflow of remittance? q2. is there any relationship between the interest rate and inflow of remittance? q3. is there any relationship between the inflation and inflow of remittance? 3.2. hypotheses h1. there is a relationship between the exchange rate movements and inflow of remittance. h2. there is no relationship between the exchange rate movements and inflow of remittance. h3. there is a relationship between the interest rate and inflow of remittance. h4. there is no relationship between the interest rate and inflow of remittance. h5. there is a relationship between inflation and inflow of remittance. h6. there is no relationship between inflation and inflow of remittance. 4. research design research design is a blue print, a plan, a guideline or a framework of the research for a researcher. the description below is describing which research designs are being followed in the research. a. degree of research question crystallization the research is formal study research, because it begins with a hypothesis and research questions and involves precise procedures. the research goal is to test the hypotheses and for these reason the research is formal study research. b. method of data collection under the method of data collection, we selected communication study. because we wanted to communicate with different person through questionnaire to understand their perception about the exchange rate, interest rate and inflation, which have significant impact on the remittance. c. the purpose of the study our study was causal explanatory as we tried to explain the relationship among different variable such as we tried to discover whether exchange rate, interest rate and inflation can affect the remittance or not. d. the time dimension the research will be carried out once and will be represent a snapshot of one point of time. e. the topical scope-breadth and depth-of the study we focused on statistical study. our study was designed for testing hypotheses quantitatively which required a good number of samples which reflected the overall scenario. f. the research environment our research occurred in actual environment conditions. this option was chosen because we had to receive information from our sample on field and relationships in variables of our study were required. participants were aware of our presence and knew the reason of being selected as sample. we tried to find out their natural behavior as much as we could via questionnaire. 5. sampling it is very much impossible to ask each and every person who is closely involve to the inflow of the inward remittance and come to know about the information about the remittance. so, to conduct our research and to obtain all possible data, we have applied the sampling. the sample is a subset of the inward remittance that is used to estimate the characteristics of the entire inflow of remittance. a. sample unit the first and foremost question we have been asked that whom should we to survey. to work on this category, we had to know about the gender, age, income per month and educational qualification information. we have done some categorization based on which we have decided our sample unit. genderour target participant gender might be male or female. ageour target participant might be in the age group of 18-25, 26-35, 36-45, 46 and above. incomeour target participant would be consists all generation or middle income level. therefore, their estimated income is 20000-35000, 36000-50000, 51000-75000, 76000-100000, mare than 100000. educationthey must be complete at least s.s.c or equivalent, h.s.c. or equivalent, graduation/masters, phd and others. locationall the respondents are from dhaka city. b. sample size to conduct this research, we chose a number of participant to whom we did questionnaire survey. as we didn‟t have that much budget, resource and time, we could effectively do our study with fifty (50) participants who are directly include to the inflow of the inward remittance. economy, 2015, 2(1): 21-31 27 c. sample procedure the study demands random sampling technique. random sampling is a process whereby every sampling unit in a fixed population has an equal chance of being selected or not selected for participation in a research study, thus the biasness of this type of sampling minimizes among sampling techniques. the result of purposeful sampling are usually expected to be more accurate than those achieved with an alternative from of sampling which could assure this to achieve its desired result. 6. instrument design a questionnaire was designed in a reasonable sequence that could convince the respondents and also increasingly gave the respondent confidence and trust in both the participant and the interviewer. hence, questionnaire development process was started by identifying the related information used to develop the question such as the independent variable. questionnaires are used to gather information that cannot be found elsewhere from any secondary information such as books, newspapers and internet resources. because of this reason, we made use of a questionnaire. there are three factors in my research model. the independent variables are exchange rate, interest rate and inflation. each independent variable has some questionnaires. there were20questions in the questionnaire except gender, age, income per month, educational qualification question and in our research the independent variables are exchange rate (has 8question), interest rate (has 7 question) and inflation (has 5 question). the dependent variable of this research is macroeconomic variable affects the inflow of remittance. i have used openended questionnaire because of its question format which doesn‟t restrict appellant with a series of answer selections and also for the research demand. the measurement of the questionnaire items in this study is by means of “fivepoint of likert scale from 1 to 5” rating from strongly agreed to strongly disagree. the questionnaire was designed to draw out information on respondents' gender, age, income per month, educational qualification their experience in the inflow of remittance. the questionnaire was divided into five scales which is [1 (strongly disagree), 2 (agree), 3 (neither agree nor disagree), 4 (disagree), 5(strongly disagree)). 7.data collection the study for this paper is about the exchange rate; interest rate and inflation are affecting mostly the overall time to time changing behaviors of the money sent from the foreign country and to achieve thepurpose of the study the data will be gathered mostly from secondary sources and a little from primary sources. primary sources in the context of bangladeshi people, as researchers i used primary data to examine the research problem and verify hypothesis.  surveying the bank‟s customers.  surveying bank employees. secondary sources secondary data are those which have already been collected and analyzed by someone else  different types of journals and articles on inflow of inward remittance. 8.data analysis after collecting, the completed questionnaires were coded and entered into spss sheet for analysis a. descriptive analysis a) frequency b) crosstabs b. reliability analysis c. hypotheses analysis a) spearman‟s correlation b) pearson‟s correlation c) regression analysis a. descriptive analysis measures of frequency and crosstabs were used to evaluate the biographical information and the distribution of gender, age, income and education groups. personal and demographic information such as gender, age, income and education are in the following tables. the frequency and crosstabs of are given below: frequencies table-1. sample size statistics gender age income education n valid 50 50 50 50 in the above table shows 50 valid for gender, age, income and education. and there have no missing values. this valid number 50 is equal to the sample number. economy, 2015, 2(1): 21-31 28 table-2. gender frequency distribution gender frequency percent valid percent cumulative percent valid male 28 56.0 56.0 56.0 female 22 44.0 44.0 100.0 total 50 100.0 100.0 gender: frequency distribution was which have been given below. there were 28 male which 56% and 22 female which 44% out of total 50 sample size. table-3. age frequency distribution age frequency percent valid percent cumulative percent valid 18-25 5 10.0 10.0 10.0 26-35 23 46.0 46.0 56.0 36-45 17 34.0 34.0 90.0 46 and above 5 10.0 10.0 100.0 total 50 100.0 100.0 age: out of 50 participants 23 participants was between 26-35 years of age that was 46%. we have 17 participant 36-45 years of age and that consists 34%, 10% of the participant are 18-25 years old and 10% of participant was more than 46 and above years old. table-4. income frequency distribution income frequency percent valid percent cumulative percent valid 20000-35000 8 16.0 16.0 16.0 36000-50000 20 40.0 40.0 56.0 51000-75000 14 28.0 28.0 84.0 76000-100000 7 14.0 14.0 98.0 more than 100000 1 2.0 2.0 100.0 total 50 100.0 100.0 income: in our surveyed information shows that 40% of the participant monthly income is 36000-50000 that are consists 20 people. 28% of the participant monthly income is 51000-75000 that consist 14 people, 16% of the participant monthly income is 20000-35000 that consists 8 people, 14% of the participant monthly income is 76000100000 that consists 7 person and 1 people that are the 2% of the participant monthly income is more then 100000. table-5. education frequency distribution education frequency percent valid percent cumulative percent valid h.s.c. or equivalent 2 4.0 4.0 4.0 graduate/masters 39 78.0 78.0 82.0 ph.d 4 8.0 8.0 90.0 others 5 10.0 10.0 100.0 total 50 100.0 100.0 education: in our questionnaire we have surveyed 50 people whose 78% educational qualification is graduate/masters that consist 39 members, no one have s.s.c. or equivalent, 4% are h.s.c. or equivalent 8% are phd holder and 10% educational qualification is others. b. reliability analysis internal consistency reliability is the accuracy or precision of a measuring instrument, which is the extent of dimension that is the detail item (questions) measure the same thing. a commonly accepted rule of thumb for describing internal consistency using cronbach‟s alpha is as follow  α ≥ 0.9 excellent  0.7 ≤ α < 0.9 good  0.6 ≤ α < 0.7 acceptable  0.5 ≤ α < 0.6 poor  α < 0.5 unacceptable table-6. reliability test result: cronbach alpha variables cronbach alpha items exchange rate .618 8 inflation .701 5 interest rate .842 7 the most highly recommended measure of internal consistency is provided by co-efficient alpha or cronbach‟s alphas it is provided a good reliability estimates in most situations. over all cronbach‟s alphas of all variables in our economy, 2015, 2(1): 21-31 29 study are more than acceptable and recommended values of 0.50. cronbach‟s alpha value should be .50 -.60 which is sufficient; .7 or above is desirable.  the eight (8) questions about exchange rate is .618 which is above .6 that means the reliability of these eight (8) items is acceptable.  the five (5) questions about inflation is .701 which is above more than .7 that mean the reliability of these five (5) items is good.  the seven (7) questions about interest rate is .842 which is more than .8 that mean the reliability of these seven (7) items is excellent. c. hypothesis testing spearman’s correlation spearman‟s correlation is used to see whether there is any relationship among variables or not. for spearman‟s correlationif correlation coefficient ρ (rho) ≠ 0 and significance, α (alpha) < 0.05 then accept the alternative hypothesis (which actually indicate having relationship between the variables). for, hypothesis 1, correlation coefficient ρ (rho) not equal to 0 and significance, α (alpha) is less than 0.05, accept the alternative hypothesis (which actually indicate having relationship between exchange rate and inflow of remittance). for, hypothesis 2, correlation coefficient ρ (rho) not equal to 0 and significance, α (alpha) is less than 0.05, accept the alternative hypothesis (which actually indicate having relationship between inflation and inflow of remittance). for, hypothesis 3, correlation coefficient ρ (rho) not equal to 0 and significance, α (alpha) is less than 0.05, accept the alternative hypothesis (which actually indicate having relationship between interest rate and inflow of remittance). table-7. nonparametric test: spearman‟s correlation spearman’s correlation h1 h2 h3 ρ=.816 ρ=.964 ρ=.935 α=.000 α=.000 α=.000 pearson’s correlation pearson‟s correlation is used to see the strength of relationship between variables. if significance or p≤ 0, then null hypotheses (h0) will be rejected and alternate one will be considered.  .00-.19 “very weak”  .20-.39 “weak”  .40-.59 “moderate”  .60-.79 “strong”  .80-1.0 “very strong” table-8. pearson‟s correlation pearson’s correlation h1 h2 h3 r=.904 r=.971 r=.963 p=.000 p=.000 p=.000 for hypothesis 1, correlation coefficient is between .80-1.0, so relationship between exchange rate and inflow of remittance is very strong. for hypothesis 2, correlation coefficient is between .80-1.0, so relationship between inflation and inflow of remittance is very strong. for hypothesis 3, correlation coefficient is between .80-1.0, so relationship between interest rate and inflow of remittance is very strong. 8.1. regression analysis linear regression analysis estimates the coefficients of a linear equation, involving one or more independent variables (that best predict the value of the dependent variable). table-9. regression analysis regression analysis h1 h2 h3 r2 =.818 r2 =.943 r2 =.928 r-square – this is the proportion of variance in the dependent variable which can be explained by the independent variables. from the table, "r-square" tells how much the dependent variable is explained by independent variables. the described calculation is being added in the appendix. 9. findings 1. for hypotheses 1,spearman‟s and pearson‟s correlation show there have relationship between exchange rate and inflow of remittance. and also the exchange rate explaining inflow of remittance too strong. so the decision is there have relationship between exchange rate and inflow of remittance. economy, 2015, 2(1): 21-31 30 2. for hypotheses 2,spearman‟s and pearson‟s correlation shows there have relationship between inflation and inflow of remittance. and also explaining inflation explaining inflow of remittance much strongly. so the decision is there have relationship between inflation and inflow of remittance. 3. for hypotheses 3,spearman‟s and pearson‟s correlation show there have relationship between interest rate and inflow of remittance. and also the interest rate explaining inflow of remittance much strongly. so the decision is there have relationship between interest rate and inflow of remittance. 10. conclusion for a developing country like bangladesh remittance income is one of the biggest sources of export income. migrant worker plays a very important role to promoting a host country economy, standard of living of the people, decrease the budget deficit and obviously the foreign reserve development etc. in bangladesh, international migration has become an increasingly important avenue for employment and poverty reduction. this mass movement of migrant workers and the growth of gdp have persuaded this study to investigate the impact of different determinants on inward remittance in bangladesh. the reason for attending this research paper was desire for, finding the factors that are affecting mostly the overall time to time changing behaviors of the transactions sent from overseas this research paper have sketched the determinants that are mostly affecting the inflow of inward remittance and the overall impact of each discussed variable. despite of all limitations, however, this study provides insights into the mostly affecting factors on the inflow of inward remittance. this research would deliver with necessary information about the changing behavior of transactions that are sending by overseas along with the movements of foreign exchange rate, differences in interest rates between host and home country and difference inflation between host and home country. the research will help us to predict the average economic effects of remittances in bangladesh, the impact of migrants 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71-81, 2015 www.asianonlinejournals.com/index.php/economy * corresponding author 71 the battle of sugar imports and domestic sugar production in nigeria: roles of political, policies, and economic environments sunday b. akpan 1* --glory e. emmanuel 2 --inimfon v. patrick 3 1,3 department of agricultural economics and extension, akwa ibom state university, nigeria 2 department of agricultural economics and extension, university of uyo, nigeria abstract this work is licensed under a creative commons attribution 3.0 license asian online journal publishing group contents 1. introduction ............................................................................................................................................................................... 72 2. literature review ...................................................................................................................................................................... 72 3. theoretical framework ............................................................................................................................................................ 73 4. materials and methods ............................................................................................................................................................. 73 5. analytical technique ................................................................................................................................................................ 73 6. results and discussion .............................................................................................................................................................. 74 7. conclusion and recommendations .......................................................................................................................................... 80 references ...................................................................................................................................................................................... 80 the study examined roles of political and economic environments on sugar import demand from 1965 to 2014 in nigeria. time series data were obtained from fao, central bank of nigeria and national bureau of statistics as well as world bank. augmented dickey-fuller-gls unit root test showed that all series were integrated of order one. the long-run and short-run elasticity of sugar import demand were determined using techniques of co-integration and error correction models. the trend in sugar import revealed an average positive exponential growth rate of about 3.49% from 1965 to 2014. the empirical results revealed that, the long run import demand function of sugar responded negatively to the agro based capacity utilization rate, nominal exchange rate, real gdp and domestic price of sugar; whereas, it reacted positively to period of civilian rule, domestic production and per capita income. the symmetric adjustment coefficient of sugar import demand to a long run equilibrium stood at 33.26% per annum. in the short run, sugar import had a significant negative and inelastic relationship with the external reserves; while it has significant positive inelastic association with the world price of sugar. to improve domestic sugar production; it is recommended that, the nigeria government should designed programmes and incentives to boost agro industrial capacity utilization in the country. market determines nominal exchange rate should prevail in the economy, such that import demand will based on equilibrium market exchange rate and not subsidize or regulated rate. the country should regulate its foreign reserve policy by setting a threshold, above which excess deposit should be plough back to the domestic economy inform of investments rather than support excessive importation. civilian regime in nigeria should strive to reduce corruption and ensured policy tight from conceptualization to implementation. keywords: sugar import, macroeconomics, agriculture, sugar policies, nigeria, economy. http://creativecommons.org/licenses/by/3.0/ economy, 2015, 2(4): 71-81 72 1. introduction sugar sub sector is one of the key providers of industrial employment in nigeria (akpan, 2013). the industry also plays an important role in food self-sufficiency policy of the federal government (national sugar development council document (nsdc), 2008). the sub sector provides critical raw materials for food and beverage, bakery and confectionery, soft drinks and pharmaceutical industries among others. the demand for direct household and industrial consumptions has continued to remain firm in nigeria. the current domestic consumption of sugar in nigeria is about 1.45 million tons per annum (central bank of nigeria (cbn), 2014). domestic sugar production however, has varied between 7,000 to 55,000 tons per annum from 1969 to 2010 (wada et al., 2001; savannah sugar company limited (ssc), 2006). nigeria’s sugar requirements are mainly met through imports of raw sugar that is refined locally. about 98 percent of all imports come in the form of raw sugar and is refined locally while the remainder of imports is refined sugar. currently, domestic production of sugar is slightly less than 5% of the country’s annual requirement (cbn, 2010) and nsdc (2010). from 2001 to 2003 domestic sugar production in the country declines considerably reaching all time low value of less than 1% of sugar consumed in the country (cbn, 2010; food and agricultural organization fao, 2014). despite depending on import, the country is the largest consumer of sugar in west africa and has a large area of cultivable land suitable for growing industrial sugarcane (busari and misari, 1996; adb, 2000; adf, 2000). also, over the years the federal government has carried out policies that were aimed at boosting sugar production in the country. some of the policies include; 50% tariff on the importation of white sugar, 5% levy on imported raw sugar, five year tax holiday to sugar refineries and privatization of major sugar firms in the country, as well as sugar expansion programme in collaboration with the african development bank and african development fund in 1989 and 1991 respectively. these packages were meant to stimulate local sugar production and increase the commodity’s productivity as well capacity utilization in the sub sector. in spite of these provisions, nigeria still imports above 90% of its sugar consume locally (nigerian financial business news, 2010). this implies that huge amount of foreign exchange is needed for sugar importation and this has a tendency to impact negatively on the country’s external reserves, development of other sectors of the economy and the welfare of sugarcane farmers in the country. for instance, about n26billion or about $173.33million (at n150 for 1 dollar) was spent on sugar importation in 2008 (nfbn, 2010). according to the national sugar development council (nsdc), nigeria has a land potential of over 500,000 hectares of suitable cane fields that can produce over 5 million metric tons of sugarcane that when processed, can yield about 3 million metric tons of sugar. however, the sector has been neglected and depends almost totally on refining imported raw brown sugar from brazil worth over $500 million per annum (annual sugar report for nigeria, 2013). government has not relented in her effort to increase the productivity of the sugar sub sector in nigeria. in 2013, government revised the sugar tariff structure to revitalize activities in the sugar industry, boost domestic raw sugar production and create jobs. new tariffs for raw and refined sugar were announced, as well as for sugar related production equipment and machinery. the government implemented a zero per cent import duty on machinery and spare parts destined for local sugar manufacturing industries; five year tax holiday for investors in the sugar value chain; 10 percent import duty and 50 percent levy on imported raw sugar and 20 percent duty and 60 percent levy for imported refined sugar (cbn, 2013). these measures were intended to re-direct investments back to the sub sector and promotes backward integration in the sugar value chain. given this brief scenario in the nigeria’s sugar industry, the need to promote domestic production and control importation of sugar will depends largely on the understanding of roles of political and economic environments on food importation in the country. since importation is basically an economic activity that is modeled by categories of policy, there are needs to understand the relationship between both political and economic environments and food importation in the country. on this premise, the study specifically established the relationship between sugar import and the political and economic environments in nigeria. 2. literature review literature on sugar import demand is scanty with respect to nigeria. however, the study reviewed import demand functions of various economies. frank and maylene (2005) employed stock‐watson dynamic ols (dols) model to derive the long‐run price, income and urbanization elasticity of import demand. the data covers the period 1970‐2000. results indicated that real gdp, relative price and urbanization are the key determinants of import demand for pulses in india. also, safoulanitou and mathias (2007) identified factors that explained food imports in congo. the analysis showed that the exchange rate of the local currency, armed conflicts, re-export trade, income and the domestic production index all represent the main factors that account for food imports in congo in the short and or long term. in nigeria, ogundele (2007) examined the effects of various trade policy instruments such as tariff, import restrictions, outright ban on rice import and other determinants on the import demand for rice in nigeria between 1960 and 2007. the long run equilibrium model revealed that, exchange rate, per capita income and local output of rice have positive significant relationship with rice import demand. the short run dynamic model (ecm) result further confirmed the significance of per capita income and local output as major positive determinants of rice import in nigeria. in another empirical work (lançon and hélène, 2007) posited that, policy measures are among the major determinant of expansion of rice imports in developing countries. in a similar manner, fatukasi and bernard (2010) assessed the determinants of import from 1970 to 2008 in nigeria. the long run model reveals exchange rate and external reserves have negative relationship with import in nigeria. the gdp and trade openness impacted positively on import in the long run. in the short run, external reserves, gdp and trade openness were important decision variables. nassr (2013) estimated import demand function in palestine. the finding showed positive relationship between the demand for imports and gdp and negative relationship with the index of consumer prices. economy, 2015, 2(4): 71-81 73 2.1. research gaps identified in the reviewed literature researches on sugar import demand are absent in the literature. the country is currently depending on sugar import for her domestic and industrial consumption. hence there is an overwhelming need to link sugar import to macroeconomic variables for efficient policy formulation on sugar imports in the country. also, it is evidenced that political environment has not been considered in the sugar import demand function in developing countries. this is a serious missing linked especially in nigeria, where politic plays a significant role in the economic activities. also, some of the studies stick to the traditional theoretical framework of import demand by incorporating few macroeconomic variables in the function. this study bridges that gap by expanding macroeconomic variables in the function. 3. theoretical framework following the work of mayes (1981) a simple import demand function is explicitly shown as: ( ) where m = import, y = domestic income, pm = international price of commodity i, pd = domestic price of commodity i. attaching log to equation 1 will yield: ( ( ) ) linearizing equation 2 and expressing it explicitly will yield: ( ) where α and β are import elasticity of demand with respect to domestic income and own price of commodity. however, equation 3 has been expanded to include several explanatory variables such as exchange rate, per capita income; external reserve and liberalization dummy etc. (ogundele, 2007; igberi et al., 2012). the study further expands equation 3 by including dummies. 4. materials and methods study area: the study was conducted in nigeria; the country is situated on the gulf of guinea in the sub saharan africa. nigeria lies between 4 0 and 14 0 north of the equator and between longitude 3 0 and 15 0 east of the greenwich. the country has a total land area of about 923,769km 2 (or about 98.3 million hectares) with 853km of coastline along the northern edge of the gulf of guinea and a population of over 140 million people (national population commission website, 2006). nigeria is bounded by the republics of benin in the west, chad and cameroon in the east and niger to the north. data source: secondary data were used for the study. these data were sourced from several publications of central bank of nigeria (cbn), national bureau of statistics, records of savanna and bacita sugar companies, food and agricultural organization (fao) as well as the world bank. data covered the period from 1965 to 2014. 5. analytical technique 5.1. the trend analysis of sugar import in nigeria (1965 – 2014) the study investigated the nature of movement and growth rate in sugar import in nigeria. an exponential trend equation was specified as shown explicitly: where ‘t’ is the time expressed in year; suit is the annual quantity of total sugar import (tons) in nigeria. the exponential growth rate is given as: (r) =( ) the exponential growth rate was adopted because several literature opine to the continuous increase in sugar imports in nigeria (cbn, 2014). the study used quadratic exponential equation to ascertain whether the growth rate in sugar import assumes an accelerated or decelerated rate over increased period of time in nigeria. explicitly, the model is shown as: (6) the inference implies that, if > 0; then sugar import has accelerated positive or negative growth rate over increase time: when < 0; the growth rate in sugar import is not significant. 5.2. long run sugar import demand function in nigeria to determine the long run sugar import demand function in nigeria, a time dependent regression model was specified at the level of variables. the model is specified explicitly as thus: where; suit = quantity of total sugar import in time‘t’ (tons) rgpt = annual real gdp of nigeria at current purchaser price (n) exct = nominal exchange rate of naira for dollar acut = annual agroindustrial capacity utilization as a proxy of domestic utilization (%) exrt = annual volume of external reserve/gdp as enhancement of importation (n) polt = political stability dummy (1 during democratic era and 0 during military period) dpst = domestic price of sugar (n/ton) rwst = real world price of sugar (n) dprt = domestic production or output of sugar (ton) economy, 2015, 2(4): 71-81 74 pcgt = per capita gdp as a proxy of household demand in nigeria (n/person) ut = stochastic error term and ut ~ iid (0, δ 2 u). β’s are long run import elasticity. to validate the existence of the long run stable relationship in the sugar import function in nigeria, the study applied the engle and granger two-step technique and johansen co-integration tests. following the granger representation theorem, the error correction model (ecm) for the co-integrating series in the study was specified. this model represents the short run import function for sugar in nigeria. the general specification of the error correction model specified for the sugar import in nigeria is explicitly shown below: ∑ ∑ variables are as defined previously in equation 7; and coefficients ( ) of the ecmt (-1< < 0) measures the deviation from the long-run equilibrium in period (t-1). 5.3. augmented dickey-fuller (adf) – gls test stationary of time series is needed to avoid the incidence of spurious regression. it is therefore necessary to convert nonstationary series to stationary status in order to obtain reliable regression estimates. in estimating an error correction model, this study applies the augmented dickeyfuller (adf) gls test to examine the stationary characteristics of the series. as suggested by dickey and fuller (1981) equation (9) is used to test the stationary of specified variables. ∑ where ‘y’ represents the variables to be tested, represents the first difference operator; t is the time drift; k represents the number of lags used and is the error term, which is assumed to be normally and identically distributed with constant means and variance;’ and are the model bounds. it is a one-sided test whose null hypothesis is versus the alternative < 0. following the work of elliott et al. (1996) adf-gls unit root involves estimating the standard adf test equation after substituting the generalized least squares detrended for the original as shown in equation (10). the test variant offers greater power than the regular adf test. ∑ 6. results and discussion the descriptive statistics of variables used in the study is shown in table 1. the result revealed high degree of volatility among specified variables. variability was high in domestic price of sugar, per capita income and real gross domestic product. also the finding shows that, variability was low in domestic production of sugar and capacity utilization in agro based industries in nigeria. table-1. summary statistics, of variables used in the analysis variable mean median min. max. std. dev. c.v. skewness ex. kurtosis sui 4.05e+5 3.99e+5 32395 1.09e+6 2.52e+5 0.6233 0.4934 -0.2005 rws 14748 2504.2 133.97 80950 22418 1.5201 1.5624 1.2607 pcg 2.70e+5 2698.1 69.257 4.99e+6 8.75e+5 3.2369 3.9899 16.439 dpr 38176 36500 13000 69000 11816 0.3095 0.4326 -0.0182 pol 0.4600 0.000 0.000 1.000 0.5035 1.0945 0.1605 -1.9742 acu 51.133 52.950 18.300 84.200 17.6220 0.3446 -0.1435 -1.0365 exc 46.394 7.7147 0.5464 158.55 61.1560 1.3182 0.8392 -1.1138 rgp 4.54e+13 1.18e+13 4.64e+12 6.11e+14 1.13e+14 2.4944 3.6208 12.761 dps 42036 790.94 137.27 1.47e+6 2.09e+5 4.9613 6.6197 42.775 exr 0.08912 0.0499 0.0061 0.3119 0.0859 0.9644 1.1810 0.1621 source: computed by authors. variables are as defined in equation 7. 6.1. unit root test of variables used in the analysis the stationary of specified variables in the study was tested with the standard augmented dickey–fuller gls unit root test. test statistics for each variable in level and first difference involving trend and without trend adfgls equations were estimated and presented in table 2. the adf-gls test result reveals that, at level all specified variables were non stationary, but were stationary at first differences. the critical value was kept at 1% significant level to ensure the best result. the result of the adf-gls unit root test implies that, the analysis of the specified variables at their levels could result in spurious regression estimates and hence unreliable policy variables. this therefor implied that, specified variables should be tested for the presence of co-integration and error correction mechanism (johansen, 1988; johansen and juselius, 1990). 6.2. result of trend analysis of sugar import demand in nigeria (1965 – 2014) estimates of the exponential trend equation for sugar import are presented in table 3. the result revealed that, sugar import in nigeria has a positive significant relationship with time. this implies that, sugar import increases as time increase. an average exponential growth rate of about 3.49% was obtained in sugar import from 1965 to 2014 in nigeria. this means that, sugar import demand has continuously witnessed upsurge over the years under consideration. economy, 2015, 2(4): 71-81 75 table-2. result of the unit root test for variables used in the analysis variable adf-gls unit root test with constant with constant and trend lag level 1 st diff. ot lag level 1 st diff. ot sui 0 -1.3175 -8.2110*** 1(1) 0 -1.9851 -8.8653*** 1(1) rws 0 0.3837 -5.3772*** 1(1) 0 -1.9164 -5.7131*** 1(1) pcg 0 1.6244 -8.2292*** 1(1) 0 -2.6281 -7.3762*** 1(1) dpr 0 -2.2052 -8.7119*** 1(1) 0 -3.0985 -11.628*** 1(1) acu 0 -2.6854 -8.6332*** 1(1) 0 -2.9312 -8.7636*** 1(1) exc 0 0.9061 -5.3757*** 1(1) 0 -1.3142 -5.5727*** 1(1) rgp 0 -0.1369 -7.7672*** 1(1) 0 -0.2453 -7.4163*** 1(1) dps 0 2.3826 -6.5094*** 1(1) 0 -0.9048 -6.0099*** 1(1) exr 0 -2.6208 -6.2957*** 1(1) 0 -2.6909 -6.4782*** 1(1) cv at 1% -3.77 -3.77 -3.77 test of residuals from the long run estimates cv at 1% 0 -3.898*** ─ 1(0) -4.254*** ─ 1(0) note: ot means order of integration. critical value (cv) is defined at 1% significant level and asterisks *** represents 1% significance level. variables are expressed in logarithm and are as defined previously in equation 7. table-3. exponential trend analysis of sugar import in nigeria variable coefficient standard error t-value constant 11.7473 0.1967 59.71*** time 0.0349 0.0067 5.208*** fcal. 27.121*** r-square 0.361 exp. gr (%) 3.49% quadratic trend equation estimates constant 10.518 0.1948 52.98*** time 0.1768 0.0176 10.03*** time square -0.0028 0.00034 -8.299*** fcal. 67.177*** r-square 0.7408 note: values in bracket represent t-values. the asterisk *** represents 1% significance level. coefficient of the square time in the quadratic trend equation indicates that, there is a significant negative relationship between sugar import and square of time in nigeria. the result showed marginal decrease in sugar import over doubled increase in time. decline in sugar import over increase time implies that, government policies on increase domestic production of refined sugar has gained momentum over increase time. this result revealed the marginal efficacy of the long term policies in the sugar sub sector in nigeria. alternatively, the result means that, the various fiscal, monetary as well as trade policies in addition to incentives implemented by various government regimes in the country to reduce sugar import and intensify domestic production as well as promote backward integration of the sub sector marginally and adversely affected sugar imports in the long run. to further validate the trend behaviour of sugar import in nigeria, figure 1 shows the linear trend graphs of tonnage of total sugar imported in the country. sugar import demand in nigeria was insignificant in the 1960s and early 1970s as depicted by a low undulated trend line in this period. in this period, it is noticed that smuggling was very minimal and the policy of import substitute were vigorously pursuit by the federal government. following this policy thrust, two integrate sugar refineries (bacita and savanna) were established during this period. also in his period, domestic and industrial utilization were minimal in the country. interest of government then was focused on domestic production through government interventions. the period 1975 to 1985 marked an era of oil boom and the corresponding dutch disease as sugar import also witnessed remarkable increase during this period in nigeria. the country external reserve escalated and there were incentives for importation. the per capita income of nigerian increase remarkably. preferences for imported food items during this era increase among nigerian. during the early period of this era, tariffs on sugar were favorable. following favorable environment for importation, the country witnessed large tonnage of sugar import as depicted by upward movement in the trend in this period. during this period, the import substitution policy in the sugar sub sector was not sustainable because domestic production was far below industrial and household demands. this forced sugar based industries to import sugar in order to sustain production. towards the end of this period, the country witnessed increase volatility in macroeconomic variables, which resulted in the draining of her foreign reserve. in 1985, the country foreign reserves could not supports importation. smuggling was predominant during this era. in the period 1986-1990, sugar import assumes a low and declining trend on average. many analysts attributed the occurrence of this trend to restrictive trade policies on sugar. this policy direction was intended to stimulate domestic production through private initiatives and competitive market structure. the introduction of the structural adjustment program (sap) in 1986 reinforced the already restricted policies on sugar import in nigeria. economy, 2015, 2(4): 71-81 76 figure-1. trend in sugar import in nigeria (1965-2014) source: data from fao, cbn and world bank. plot was done by authors using gretl software. despite the stringent policies on sugar trade, significant quantity of sugar imports was still found in the nigeria’s markets. again, economists linked this scenario to the porous nature of the nation borders and issues on corruption (akande, 2003). also, during this period, the nation witnessed the highest level of macroeconomic volatility and continuous draining of the external reserves. during the early period of this era, importation was economically disabled, while domestic production shrink and this encourages massive smuggling through the boarders. towards the end of the period, (i.e. 1990), restrictions on sugar import were lessen and this encourages gradual inflow of sugar imports. the period 1991 to 2002 saw a massive renaissance in sugar importation with lesser restrictions and more favorable tariff regimes. sugar import trended upward during this period. in this era, the country economy was liberalized and some restrictions on sugar importation were lifted. several institution and fiscal policies were put in place to promote domestic production. despite these programmes and policies, sugar import continues to grow upward. in 2002, privatization of major sugar companies begun in nigeria. the rehabilitation of the privatized industries was delayed and this hindered domestic production. from 2003 to 2014, the country witnessed massive importation of semi processed sugar from brazil. tariff incentives and outright ban on cubed sugar encourage production of refined sugar from imported semi processed brown sugar. this policy direction drastically lowered importation of refined sugar in nigeria during this period. as revealed in the graph, the trend exhibited average downward fluctuation in the period 2003 to 2014. in summary, it is observed that, trend in the sugar import in nigeria has been consistence with the various trades, fiscal and institutional policy regimes in the country. the trend assumes undulated pattern with troughs and crests responding to several policies, economic and political environments in the country. 6.3. co-integration test for sugar import function in nigeria the study applied the engle and granger two-step technique and johansen cointegration approach to examine the co-integration relationship among specified variables. the result of the engle and granger two-step technique of cointegration test is presented in the lower portion of table 2. the results showed that at 1% significance level of critical value, the engle–granger cointegration tests rejected the null hypothesis of no cointegration. hence, there exists a long run equilibrium relationship between the sugar import and selected macroeconomic variables in nigeria. the results showed that at 1% probability level of significance, the augmented dicker-fuller –gls (adf-gls) test for the residuals at level is greater than the critical value at 1% probability value. table-4. unrestricted johansen cointegration test results hypotheses (null) (alternative) eigenvalue trace statistic 0.05 critical value max-eigen statistic 0.05 critical value r = 0 r ≥ 1 0.9940 493.926 197.371*** 245.929 58.434*** r ≤ 1 r ≥ 2 0.7862 247.996 159.529*** 74.047 52.363*** r ≤ 2 r ≥ 3 0.7121 173.949 125.615*** 59.769 46.231** r ≤ 3 r ≥ 4 0.6009 114.179 95.754*** 44.091 40.078** r ≤ 4 r ≥ 5 0.4729 70.089 69.819** 30.736 33.877 r ≤ 5 r ≥ 6 0.3397 39.353 47.856 19.922 27.584 r ≤ 6 r ≥ 7 0.1834 19.431 29.797 9.722 21.132 r ≤ 7 r ≥ 8 0.1458 9.708 15.495 7.566 14.265 r ≤ 8 r ≥ 9 0.0436 2.142 3.841 2.142 3.841 note: trace test indicates 12 co-integrating equations at 5% significant level. * denotes rejection of the null hypothesis at 0.05 level. ** mackinnon et al. (1999) p-values. for the johansen co-integration approach, the tabulated trace and maximum eigenvalue test statistics were significant at various rank levels. the result as presented in table 4 revealed that the calculated trace test and maximum eigenvalue test statistics are greater than the critical values at various conventional probability levels. this result confirms the presence of cointegration between sugar import and some determinants of sugar imports in nigeria. following the presence of cointegration in the sugar import demand function in nigeria, the long run sugar import demand function was estimated and presented in table 5. the estimated coefficients represent the long run sugar import demand elasticity with respect to each specify macroeconomic variable. economy, 2015, 2(4): 71-81 77 table-5. long run sugar import demand estimates in nigeria variables coefficient standard error t-test constant 24.8668 6.7075 3.707*** pcg 0.75688 0.1646 4.598*** dpr acu 0.71040 − 0.6590 0.2370 0.2566 2.997** − 2.568** exc − 0.4968 0.1957 − 2.538** rgp − 0.7092 0.2483 − 2.856*** dps − 0.2862 0.1139 − 2.511** pol 0.3058 0.1794 1.704* rws 0.1131 0.2079 0.544 exr − 0.0388 0.1101 − 0.353 diagnostic tests rsquare 0.7678 f-cal. 14.6966*** lm(1) 9.9589*** normality test 1.3789 reset test 11.6172*** dwatson 1.1719 note: variables are expressed in logarithm 6.4. stability of the long run sugar demand function in nigeria testing the stability of the long run sugar import demand function is very important especially when formulating policies to promote trade and domestic production. in testing the model stability, it is observed whether the estimated sugar import demand function remain stable within a certain probability over the specified period of time. the study used cusum tests and recursive coefficients to check the sugar import demand function. the cusum test is based on the cumulative sum of the recursive residuals. figure-2. cusum plot with 95% confidence band source: product of analysis using e-view software. figure 2 shows that, the long run sugar import demand function is stable during the sample period specified because the cumulative sum revolves between the two critical lines. the result of the stability test shows that all estimated coefficients of the explanatory variables revolve within the two critical bands, so all coefficients estimated in sugar import demand function are stable in the long run. 6.5. generating optimal laglength for the co-integrating variables appropriate lag length for the co-integrating series is needed to generate the error correction model (ecm) for the co-integrating variables. the akaike criterion (aic), schwarz bayesian criterion (bic) and hannanquinn criterion (hqc) tests were employed to determine the appropriate lag length. the test result as shown in table 6 indicates that the optimum lag length appropriate for generating the ecm is at lag 1. table-6. determination of optimum lag length lag loglike p(lr) aic bic hqc 1 -10.101 ─ 0.938* 1.379* 1.102* 2 -9.743 0.398 0.966 1.448 1.146 3 -9.009 0.226 0.978 1.500 1.173 4 5 -8.902 -8.320 0.643 0.281 1.018 1.036 1.579 1.639 1.227 1.261 the asterisks below indicate the best (that is, minimized) values of the respective information criteria, aic = akaike criterion, bic = schwarz bayesian criterion and hqc = hannan-quinn criterion. 6.6. error correction model for sugar import in nigeria the primary reason for estimating the ecm model was to capture the dynamics in the sugar import and identify the speed of adjustment as a response to departure from the long-run equilibrium. economy, 2015, 2(4): 71-81 78 table-7. short run demand function of sugar import in nigeria variables coefficient standard error t-value constant 0.0829 0.1056 0.785 ∆ln suit-1 -0.0935 0.1194 -0.783 ∆lnrwst 0.0129 0.1614 0.080 ∆lnpcgt 0.1191 0.3749 0.318 ∆lndprt -0.0737 0.2461 -0.299 ∆lnacut -0.3090 0.2124 -1.455 ∆lnexct 0.0813 0.1577 0.516 ∆lnrgpt -0.1679 0.3721 -0.451 ∆lndpst -0.2177 0.0818 -2.662** ∆lnexrt -0.1894 0.0638 -2.969*** polt -0.0619 0.1084 -0.571 ecmt-1 -0.3326 0.1410 -2.359** diagnostic tests rsquare 0.3588 f-cal 5.5342*** loglik. -13.8607 normality test 3.8295 dw test 1.8397 reset test 0.5397 note: variables are expressed in logarithm the study adopted hendry (1986) approach in which an over parameterized model is initially estimated and then gradually reduced by eliminating insignificant lagged variables until appropriate model is obtained. the result of the exercise is presented in tables 7. the slope coefficient of the error correction term is negative and statistically significant at 5% significant level. the result validates the existence of a stable long-run symmetric equilibrium relationship in the specified sugar import demand function in nigeria, and also indicates that sugar import is sensitive to the departure from its equilibrium value in the previous periods. the slope coefficient of the error correction term (-0.3326) represents the speed of adjustment and also is consistent with the hypothesis of convergence towards the long-run equilibrium once the equilibrium status of sugar import demand is disturbed. the stronger the negative value of the ecm, the shorter the period it takes sugar import demand to adjust to equilibrium position amidst specified explanatory variables in the long run and vice versa. the diagnostic test for the ecm model revealed r 2 value of 0.3588. the durbin-watson value for the sugar import demand equation indicates significant effect of serial correlation. the ecm model has been shown to be robust against residual autocorrelation. therefore, the presence of autocorrelation does not affect the estimates (laurenceson and chai, 2003). 6.7. stability of the short run sugar demand function in nigeria the test result revealed that all estimates of the short run model are stable at 5% probability level within the period under consideration. the cusum test is based on the cumulative sum of the recursive residuals. figure 3 show that the long run sugar import demand function is stable during the sample period specified because the cumulative sum revolves between the two critical lines. figure-3. cusum plot with 95% confidence band source: product of analysis using e-view software. the cusum of squares test indicates that residual variance is stable over the sample period because cumulative sum of squares line does not go outside the 5% critical lines. the result of the stability tests show that all estimated coefficients of the explanatory variables revolve within the two critical bands, so all coefficients estimated in sugar imports demand function are stable in the short and long runs. economy, 2015, 2(4): 71-81 79 figure-4. cusumsq plot with 95% confidence band source: product of analysis using e-view software. 6.8. discussion of the long run elasticity of sugar import demand function in nigeria the long run model results revealed that, sugar import has a significant negative and inelastic relationship with respect to the agro industrial capacity utilization rate in nigeria. this means that, 1% change in the agro based capacity utilization rate will lead to less than 1% change in the quantity of sugar imported in nigeria. this implies that, the rate at which agro based capacity utilization rate change is greater than the rate at sugar import demand changes in nigeria. the result also indicates that, the volume of sugar import has a negative causal relationship with the agro based capacity utilization rate in nigeria. this result is contrary to a priory expectation. however, the finding could suggest that, some agro based industries have backward integration policy with some sugar firms in the country. also, issues related to increase smuggling of sugar through the country porous border could cause this relationship. in another perspective, it could be the inefficiency of the agro based firm or increase in the used of sugar substitute in their production processes or even the case of diversification in production. similarly, the quantity of sugar import exhibited inverse and inelastic relationship with the nominal exchange rate in the long run in the country. explicitly, 1 unit change in the nominal exchange rate will result at less than i unit change in sugar import demand in nigeria. this means that, as the exchange rate (n/$) decreases, it becomes cheaper to import sugar and vice versa. as the value of naira appreciates, it strangles the availability of foreign exchange resulting in the reduction of the quantity of sugar import. it is also noted, that within the period under consideration several exchange rate policies were implemented to reduce sugar import and give buffer to the domestic economy. this result is in line with the findings of safoulanitou and mathias (2007); ogundele (2007) and fatukasi and bernard (2010). in a similar manner, sugar import showed significant negative and inelastic relationship with the country’s real gdp. this means that, 1% change in the country’s gdp will result to a less than 1% change in sugar import demand in nigeria. this result suggests the prevalence of high rate of sugar smuggling along the country’s international borders. this is because, the country has enunciated several tight trade; fiscal and monetary policies to check excessive sugar import; but it seems these measures were not very effective or implemented adequately. the negative relationship between these variables could also be explained by the fact that, nigeria’s government has invested heavily on the development of the domestic sugar sector and issues related to corruptions. several institutional frameworks, programmes and policies have been enunciated and implemented to upsurge domestic sugar production in the country. hence, as gdp increases, more domestic investments are initiated to reduce capital flight which certainly has an inverse impact on sugar import in the country. this result corroborate he findings of frank and maylene (2005) as well as nassr (2013). in the same direction, sugar import has an inelastic and negative correlation with the domestic price of sugar in nigeria. this means that, 10% increase in the domestic price of sugar will lead to less than 10% increase in sugar import. this means that a change in domestic price of sugar is greater than a change in sugar import. this result could be substantiated by the fact that, the domestic price of sugar is not competitive relative to international price of sugar in nigeria. this is because currently the domestic production constitute less than 5% of the total sugar consume in nigeria. the quality of domestic sugar production and the preference as well as the utility of consumers could also help to explain this relationship. for instance, if consumers prefer imported sugar to domestic sugar, irrespective of price change in the domestic sugar, the demand for imported sugar will increase. this result agrees with the finding of frank and maylene (2005). on the other hand, sugar import has a positive and inelastic correlation with the political environment (i.e. the civilian regimes in nigeria) in the long run in nigeria. this means that, variation in the political environment in the country is more compared to changes in sugar import demand in the long run. the causation relationship shows that, periods of civilian rules promoted sugar import in nigeria. this could be due to the porosity of most trade and tariff policies in this era. the issue of corruption among government officials played a very important role in this relationship. lançon and hélène (2007) have reported similar result earlier. the coefficient of per capita income in the long run model shows significant positive and inelastic relationship with the volume of sugar import in nigeria. it means that, a percentage change in sugar import is less than equivalent change in per capita income. the causation relationship satisfies a priori expectation, as increase in the per capita income will likely increase incentives for consumers to either buy more or go for more superior quality of sugar in the market. alternatively, increase in per capita income will likely increase effective demand for sugar in the country. where domestic supply falls short of demand, the economy will be force to import in order to fill the supply economy, 2015, 2(4): 71-81 80 gap in the country. continuous increase in per capita income can even encourage smuggling in a situation of restrictive trade policies or quantitative restriction as well as outright ban in the country. the finding is in consonance with ogundele (2007) result. the result also revealed that, the sugar import has significant positive inelastic association with the domestic production of sugar in nigeria. this means that, sugar import demand expanded less than proportionate increase in the domestic production of sugar in the country. the insignificant proportion of the domestic production in the total quantity consume in the country could be responsible for this result. it also reveals that, the domestic sugar industry is not competitive relative to the internal market. reasons for this result could also be linked to the low installed capacity and obsolete technology in the country’s sugar refineries. the low productivity of sugar cane and low technical know-how in the industry are worth mentioning. issues such as policy insincerity in the part of government and corruption contributed to this relationship in nigeria. safoulanitou and mathias (2007) have reported similar result elsewhere. 6.9. the short run elasticity of sugar import demand function in nigeria the short run elasticity of sugar import demand showed the responsiveness of sugar import demand to changes in factors that affect it. in this regards, the sugar import demand has an inelastic and negative relationship with the domestic price of sugar in the short run. this connotes that, 1% increase in the domestic price of sugar will result to less than 1% increase in sugar import demand in the short run in nigeria. the causation relationship revealed negative significant association between sugar import demand and domestic price of sugar. this means that, as domestic price of sugar increases, demand for imported sugar decrease in nigeria. this implies that domestic sugar and exotic sugar are substitute goods. similar relationship has been reported by frank and maylene (2005) as well as nassr (2013). similarly, inelastic and adverse relationship exists between the sugar import demand and the external reserves in the short run. this implies that 10% increase in the country external reserve will result in less than 10% increase in quantity of sugar import in the short run. the several ad hoc trade and monetary policies enunciated by the federal government to reduce sugar import and boost domestic production could help to explain this finding. following these policies, increase in the country’s external reserve did not have strong positive relationship with sugar import in nigeria. this result also connotes that, large proportion of imported sugar in the country’s economy enter through illegal ways. if all imported sugar should pass through the legal ways, it will definitely be determine positively by the external reserve. the result coincided with the finding of fatukasi and bernard (2010). 7. conclusion and recommendations sugar import is a reoccurring phenomenon in nigeria. nigeria has form several policies and programmes to boost domestic sugar production. despite these several attempts by the government of nigeria, sugar import has continuously trended upward in recent years. the study has been able to identify the role of political and economic environments on sugar import demand in nigeria. the study revealed an exponential growth rate of about 3.49% from 1965 to 2014. the coefficient of time in the quadratic trend equation was negative which connotes that, over increase time the policy trust on domestic sugar production paid up marginally in the country. the long run import demand function of sugar had a negative significant inelastic relationship with agro based industrial capacity utilization rate, nominal exchange rate, real gross domestic product and domestic price of sugar. the long run sugar import demand also reacted positively to period of civilian rule, per capita income and domestic production of sugar. the study discovered symmetric adjustment coefficient of 33.26% per annum in sugar import demand in the country. in the short run, sugar import had a significant negative and inelastic relationship with the domestic price of sugar and external reserves of nigeria. based on the findings, the following recommendations are proposed;  the federal government as a matter of urgent policy should designed programmes and incentives to boost industrial capacity utilization in the sugar industry in the country. such policy should encourage backward integration between industries and sugar firms in the country.  market determines nominal exchange rate should be maintained in line with the liberalization policy in the country. in this regards, sugar import demand will be based on equilibrium market determine exchange rate and not at subsidize or intervene rate.  the country should regulate its foreign reserve policy by setting a threshold, above which excess deposit should be plough back to the domestic economy inform of investments rather than support excessive sugar importation  civilian regime in nigeria should strive to reduce corruption and ensured policy tight from conceptualization to implementation. this will remove some of incentives that encourage sugar import and encourage domestic production.  government should also ensure full commercialization of all privatized sugar refineries in the country. this will allow the domestic price of sugar to float on market determined level.  government should develop the economy and maintained increase gdp and should endeavor to invest on the agro sector such as sugar industry in order to boost domestic production. references adb, 2000. operations evaluation documents. available from http://www.afdb.org/en/. adf, 2000. operations evaluation documents. available from http://www.afdb.org/en/about-us/african-development-fund-adf/. akande, t., 2003. an overview of nigerian rice economy. ibadan: monography published by the nigerian institution of social and economic research niser. akpan, s.b., 2013. investigating the trend and sources of economic efficiency in the sugar industry in nigeria. asian journal of agricultural extension, economics & sociology, 2(1): 85-104. http://www.afdb.org/en/ http://www.afdb.org/en/about-us/african-development-fund-adf/ economy, 2015, 2(4): 71-81 81 annual sugar report for nigeria, 2013. usda foreign agricultural service usda foreign agricultural service. available from https://www.nigerianseminarsandtrainings.com/articlespg/71-annual-sugar-report-for-nigeria-2013. busari, l.d. and s.m. misari, 1996. sugar and sugarcane in nigeria. nigeria: a publication of national crop research institute in bida. cbn, 2010. publication of the cbn. available from http://www.cenbank.org/ [accessed 13th of september 2015]. cbn, 2013. publication of the cbn, department of trade and exchange. available from http://www.cenbank.org/. central bank of nigeria (cbn), 2014. statistical bulletin and publication. central bank of nigeria statistical bulletin, 2011. available from http/www.cbn.org/out/publications [accessed 03 –09 – 2014]. dickey, d.a. and w.a. fuller, 1981. distribution of the estimators for autoregressive time series with a unit root. journal of the american statistical association, 74(366): 427–431. elliott, g.t., j. rothenberg and j.h. stock, 1996. efficient tests for an autoregressive unit root. econometrica, 64(4): 813–836. fatukasi, b. and o.a. bernard, 2010. determinants of import in nigeria: application of error correction model. centrepoint humanities edition, 14(1): 52-72 food and agricultural organization fao, 2014. website mega data from nigeria agricultural sector. available from http://faostat3.fao.org/download/t/tp/. frank, a.w. and d.y. maylene, 2005. time-series estimation of import demand functions for pulses in india. journal of economic studies, 32(2): 146 157. hendry, d.f., 1986. the role of prediction in evaluating econometric models. proceedings of the royal society of london, 407: 25-34. igberi, c.o., s.u. nwibo and n.e. odo, 2012. analysis of import and export elasticity of agricultural products in nigeria: 1975 – 2009. journal of science and multidisciplinary research, 4(sept., edition): 51 – 58. johansen, s., 1988. statistical analysis of cointegration vectors. journal of economic dynamics and control, 12(2/3): 231-254. johansen, s. and k. juselius, 1990. maximum likelihood estimation and inference on cointegration-with applications to the demand for money. oxford bulletin of economicsand statistics, 52(2): 169-210. lançon, f. and d. hélène, 2007. rice imports in west africa: trade regimes and food policy formulation. poster prepared for presentation at the 106th seminar of the eaae pro-poor development in low income countries: food, agriculture, trade, and environment held at montpellier, france. laurenceson, j. and j.c. chai, 2003. financial reform and economic development in china. cheltenham: edward elgar. mackinnon, j.g., a.h. alfred and m. leo, 1999. numerical distribution functions of likelihood ratio tests for cointegration. journal of applied econometrics, 14(5): 563-577. mayes, g.m., 1981. applications of econometrics. london: prentice hall, inc. nassr, m.a.n., 2013. determinants and econometric estimation of imports demand function in palestine. unpublished master thesis in the department of economics, islamic university of gaza. national population commission website, 2006. available from http://www.population.gov.ng/ [accessed 8th of march 2015]. national sugar development council document (nsdc), 2008. a publication of national sugar development council. abuja, nigeria: federal ministry of industry. nigerian financial business news, 2010. available from www.thenigeriabusiness.com [accessed 18– 03 – 2014]. nsdc, 2010. a publication of national sugar development council. abuja, nigeria: federal ministry of industry. ogundele, f., 2007. trade liberalization and import demand for rice in nigeria; a dynamic modeling. journal of economics and rural development, 16(1): 34 – 45. safoulanitou, l.n. and m.a.n. mathias, 2007. an empirical analysis of the determinants of food imports in congo aerc research paper 195 african economic research consortium, nairobi. savannah sugar company limited (ssc), 2006. unofficial reports for 2006 and 2010. reports on production data, sugarcane utilization and labour requirements. wada, a.c., g. agidi, m.n. ishaq and l.d. busari, 2001. current status of sugar research and development in nigeria. sugar technol, 3(1): 412. views and opinions expressed in this article are the views and opinions of the authors, economy shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. http://www.nigerianseminarsandtrainings.com/articlespg/71-annual-sugar-report-for-nigeria-2013 http://www.cenbank.org/ http://www.cenbank.org/ http://www.cbn.org/out/publications http://faostat3.fao.org/download/t/tp/ http://www.population.gov.ng/ economy issn: 2313-8181 vol. 1, no. 1, 1-4, 2014 www.asianonlinejournals.com/index.php/economy 1 growing demand for biofuel and its impact on sustainable rural development in nigeria idoma kim 1 --muhammad isma’il 2 1,2 department of geography, ahmadu bello university, zaria abstract this work is licensed under a creative commons attribution 3.0 license asian online journal publishing group 1. introduction there is no gainsaying the fact that energy is vital for social and economic development of any economy. this has inadvertently led to an increase in the demand for energy worldwide (poornima and suren, 2013). however, it is important to note that fossil fuels which have been the backbone of most economies over the years are now unreliable on account of their damaging effects on the environment via the emission of greenhouse gases and unsustainability of the resources. (goldemberg, 2007). in realization of these facts, governments of various countries are beginning to explore promising alternative sources of energy. besides, the increased global concern on climate change is a factor driving interest in expanding bioenergy use, which is both renewable and environment friendly (msangi et al., 2007). consequently, karth and larson (2000) and carc (canadian agri-food research council) (2003) opined that biofuels are increasingly becoming important sources of renewable energy capable of competing with the fossil fuels and addressing the energy needs of the world. thus, it has been widely accepted that biofuels have the capability to achieve the goals of sustainable development through the reduction of carbon emissions, an important component of climate change mitigation (fao (food and agricultural organization of united states), 2005a). biofuel is a type of energy derived from renewable plant and animal materials. examples of biofuels include ethanol (often made from corn in the united states and sugarcane in brazil), biodiesel (vegetable oils and liquid animal fats), green diesel (derived from algae and other plant sources) and biogas (methane derived from animal manure and other digested organic material). [see tables 1&2 for types of biofuel and major producing countries]. biofuels are most useful in liquid or gas form because they are easier to transport, deliver and burn cleanly (gail and khamarunga, 2009). these biofuels can be put to a variety of uses such as heating, cooking, transportation, electricity generation etc. (dufey, 2007). table 1 shows types of biomass resources and biofuel produced. table-1.types of biomass resources and biofuel produced biomass resources biofuel produced energy services agriculture and forestry residues wood pellets, briquettes, biodiesel heat, electricity, transport energy crops: biomass, sugar, oil char/charcoal, fuel gas, bio oil; bioethanol heat, electricity, transport continue the recent upsurge in the demands for energy as well as the anticipated shortages and uncertainties associated with current energy sources, has necessitated the need to explore energy options from renewable sources. hence, modern biofuels, which is obtained primarily from renewable biomass, are being given top priority in most countries owing to their great potentials in offering opportunities for achieving meaningful strategy for environmental and socioeconomic growth. admittedly, one major goal of advocating for biofuels projects is the development of the rural economy. consequently, anchoring on content analysis, the paper explored the implications of biofuel production on rural development. it is the contention of this paper that environmentally friendly and socially acceptable biofuel projects can be of immense benefit to the rural economy in most developing countries, nigeria inclusive. the paper concludes with the recommendation that assessment of other options for rural growth is germane owing to the fact that biofuel production may not be an exclusive panacea to rural development problems. keywords: bioenergy, biofuels, demand, impact, nigeria, renewable, rural development, sustainable development. http://creativecommons.org/licenses/by/3.0/ economy, 2014, 1(1):1-4 2 biomass processing wastes biogas, bioethanol, solvents transport municipal waste refusederived fuel, biogas heat, electricity source: domac et al. (2005) table-2.top five biofuel producers in the world country ethanol(million liters) biodiesel(million liters) total united states 41.0 2.1 43.1 brazil 26.0 1.6 26.7 france 0.9 2.6 3.5 germany 0.8 2.6 3.2 china 2.1 0.4 2.5 subtotal 70.8 9.3 80.1 rest of the world 5.2 7.3 12.5 total 72.0 16.6 92.6 source: ren21 (2010). from the foregoing, it is important to state that biofuel can be broadly categorized into two: the modern and traditional biofuels. however, the thrust of this study is the modern biofuel, which according to goldemberg and suani (2004) refer to fuels produced in a sustainable way for electricity generation, heat production and transportation, from agricultural and forest residues and solid waste. this modern biofuel is basically composed of liquid fuels (ethanol and biodiesel) and biogas. ethanol and biodiesel are the two common types of biofuels majorly used in the energy sector. undoubtedly, divergent policies affect the biofuel sector globally, nevertheless the goals of biofuel development projects in most countries as stated by (dufey et al., 2007), (baun et al., 2009) include energy security; rural development; trade development, and mitigation of adverse impacts of climate change. correspondingly, faaij and julije (2006) noted that irrespective of the varying nature of policy goals, the driving forces in biofuel development projects are rural development and employment generation. in addition, biofuels already constitute the major source of energy for over half of the world’s population, accounting for more than 90% of the energy consumption in poor developing countries (fao (food and agricultural organization of united states), 2005a). aside from lessening the dependence of energy driven economies on limited fossil fuel sources, bioenergy has continued to receive increasing attention from those concerned with promoting agricultural and environmental sustainability through the reduction of carbon emissions, an important component of climate change mitigation (msangi et al., 2007). furthermore, bioenergy is regarded by some to be a potentially important contributor towards the economic development of rural areas, and a means of poverty alleviation via the generation of employment and incomes i.e. linking biofuel development directly or indirectly with multiple millennium development goals (fao, 2005b; kammen, 2006). subsequently, bioenergy is seen as a highly promising and largely untapped renewable energy resource, and its potential environmental and socioeconomic advantages are becoming more obvious as technological improvements continue to emerge. hence, the thrust of this paper is to discuss profoundly the influence of biofuel production on the development of the rural areas, with greater emphasis on developing countries like nigeria. in the light of the preceding, the study will construct answers to the following questions:  what is the rationale for embarking on biofuel projects by governments across the world?  to what extent does biofuel production leads to rural development?  what policy approaches can be put in place by government to accelerate rural development benefits of biofuels? following the introduction, we have section 2, which examines in details the reasons for rising demand for biofuels; section 3 explores the impact of biofuel projects on rural livelihood, section 4 discusses policy approaches to maximize rural development benefits of biofuels. section 5 concludes the study. 2. the rising demand for biofuels there is a renewed interest in renewable energy sources and particularly bioenergy. this interest stems from the growing demand for energy ensuing hike in world fossil fuel prices and concerns about global warming. although, at the world energy market, fossil fuel consumption still dominates, however, the anticipated uncertainty in future supply as well as potentially unsustainable patterns of energy consumption, and the costs of expanding proven reserves of fossil fuels have led many energy analysts and managers around the world to seek alternatives from other, more renewable resources, such as bioenergy (msangi et al., 2007). in addition, the steadily increasing trend of gasoline prices overtime strengthens the rationale for seeking cheaper supply alternatives. besides, minimizing the undue reliance of energy driven economies on limited fossil fuel sources, necessitates the search for bioenergy which has the potentials of promoting agricultural and environmental sustainability through the reduction of carbon emissions (msangi et al., 2007) 3. implications of biofuel production on rural development undisputedly, biofuel production is a topic faced with different driving forces and diverging interests. it is to be noted that while the global north is in favour of biofuel production so as to mitigate the effects of fossil fuels and invariably minimizes its dependence; the global south on the other hand sees it as a way of rather promoting rural development (gmunder and portner, 2009). as a matter of fact, it has been increasingly noted that biofuel production provides employment opportunities, access to new markets and helps in the expansion of agricultural production technology. it also increases purchasing power and decreases vulnerability to food and energy price shocks. this in no small measure would lead to significant welfare gains (gmunder and portner, 2009). consequently, biofuels support rural development by increasing farm income. they offer hope of economic growth, especially for economy, 2014, 1(1):1-4 3 developing countries near the equator, where energy crop production is expected to be particularly cost-effective. they also offer modest greenhouse gas emissions reductions (steven and david, 2010). according to poornima and suren (2013), the production and use of biofuels are increasingly gaining attention in many countries to address various energy needs and that ethanol and biodiesel are the two dominant biofuels, which are extensively used in the transportation sector. as at the present, ethanol and biodiesels are blended with gasoline and petroleum based diesel, respectively and used in conventional diesel‐fueled vehicles (world watch institute (wwi), 2006). thus, biofuels have been considered by many as a panacea to global society’s problems. table 3 presents significant changes resulting from the production of biofuels that have direct bearing on rural development. conversely, recent studies have affirmed that biofuels have a notable effects on food security (fao, 2008), landuse rights (lorenzo et al., 2008) and on the environment (scharleman and laurance, 2008). subscribing to the preceding, steven and david (2010) remarked that rising energy demand is likely to put pressure on food production and the environment, have significant distributional effects, and induce reorganization in agriculture. this is more evident in the rural south, where the rapid expansion of biofuel production is having both adverse and positive effects. however, the magnitude of the impacts of biofuel production is yet to be ascertained owing to the dearth of sound scientific research on biofuels. table-3.various rural development aspects associated with biofuel production aspects to rural development direct relationship indirect relationship local job creation higher level income x better energy services x improved local health x good infrastructure facilities x improved knowledge and skills x high productivity quality of life x stabilized local economy x source:poornima and suren (2013) 4. policy approaches as stated in preceding sections, modern biofuels are highly promising in meeting rural development needs. however, development of biofuel projects requires effective measures to enhance the benefits and also to avoid certain environmental and socioeconomic risks that could emerge in the process (poornima and suren, 2013). hence, it is imperative according to rossi and yianna (2009)that a proper appraisal of the local biophysical and socioeconomic conditions is done as it will help in identifying the most efficient and cost effective measures for each specific rural area. ensuring environmentally, economically and socially sustainable biofuel production requires policy action in the following broad areas: • protecting the poor and food-insecurity; • taking advantage of opportunities for agricultural and rural development; • ensuring environmental sustainability; • reviewing existing biofuel policies; • making the international system supportive of sustainable biofuel development. 5. conclusions it has been established clearly in the study that modern biofuels have the potential to contribute to the development of rural areas, particularly in developing countries like nigeria. this includes energy services to the rural community, present jobs and livelihood options and create good local heath environment. however, it is important to note that the strategies to establish biofuel projects that would impact positively on the rural people differ from one region to another based on local energy needs, environmental resource base and other socioeconomic priorities of the region. this is necessary especially in nigeria where there are geographical variations across the various regions in the country. governments should develop and promote biofuels policies, regulations and programs that take into account the needs and interests of small farmers and people in rural communities. consequently, it is out of place to assume all biofuel projects will yield expected results in all cases and in all places. hence, the need for proper appraisal and analysis. references baun, a., g. berndes, m. junginger, f. vuille, r. ball, t. bole, c. chudziak, a. faaij and h. mozaffarian, 2009. bioenergy: a sustainable and reliable energy source.a review of status and prospects. paris: iea bioenergy. pp: 108. carc (canadian agri-food research council), 2003. an assessment of the opportunities and challenges of a bio-based economy for agriculture and food research in canada. ottawa: canadian agri-food research council. domac, j., k. richards and s. risovic, 2005. socio-economic drivers in implementing bioenergy projects. biomass and energy, 289(2): 97106. dufey, a., 2007. international trade in biofuels: good for development? and good for environment? , london: international institution for environment and development. dufey, a., v. sonja and v. bill, 2007. biofuels: strategic choices for commodity dependent developing countries. london: common fund for commodities and international institute for environment and development. faaij, a.p.c. and d. julije, 2006. emerging international bio-energy markets and opportunities for socio-economic development. energy for sustainable development, 10(1): 7-19. fao, 2005b. bioenergy and the millennium development goals. forestry department, fao,rome, italy. available from http://www.fao.org/forestry/energy [accessed july 9, 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policy, 32(6): 711-714. kammen, d.m., 2006. bioenergy in developing countries: experiences and prospects. in bioenergy and agriculture: promises and challenges, eds., p. hazell and r.k. pachauri. washington, d.c. karth, s. and e.d. larson, 2000. bioenergy primer-modernized biomass energy for sustainable development. new york: united nations development programme. pp: 133. lorenzo, c., d. nat and v. songer, 2008. fuelling exclusion? the biofuels boom and poor people’s access to land: fao and iied, 2008. msangi, s., s. timothy, r. mark and r. valmonte-santos, 2007. global scenarios for biofuels: impacts and implications for biofuel security and water use. a paper presented at the tenth annual conference on global economic analysis special session on cge modeling of climate, land use and water: challenges and applications.7-9 june,2007. pp: 1-16. poornima, s. and k. suren, 2013. sustainable biofuel production: opportunities for rural development. international journal of environment and resource, 2(1): 1-13. ren21, 2010. renewable 2010 global status report. paris: renewable energy policy network for the 21st centrury, 2010. rossi, a. and l. yianna, 2009. making sustainable biofuels work for small holder farmers and rural households: issues and perspectives. rome: fao. scharleman, j.p.w. and w.f. laurance, 2008. how green are biofuels? science, 319(5859): 43-44. steven, s. and z. david, 2010. agricultural biotechnology can help mitigate climate change. agricultural and resource economics, 4(2): 1-12. world watch institute (wwi), 2006. biofuels for transportation, global potential and implications for sustainable agriculture and energy in the 21st century. washington, d.c. available from www.worldwatch.org/pubs/biofuels[accessed [accessed july 9,2014]. views and opinions expressed in this article are the views and opinions of the authors, economy shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. http://www.bioenergyinafrica.net/ http://www.worldwatch.org/pubs/biofuels%5baccessed economy vol. 4 no. 1, 1-6, 2017 issn(e) 2313-8181/issn(p) 2518-0118 doi: 10.20448/journal.502.2017.41.1.6 1 responsiveness of the indian tax system: a time series analysis from 1990 to 2010 debasis patnaik1  annie pillai2 ( corresponding author) 1asst prof, department of economics, bits pilani k k birla goa campus, india 2msc economics, department of economics. bits pilani k k birla goa campus, india abstract the post reform period in indian fiscal system needed to assess the impact of reforms as regards tax buoyancy and elasticity of indian tax system in pre gst exercise. this paper studies the variation in buoyancy of the following taxes: corporation tax, income tax, customs tax, union excise duty. it also attempts to study the elasticities of the above mentioned taxes by eliminating the impact of discretionary changes. keywords: tax elasticity, indian tax system, time series, gdp, tax revenue, tax buoyancy. citation | debasis patnaik; ms annie pillai (2017). responsiveness of the indian tax system: a time series analysis from 1990 to 2010. economy, 4(1): 1-6. history: received: 13 july 2016 revised: 8 may 2017 accepted: 24 may 2017 published: 22 june 2017 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group contribution/acknowledgement: both authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ......................................................................................................................................................................................... 2 2. literature reviews .............................................................................................................................................................................. 2 2.6. objective............................................................................................................................................................................................ 2 3. methodology ........................................................................................................................................................................................ 3 4. data and results ................................................................................................................................................................................. 3 5. conclusion ............................................................................................................................................................................................ 4 appendix ................................................................................................................................................................................................... 4 references ................................................................................................................................................................................................. 6 bibliography ............................................................................................................................................................................................. 6 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ https://orcid.org/orcid-search/quick-search?searchquery=debasis patnaik https://orcid.org/orcid-search/quick-search?searchquery=annie pillai https://orcid.org/orcid-search/quick-search?searchquery=debasis patnaik https://orcid.org/orcid-search/quick-search?searchquery=annie pillai https://orcid.org/orcid-search/quick-search?searchquery=debasis patnaik https://orcid.org/orcid-search/quick-search?searchquery=annie pillai economy, 2017, 4(1): 1-6 2 1. introduction india has a well-developed tax structure with clearly demarcated authority between central and state governments and local bodies. central government levies taxes on income (except tax on agricultural income, which the state governments can levy), customs duties, central excise and service tax. indian taxation system has undergone tremendous reforms during the last 2 decades. the tax reform committee was set up in 1990 to rationalize the tax system in india. various reforms were brought into the system from the recommendations of this committee. thus it is important to study how effective these reforms have been and hence the period of study chosen is from 1991 to 2010. the tax rates have been rationalized and tax laws have been simplified resulting in better compliance, ease of tax payment and better enforcement. the process of rationalization of tax administration is ongoing in india. it is important to analyze the responsiveness of tax revenue to aid the policy makers in this process. to measure the tax sensitivity, tax elasticity and tax buoyancy are used widely. tax elasticity is change in the tax revenue due to a change in gdp (or relevant gdp component). tax buoyancy is change in tax revenue due to a change in tax rates, bases, rules, administrative efficiency, etc. (discretionary changes). thus, we see that tax buoyancy measures total change in tax revenues i.e. including effect of discretionary measures and gdp changes. it is vital to study both effects as each of these corresponds to increase in the tax revenue due to different factors. tax buoyancy is effect of increase in the tax base along with the impact of tax reforms whereas tax elasticity excludes the effect of discretionary tax measures focusing only on the impact of increase in the national income. 2. literature reviews 2.1. elasticity and buoyancy of major taxes in pakistan fauzia (2001) estimates the elasticity and buoyancy for four major tax revenue sources of pakistan – direct tax, sales tax, customs duties and excise duties – for the period 1981-2001 using the chain indexing technique. elasticity is calculated by first removing the effects of discretionary changes on the tax revenues and then a twostep regression analysis which gives the responsiveness of the tax base to the gdp and tax revenue to tax base. the paper finds that the elasticity of direct and sales taxes have a relatively higher elasticity as compared to customs and excise duties, which appear to be very rigid. also, it was found that the discretionary measures were found to have a positive effect on the tax structure, improving the elasticities of all the taxes. 2.2. the trends and responsiveness of personal income tax in india ankita (2009) presented in the fourth annual international conference on public policy and management, analyses the responsiveness of personal income tax revenue to changes in income and tax reforms . tax elasticity and buoyancy have been used to measure this response. to study the data the hypothesis used: h0: buoyancy of personal income tax in pre and post liberalization period has remained same. the hypothesis is tested using time series data and ols method. the paper concludes by rejecting the null hypothesis and implying that there has been a significant change in the buoyancy between the pre and post liberalization period which can be attributed to the tax reforms in the later period. 2.3. the effect of tax elasticity on government spending eleanor and james (1980) explore the effects of tax elasticity structures on the amount of spending by state governments. the authors define tax elasticity as tax revenue generating capability of a tax structure in response to increases in tax payer’s income without a change in statutory tax rates. the authors measure this for the case of us during the years 1970-1975. the authors used ols estimation to test the hypothesis and conclude that there is significant relation between tax elasticity and government spending levels i.e, states with significantly higher tax elasticities tend to spend more than the states with correspondingly lower tax elasticities. 2.4. tax elasticity in sierra leone: a time series approach the authors (brima and festus, 2012)study the impact of the tax reforms on the tax revenues. the impact is studied by calculating the tax buoyancy and the tax elasticity for different types of taxes. to adjust the tax data for discretionary changes, singer’s dummy variable method was used. this analysis was empirically applied to data for sierra leone for the period from 1977 to 2009. the paper concludes by accepting the importance of discretionary measures of the government in maintaining the tax revenues during the period. 2.5. shortand long-run tax elasticities: the case of the netherlands ‘shortand long-run tax elasticities: the case of the netherlands’. this paper provides estimates for the base elasticities of dutch taxes, paying particular attention to differences between short-and long-term elasticities, and allowing for asymmetric adjustment. estimates are presented for five tax categories for the period 1970-2005, after making appropriate corrections for effects of discretionary tax measures. the empirical results indicate that short term elasticities often are lower than long-term ones, notably when taxes are subdued. consequently, shocks to tax revenues tend to be aggravated by the dynamics of short-term elasticities. ignoring differences between shortand long-term elasticities contributes to revenue ‘surprises’ and an incorrect assessment of the fiscal stance. 2.6. objective to find out the relationship between the tax schedule and the tax revenue for the period 1990 to 2010, the following objectives have been formulated 1.to study the variation in buoyancy of the following taxes  corporation tax economy, 2017, 4(1): 1-6 3  income tax  customs tax  union excise duty 2. to study the elasticities of the above mentioned taxes by eliminating the impact of discretionary changes. 3. to analyze the effect of tax reforms in india on the tax revenue. 3. methodology the responsiveness of tax revenue for each type is measured by its buoyancy with respect to changes in gdp. for time series analysis, tax buoyancy is estimated by using ordinary least square method. the functional form measuring the tax buoyancy is t=a y b we perform a logarithmic transformation to get the equation log t= log a+ b log y + e t = tax revenue y = national income a = constant b = buoyancy coefficient when this equation is fitted into the data, the regression coefficient b gives the percentage change in tax revenue (t) corresponding with a percent change in income. if the coefficient b turns out to be more than one, the responsiveness of tax system will be considered relatively high and if it is less than one, the same will be considered as relatively low. the above mentioned method assumes the existence of significant correlation between t (tax revenue) and y (national income). an indication of this is provided by the statistic r2 that measures the goodness of fit of the functional relationship being measured. in order to obtain the buoyancy coefficient the series of gross tax receipts is regressed (inclusive of revenue yield from discretionary measures) on the income series. conceptually, the most appropriate measure of the responsiveness of tax revenues to changes in the base for most analytical applications is the ‘elasticity’, which seeks to relate the percentage change in tax revenue to a percentage change in the tax base with a given tax structure. however, since legislative changes in the tax structure alter this relationship from time to time, direct measurement of the tax elasticity from a historical revenue series often becomes problematic. in estimating the elasticity of a tax, therefore, either the time series data on tax revenues need to be adjusted to eliminate the effects of discretionary tax measures[1], or a suitable estimation methodology has to be adopted, or a combination of the two. the most appropriate method would clearly depend upon the availability, nature and reliability of information on tax revenues, discretionary changes in the tax structure and tax bases. over the years, at least four approaches have been used : (1) proportional adjustment (2) constant rate structure (3) divisia index (4) econometric methods (use of dummy variables) [1]a discretionary tax measure is a change in the tax rate or base coverage with the aim of increasing the tax revenue the proportional adjustment method [2] has been used here to eliminate effects of discretionary tax measures. in the indian case, estimates of tax yields arising out of discretionary changes in tax rates and coverages are routinely available in the budget documents. therefore, the application of the proportional adjustment method is perfectly feasible for estimating tax elasticities in india. the method for calculating the adjusted tax revenue has been outlined in the appendix i. the adjusted tax revenue thus found was then regressed with its respective proxy base and the proxy base subsequently with gdp. the coefficients were multiplied to get the elasticity. [2] pronab (2009) a note on estimating tax elasticities, planning commission report 4. data and results tax revenues and their budgeted estimates were taken from the receipts budget section in the union budget report of each of the years from 19990 to 2010. the proxy bases used for corporate and income tax is non agricultural gdp which was taken from the dch databook of centre for statistical organisation. the proxy tax base used for union excise duty is private consumption (also known as household consumption). data for this has been used from the world bank database. the customs tax is regressed with trade volume as the base and the data for this has been used from the annual reports of the directorate general of foreign trade. all sources of data were secondary. the regression results were as follows: all taxes showed high r2 value when regressed with gdp implying the significance of gdp on tax revenue. table-5.1. influence of individual taxes on gdp tax rsquare corporate tax 88.84% taxes on income 99.12% union excise tax 92.7% customs tax 95.4% source: based on world bank data the elasticity and buoyancy coefficients along with percentage change in tax revenues due to tax reform economy, 2017, 4(1): 1-6 4 table-5.2. buoyancy, elasticity and changes in tax revenues due to tax reforms tax buoyancy elasticity % attributed to tax reforms corporate tax 2.18 3.24 -48.43 taxes on income 1.40 0.65 53.22 customs tax 0.753 0.30 60.00 union excise tax 0.75 0.24 68.29 source: based on world bank data thus the results imply that the indirect taxes customs and union excise duties are better affected due to the tax reforms. the tax reforms have positively affected the revenues. moreover the taxes on income attribute most of their growth in tax revenue to the growth in the tax base and hence are more elastic than the indirect taxes. the tax reforms in the corporate sector seem to have negatively affected the tax revenues and the buoyancy coefficient shows that its automatic growth is really high as compared to the others. this can be due to the instability in the tax reforms in the corporate sector. in 1997-98 company tax rate was brought down to 35 % and the 10% dividend tax rate was shifted from the individual to the company. in 2001 dividend tax rate was increased to 20% and in the subsequent year it was again reduced to 10% and the individuals were taxable for the dividends instead of the company. in 2003-04 there was a reversal of policy again. due to these continuous fluctuations and instability the reforms have adversely affected the tax revenues. 5. conclusion the tax buoyancy and elasticity were calculated and analyzed for four main types of taxes namely the corporation tax, income tax, union excise duties and custom duties for the time period 1990 to 2010. out of the four, the two direct taxes namely the corporation and the income tax were observed to be highly elastic. this is supposed to work in the favor of a growing economy like india as the revenue from these taxes will rapidly increase along with the increase in the respective tax bases resulting from changes in the gdp without changing the tax rates by much. the difference between the tax buoyancy and elasticity for the two direct taxes and for customs duties were found to be marginal indicating that the increase in tax revenue has been mainly due to increase in gdp. for the remaining two indirect taxes, the elasticity was observed to be lower than the direct taxes. moreover the tax reforms seem to have had a positive effect on the tax revenues and have affected indirect tax revenue more than the direct tax revenue. appendix appendix-1. the data cleaning process may be described in the following manner: let : ati = the adjusted or cleaned tax yield in year i ti = the actual tax yield in year i di = budget estimate of the yield arising out of discretionary tax changes in year i in the reference year ‘0’, i.e. the year whose tax structure is to be used as the basis for building up the adjusted series, the adjusted tax yield is set at the actual: at0 = t0 (1) for the following year : at1 = t1 – d1 since at0 is equal to t0 by equation (1), no further adjustment is needed. in every subsequent year, however, the non-discretionary component of tax receipts have to be adjusted in the following manner: 1j 1j jjj t at )dt(at     j = 2, ......., n (3) through sequential substitution it can be shown that equation (3) can be rewritten as :      j 2i 1i ii 1j t )dt( .atat  j = 2, ......., n (4) which is in essence the mansfield equation for proportional adjustment data cleaning. appendix 2 data tables used for regression analysis economy, 2017, 4(1): 1-6 5 table-6.1. union excise taxes year gdp pvt consumption union excise duty adjusted tax (at) 1990-91 515,032 339226.4362 23588.4656 23588 1991-92 594,168 386335.6105 27094.0608 21081 1992-93 681,517 457530.9015 29782.2929 18288.25273 1993-94 792,150 523893.4333 30973.065 15009.04756 1994-95 925,239 592420.8519 35899.2732 14061.91939 1995-96 1,083,289 739072.9268 38890.0751 12102.17185 1996-97 1,260,710 820886.8664 44376.992 11375.2055 1997-98 1,401,934 919719.1474 47245.1758 9433.076532 1998-99 1,616,082 1015310.643 53200 8492.632391 1999-00 1,786,526 1156852.866 68526.13 11023.22293 2000-01 1,925,016 1220725.272 91433 16270.50742 2001-02 2,097,726 1354622.042 82309.52 13023.45988 2002-03 2,261,415 1445846.659 90774.31 13410.81157 2003-04 2,538,170 1481432.788 99125.43 13156.34032 2004-05 2,971,464 1711301.961 111225.56 13394.27361 2005-06 3,390,276 1931135.79 117612.76 13996.39089 2006-07 3,953,276 2201706.966 123611.03 13923.71514 2007-08 4,582,086 2685660.144 108612.78 8938.268029 2008-09 5,303,567 3036922.621 103621 8292.436469 2009-10 6,091,485 3439185.361 138299 11571.68652 source: union budget reports and world bank database table-6.2.taxes on income year basenon agriculturalgdp taxes on income at (adjusted tax) 1990-91 364232 5150.32 5150.32 1991-92 418002 6476.431 4197.86 1992-93 483948 7632.99 2997.798 1993-94 562978 8951.295 2233.757 1994-95 661344 11102.87 2172.479 1995-96 796343 15057.72 2401.326 1996-97 915690 18028.15 2289.469 1997-98 1035809 28459.26 4570.329 1998-99 1195596 29367.35 5110.79 1999-00 1340011 31764 5746.105 2000-01 1475451 34438 5115.129 2001-02 1611109 36866 4635.361 2002-03 1789355 41387 4866.344 2003-04 2005828 49268 5597.795 2004-05 2406038 60757 6280.269 2005-06 2752504 80409 8621.746 2006-07 3230292 111821 13388.73 2007-08 3745568 106075 8840.653 2008-09 4360363 132314 12649.71 2009-10 5012120 146586 15784.75 source: union budget reports of each year and economic surveys table-6.3. customs tax revenue year trade volume (tax base) customs tax revenue at(adjusted tax) 1990-91 77,751 19828.732 19828.73 1991-92 91,893 21449.4648 19309.93 1992-93 117,063 22967.1229 18019.67093 1993-94 142,852 21704.91 14559.41135 1994-95 172,645 25721.6442 14719.31292 1995-96 229,031 34665.248 14246.54634 1996-97 257,737 42359.856 13220.94371 1997-98 284,277 40656.086 10350.87681 1998-99 318,085 44342.78 9755.242856 1999-00 374,797 47542.2 8818.415461 2000-01 434,444 45193 6596.626312 2001-02 454,218 44851.62 6496.966795 2002-03 552,343 48629.22 6939.761459 2003-04 652,475 57610.9 8701.141983 2004-05 852,411 65067.14 11622.32692 2005-06 1,116,827 86327.24 17074.0648 2006-07 1,412,285 104118.94 21650.89115 2007-08 1,668,176 99878.86 16807.62566 2008-09 2,215,191 83323 11551.75651 2009-10 2,209,270 135812 21714.08028 source: union budget reports and annual report of directorate general of foreign trade economy, 2017, 4(1): 1-6 6 table-6.4. corporate tax revenue year corporate tax revenue at (adjusted tax) 1990-91 5150.32 5150.32 1991-92 7545.934 8070.8672 1992-93 1771.944 1798.889129 1993-94 1901.16 1733.282226 1994-95 3978.528 -6876.881382 1995-96 5091.458 16277.41979 1996-97 5673.195 -33612.06817 1997-98 7149.863 72579.38743 1998-99 29915 294180.5361 1999-00 35696 357486.5353 2000-01 39059 339677.7396 2001-02 46172 380287.9227 2002-03 63562 622868.3827 2003-04 82680 753799.1511 2004-05 101277 838603.9922 2005-06 144318 1288632.937 2006-07 192911 1941371.559 2007-08 213395 2017040.042 2008-09 244725 2199745.43 2009-10 298687 2661024.563 source: union budget reports (receipt budgets) references ankita, g., 2009. the trends and responsiveness of personal income tax in india. fourth annual international conference on public policy and management, igidr proceedings-project reports series. pp: 062-29. brima, i.b.k. and e.o. festus, 2012. tax elasticity in sierra leone: a time series approach. international journal of economics and financial issues, 2(4): 432-447. view at google scholar eleanor, c.d. and h.a. james, 1980. the effect of tax elasticity on government spending. journal of public choice, 35(3): 267-275. view at google scholar fauzia, m., 2001. elasticity and buoyancy of major taxes in pakistan. pakistan economic and social review, 39(1): 75-86. view at google scholar pronab, s., 2009. a note on estimating tax elasticities. planning commission reports, working paper series. bibliography guido, w., 2007. shortand long-run tax elasticities: the case of the netherlands. european central bank, no. 273. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. https://scholar.google.com/scholar?hl=en&q=tax%20elasticity%20in%20sierra%20leone:%20a%20time%20series%20approach https://scholar.google.com/scholar?hl=en&q=the%20effect%20of%20tax%20elasticity%20on%20government%20spending https://scholar.google.com/scholar?hl=en&q=the%20effect%20of%20tax%20elasticity%20on%20government%20spending https://scholar.google.com/scholar?hl=en&q=elasticity%20and%20buoyancy%20of%20major%20taxes%20in%20pakistan economy issn: 2313-8181 vol. 1, no. 1, 20-31, 2014 www.asianonlinejournals.com/index.php/economy 20 political instability and the effectiveness of economic policies: the case of thailand from 1993-2013 jonathan e. leightner 1 --tomoo inoue 2 1 hull college of business administration georgia regents university, georgia, usa 2 faculty of economics seikei university, kichijoji-kitamachi, musashino-shi tokyo, japan abstract this work is licensed under a creative commons attribution 3.0 license asian online journal publishing group 1. introduction thailand’s political/economic history from 1993 to 2013 is filled with changes in thailand’s economic policies, political situation, and external environment. this time period involves the opening of an international banking center, a speculative attack, the collapse of an exchange rate that had been successfully fixed for thirteen years, the acceptance of a 17.2 billion dollar loan from the imf along with the conditions that came with that loan, the political rise of thaksin shinawatra, the biggest land-slide election victory in thai history, another election in which the opposition did not win enough seats to even initiate a censor debate, government condoned killing of drug lords and muslims, the use of political power to enrich the shinawatra clan, massive street protests in bangkok, the calling of a snap election that the opposition boycotted and that resulted in a constitutional crisis, thailand’s king telling thailand’s judges to fix the situation or wear chamber pots over their heads to cover their shame, an annulling of the boycotted election, a coup, new elections, protesters taking over bangkok’s international airport, a new government, different protestors taking over the central business/shopping area of bangkok, the army dispersing the protesters while several malls burn, the election of thaksin’s sister, yingluck, as thailand’s first female prime minister, and a failed rice manipulation scheme by the government (leightner, 2007b). immediately after this time period there was another coup. it is impossible to create a macroeconomic model that would capture the effects of all of these structural changes, but all of these changes could potentially modify the effectiveness of government policies by directly affecting the economy or by affecting internal and/or external business expectations. even if such a model could be developed, there would be insufficient data to estimate it because the shortest temporal length for gross domestic product (gdp) data for thailand is quarterly and there are too few observations between major structural changes. fortunately, leightner (2015) has developed a regression procedure that produces unbiased estimates that capture the influence of omitted variables without having to identify, quantify, find proxies for, or model the influence of these important, but omitted variables. between 1993 and 2013, the thai economy suffered from massive changes in its economy, political situation, and external environment. given data constraints and the rapidity of the changing situation, it is impossible to create an adequate macroeconomic model for thailand during this time period. thus we use a statistical method designed to solve the omitted variables problem with regression analysis. this method produces a separate slope estimate for every observation which makes it possible to see how omitted variables are affecting the estimated relationships over time. we use this method to estimate dgdp/dg, dgdp/dmb, dgdp/dx, dgdp/de, and dgdp/dreserves using quarterly thai data from 1993 to 2013 where gdp is gross domestic product, g is government consumption, mb is the monetary base, x is exports, e is the baht/us$ exchange rate, and reserves are foreign reserves. we find that the pro-equality policies of the thaksin regime were helpful and that export driven growth is no longer a viable option for thailand. although we approve of thaksin’s economic policies, we disapprove of other aspects of his regime. keywords: fiscal policy, monetary policy, trade policy, thailand, omitted variables. http://creativecommons.org/licenses/by/3.0/ economy, 2014, 1(1): 20-31 21 this paper uses leightner (2015) method to estimate dgdp/dg, dgdp/dmb, dgdp/dx, dgdp/de, and dgdp/dreserves using quarterly thai data from 1993 to 2013 where gdp is gross domestic product, g is government consumption, mb is the monetary base, x is exports, e is the baht/us$ exchange rate, and reserves are foreign reserves. leightner’s method produces a separate slope estimate for every observation which makes it possible to see how omitted variables affected the estimated relationships. we find that export driven growth is no longer a viable policy for thailand and that the economic policies of the thaksin regime were helpful to the thai economy. however, it is important to realize that we do not condone the corruption, the extra-judicial killings of drug lords and muslims, and the undercutting of the institutions required by democracy that are associated with the thaksin regime. leightner (2015) shows (using data from the 17 countries using the euro, the usa, the uk, japan, russia, brazil, and china) that the world needs a pro-equality approach in order to solve the current world-wide economic malaise that is due to a surplus of savings and under-consumption. thaksin’s economic policies were proequality. it is a shame that those effective policies came bundled with a corrupt, power-hungry, and immoral regime. section ii will provide an intuitive explanation of the statistical technique used in this paper. section iii presents the empirical results, and section iv concludes. 2. an intuitive explanation of the analytical technique used omitting important variables from the analysis is one of regression analysis’ most serious problems. for example, if just equation (1) is estimated, while not considering the fact that equation (1)’s slope is a function of other variables (equation 2), then a constant slope is found, in contrast to the true slope which varies. y = α0 + β1 x (1) β1 = α1 + α2 q (2) y = α0 + α1x + α2 xq (3) we substitute equation 2 into equation 1 to produce equation 3, which provides a convenient way to model the omitted variables problem. we initially assume that all variation from the fitted line (error) is due to omitted variables. leightner (2015) shows that, in this case, the “error” for the ith observation from estimating equation (1) without considering equation (2) is α2xi(qi – e[q]) where e[q] is the mean value of q. the standard approach to the omitted variable’s problem is to use instrumental variables. however, this standard approach requires instruments that are almost perfectly correlated to the omitted variables while not being independently related to the dependent variable. finding and justifying such variables is usually impossible. once instruments are selected, their relationship to the omitted variables and the relationship between the omitted variables and the dependent variable must be correctly modeled. all of these conditions are impossible to meet for a subject as complex as the effectiveness of macroeconomic policies. for recent papers that express concern over omitted variable bias see abbott and allen (2011), angrist and alan (2001), black and lisa (2001), botosan and marlene (2002), cellini (2008), diprete and markus (2004), harris and keith (2007), mustard (2003), pace and james (2010), paterson and kevin (2002), scheffler et al. (2007) , sessions et al. (2006), streams and edward (2004), and swamy et al. (2003). fortunately, branson and knox (2000) explain that the observations at the top of any given data set would be associated with the most favorable values for all omitted variables (in other words, the values of the omitted variables that would lead to the largest values for the dependent variable, ceteris paribus). building on this intuition, leightner (2002) developed a new analytical technique named “reiterative truncated projected least squares” (rtpls) that solves the omitted variable problem of regression analysis without using instrumental variables and their unreasonable assumptions. leightner (2008) and leightner and tomoo (2012b) created the second and third generation of the technique respectively: rtpls2 and rtpls3. leightner and tomoo (2012b) also produce an argument that rtpls3 is unbiased. leightner (2015) uses the fourth generation, rtpls4. his simulations show that the average ratio of ordinary least squares (ols) error to rtpls error is 3.8 when the effect of omitted variables on the true slope is 10 times the size of random error. furthermore, the ols/rtpls4 error ratio is more than 28 when the effect of omitted variables on the true slope is 100 times the size of random error. as random error approaches zero and as the sample size increases, the ols/rtpls error ratio approaches infinity. published studies that used rtpls, rtpls2, rtpls3, or rtpls4 in applications include leightner and tomoo (2012a; 2012b; 2009; 2008a; 2008b; 2007) and leightner (2015; 2013; 2011a; 2011b; 2010a; 2010b; 2008; 2007a; 2005a; 2005b; 2002). figure 1 will be used to explain rtpls. to construct figure 1, we generated two series of random numbers, x and q, which ranged from 0 to 100. we then calculated a series for the dependent variable, y, using equation (4): y = 100 + 10 x + 0.6 q x (4) ∂y/∂x for equation (4) equals 10 + 0.6 q. this slope will take numerical values that range from ten (when q equals zero) to seventy (when q equals one hundred). since seventy is seven times bigger than ten, q makes a seven hundred percent difference to the true slope in this example. in figure 1, we identified each point with that observation’s value for q. notice that the upper edge of the data corresponds to relatively large qs – 91, 96, 98, 98, 98, 96, 95, and 94. the lower edge of the data corresponds to relatively small qs – 17, 0, 3, 4, and 11. this makes sense since as q increases so does y, for any given x. for example, when x approximately equals 85, reading the values of q from top to bottom of figure 1 produces 86, 80, 75, 68, 65, 54, 49, 43, 35, 27, and 21. thus the relative vertical position of each observation is directly related to the values of q. if, instead of adding 0.6qx in equation 4, we had subtracted 0.6qx, then the smallest qs would be on the top and the largest qs on the bottom of figure 1. either way, the vertical position of observations captures the influence of q. also realize that the omitted variable, q, represents the combined effects of all forces that are not included in the analysis. for example, if there are 500 forces that are omitted where 300 of them are positively related to y and 200 are negatively related to y, then the observations on the frontier will correspond to when the 300 variables are at their largest levels and the 200 are at their lowest levels. economy, 2014, 1(1): 20-31 22 where q is biggest, along the upper edge of figure 1, the slope is also biggest. likewise, where q is smallest, along the bottom edge of figure 1, the slope is also smallest. the relative vertical position of the observations that correspond to any given x is related to the true slope. imagine that a researcher does not know what q is and that he, thus, omits it from his analysis. in this case, ols produces the following estimated equation: y = -59.85 + 45.27x with an r-squared of 0.6524 and a standard error of the slope of 3.338. although, this ols regression may look successful, it is not. remember that the true equation is y = 100 + 10 x + 0.6 q x. since q ranges from 0 to 100, the true slope (true derivative) ranges from 10 to 70 and ols produced a constant slope of 45.27. ols did the best it could, given its assumption of a constant slope; ols produced a slope estimate of approximately 10 + 0.6 e(q) = 10 + 0.6(53) = 42. ols is always biased when it assumes a constant slope when, in reality, the slope varies. the most important implication from figure 1 is that the relative vertical position of different observations contains information about the combined influence of all omitted variables. rtpls4 uses this relative vertical position to solve the omitted variables problem. furthermore, using rtpls4 does not require that the researcher find appropriate proxies for the omitted variables, measure the omitted variables, or model how the omitted variables affect the dependent variable. indeed, a researcher can use the relative vertical position of observations to capture the combined effects of all omitted variables even when he cannot name the important omitted variables. fig-1. the inuttion behind bd-rtpls4 rtpls4 uses data envelopment analysis (dea) to draw a frontier through the top data points in figure 1. all the data is then projected vertically upwards to this frontier. since the observations on the frontier are the observations for which the omitted variables are most favorable (the values for q are at their highest levels along the economy, 2014, 1(1): 20-31 23 top edge of figure 1), this projection makes every observation correspond to the most favorable omitted variables values. in other words, this projection equalizes the influence of omitted variables to their most favorable level. however, to the right of the top most observation (the 94 in the upper right hand corner in figure 1), dea draws a horizontal line extending to infinity. the projection of all observations vertically upward may result in some observations being projected to this horizontal section. for example, the 81 which is closest to the upper right hand corner of figure 1 would be projected to a horizontal section of the frontier. because this horizontal section has nothing to do with the true relationship between x and y, it should not be included when ols is used to find a slope estimate for the projected data. the ols slope estimate found for the projected data (after truncating off any horizontal part of the frontier) is a slope estimate for when q is at its most favorable level. we call this slope estimate the “truncated projected least squares” slope estimate (tpls) for the first iteration. a new column is then added to the data and this tpls slope estimate is put into that data column for the observations that did not need to be projected upwards – i.e. the observations through which dea drew the initial frontier. the observations that did not need to be projected upwards are then cut from the original data file and pasted into a second data file and the procedure repeated using the original data file (sans all previous iterations’ frontier observations). we reiterate this process, peeling the data down, layer by layer, from the top of the data to the bottom of the data. the first iteration of this process produces a tpls slope estimate for when omitted variables cause the dependent variable, y, to be at its highest numerical level. the second iteration produces a tpls slope estimate for when omitted variables cause the dependent variable to be at its second highest level, etc. when the regression at the end of an additional iteration would use fewer than ten observations, this process is terminated (the remaining observations will be located at the bottom of the data). once the data set has been peeled from the top to the bottom, we return to the original data set and peel it up from the bottom to the top. when peeling up from the bottom, we project the data downward to the lower boundary of the data, we truncate off any lower left horizontal region, we run ols regressions through the truncated projected data, we cut the frontier observations from the original data set and paste them (along with their tpls estimates) into the second data set, and we reiterate this process until there are fewer than 10 observations remaining (the remaining observations will be at the top of the original data). by peeling the data both directions – from bottom to top and from top to bottom – all observations will have at least one tpls estimate associated with it and some (in the middle of the data) will have two. all the “peeling up” and “peeling down” tpls estimates (with the corresponding original data) are put into the second data file. we then use this second data file to run a final regression where these tpls estimates minus y/x are the dependent variable and 1/x is the sole independent variable. the following derivation provides the rational for this final regression. y = α0 + α1 x + α2 xq (equation 3 repeated) (5) ∂y/∂x = α1 + α2q (derivative of equation 5) (6) y/x = α0/x + α1 + α2q (dividing equation 5 by x) (7) α1 + α2q = y/x α0/x (rearranging equation 7) (8) ∂y/∂x = y/x α0/x (from equations 6 and 8) (9) ∂y/∂x y/x = α0/x (rearranging equation 9) (10) the α0 estimated in this final regression and the data for y/x and x are plugged into equation 9 to produce a separate rtpls4 slope estimate for each observation. alternatively, generalized least squares (gls) could be used to estimate α0 from equation (1) and the resulting α0 along with data on y/x and x could be plugged into equation (9); inoue et al. (2014) name this alternative approach “variable slope generalized least squares” (vsgls). theoretically vsgls produces the best linear unbiased estimate (blue) for α0 because equation (1) has heteroscedastic error (aitken, 1935); however simulations show that vsgls produces between twice and three times the error of rtpls4 when sample sizes of 250 observations are used and all error is due to omitted variables. thus, under these conditions, rtpls4 is “better than blue.” however, when random error is added, rtpls4 and vsgls perform equally well (inoue et al., 2014) . figure 1 can be used to better explain the role of the final regression in the rtpls4 process. if all the upper frontier observations had the exact same omitted variable values (perhaps 97), then the resulting tpls estimate would be exactly equivalent to the true slope for the frontier observations. however, figure 1 shows that the observations on the upper frontier were associated with omitted variable values of 91, 96, 98, 98, 98, 96, 95, and 94. the resulting tpls slope estimate would perfectly fit a q value of approximately 96 (the mean of 91, 96, 98, 98, 98, 96, 95, and 94). when a tpls estimate for a q of 96 is associated with qs of 91, 96, 98, 98, 98, 96, 95, and 94, some random variation (both positive and negative variation) remains. by stacking the results from all iterations when peeling down and up, and then conducting this final regression, this random variation is eliminated. realize that y is co-determined by x and q. thus the combination of x and y should contain information about q. this final regression exploits this insight in order to better capture the influence of q. rtpls4 generates reduced form estimates that include all the ways that x and y are correlated. thus, even when many variables interact via a system of equations, a researcher using rtpls4 does not have to discover and justify that system of equations. in contrast, traditional regression analysis theoretically must include all relevant variables in the estimation and the resulting slope estimate for ∂y/∂x is for the effects of just x – holding all other variables constant. rtpls4’s reduced form estimates are not substitutes for traditional regression analysis’ partial derivative estimates. instead traditional regression analysis and rtpls4 are compliments that capture different types of relationships. one disadvantage of rtpls4 is that it cannot determine the mechanism by which the independent variable affects the dependent variable. on the other hand, rtpls4 has the significant advantage of not having to model and find data for all the forces that can affect y in order to estimate dy/dx. both rtpls4 and standard regression techniques estimate “correlations.” neither one of them prove “causation.” we created confidence intervals for each rtpls4 estimate by grouping the estimate with the 2 estimates before and after it and then using equation (11), which is based on the central limit theorem. economy, 2014, 1(1): 20-31 24 99% confidence interval = mean + (s/√n)tn-1, α/2 (11) in equation (11), “s” is the standard deviation, “n” is the number of observations which is 5, and tn-1, α/2 is 4.032 as taken off the standard t table. by always considering a given estimate and the 2 estimates before and after it, we created a moving confidence interval (much like a moving average) for a given set of rtpls estimates. this 99% confidence interval can be interpreted as meaning that there is only a one percent chance that the true average for a given rtpls estimate with the two rtpls estimates before it and the two rtpls estimates after it will lie outside of the given range. given this interpretation, it is possible for a given rtpls estimate to lie outside of its confidence interval if the other four estimates around it are all noticeably above or below the given rtpls estimate. 3. the data and the empirical results the data is given in table 1. the data for g, mb, and x are in millions of current baht. the exchange rate data is given in thai baht per us dollar, and the foreign reserves are given in millions of current us dollars. the empirical results are given in table 2 where the columns labeled “upper” and “lower” give the upper and lower bounds for a 99% confidence interval for the estimates in the column immediately to the left of these labels. figures 2 through 6 depict the empirical results. table-1.the data (gdp, g, mb, and x in millions of baht; e in baht per us $; reserves in millions of us dollars held at the end of the quarter) gdp g mb x e reserves 1993 q1 755554 71336 247009 278949 25.4893 22239.4 q2 755573 75095 251122 278051 25.2309 23979.8 q3 811118 89321 253105 314353 25.2344 25225.3 q4 842977 80230 271418 330152 25.3676 25438.8 1994 q1 886103 84356 292341 329351 25.4176 26672.6 q2 870964 82994 290243 332490 25.2050 28340.5 q3 896836 102342 298691 356983 24.9855 29950.2 q4 975438 84695 313430 391962 25.0403 30279.0 1995 q1 1033855 102381 346179 425287 24.9711 30119.5 q2 1026365 98676 356481 421084 24.6360 34958.3 q3 1032857 115885 358564 438776 24.9432 35866.1 q4 1093135 97461 377820 466527 25.1481 37026.7 1996 q1 1116552 111052 404999 461125 25.2593 38982.5 q2 1146094 111159 401172 441700 25.3116 39830.0 q3 1154274 125651 402961 442540 25.3478 39537.0 q4 1194121 121654 430313 464545 25.5124 38724.5 1997 q1 1158084 117538 459817 471972 25.8872 38065.6 q2 1165717 113471 469964 467382 25.4479 32353.0 q3 1182021 130782 445963 589362 32.6166 29612.2 q4 1226788 114914 453171 743399 40.2875 26967.7 1998 q1 1210828 116037 461473 776676 46.6776 27680.0 q2 1117120 111876 441534 645169 40.3994 26571.7 q3 1112059 150137 443404 671389 41.1398 27290.8 q4 1186440 133641 464258 630719 36.9918 29535.9 1999 q1 1159803 119749 476324 628982 37.0998 29936.1 q2 1108838 129285 431217 625559 37.2054 31433.9 q3 1152229 144485 429386 692836 38.4051 32360.2 q4 1216209 139522 516166 755931 38.8182 34780.6 2000 q1 1231245 131830 499570 746880 37.7030 32283.9 q2 1189978 130009 457647 735051 38.8022 32142.0 q3 1212115 156021 468615 874782 41.0781 32249.8 q4 1289393 139947 506770 930571 43.5539 32661.3 2001 q1 1284700 136881 519127 837246 43.3145 32294.7 q2 1257209 143445 505812 844237 45.6110 31611.5 q3 1270065 164660 506510 857128 45.1024 32635.4 q4 1321528 136131 534152 842139 44.3687 33048.4 2002 q1 1355115 152036 560397 820135 43.6763 33614.5 q2 1325184 145700 552827 833325 42.7687 36790.6 q3 1343999 166374 563519 898844 42.0522 37652.0 q4 1426345 139781 587629 946700 43.3824 38923.7 2003 q1 1471707 146465 627072 946261 42.9705 37631.7 q2 1424519 156390 607517 913278 42.2336 39327.1 q3 1457881 179425 611538 979831 41.2460 40264.3 q4 1563262 153722 651981 1047196 39.7335 42147.7 2004 q1 1583692 161420 681915 1059950 39.1582 43036.4 q2 1568023 183434 675812 1108574 40.2158 43306.1 q3 1606091 199173 691135 1182636 41.2266 44767.5 q4 1731670 176568 763277 1236708 40.2704 49831.7 2005 q1 1716030 193301 776977 1147003 38.5887 48681.1 q2 1691863 204321 763749 1244214 40.0950 48357.3 q3 1780615 239439 756188 1430853 41.3042 49795.2 q4 1904385 206588 794965 1396009 41.0472 52065.9 2006 q1 1948891 220051 837441 1379062 39.3269 55265.8 q2 1900243 230628 795231 1381043 38.1247 58057.4 q3 1945831 262614 789179 1522271 37.6822 61592.7 q4 2049974 212694 826019 1495178 36.5307 66984.8 2007 q1 2096403 245357 845252 1470577 33.9916 70863.0 q2 2047536 254724 823516 1473854 32.6376 72999.5 q3 2107739 295134 831429 1575307 31.4757 80686.7 q4 2273519 244055 880730 1739843 31.0903 87455.1 economy, 2014, 1(1): 20-31 25 gdp g mb x e reserves 2008 q1 2283347 259812 922963 1662721 31.0426 109970.3 q2 2283267 268331 906861 1739789 32.2996 105676.2 q3 2305387 314762 898575 1934054 33.8802 102421.6 q4 2208465 277937 967818 1604962 34.8593 111008.0 2009 q1 2199600 279823 971511 1449590 35.3349 116216.3 q2 2196020 288743 975599 1392586 34.7276 120811.0 q3 2246467 344407 969872 1616066 33.9632 131755.7 q4 2399464 300955 1032435 1721810 33.3039 138417.6 2010 q1 2560083 316260 1082431 1767053 32.8966 144094.1 q2 2471448 315689 1086842 1764641 32.3844 146759.2 q3 2490045 359799 1076872 1820548 31.6276 163235.3 q4 2583245 318279 1141793 1851057 29.9859 172128.9 2011 q1 2744960 334477 1244944 2058719 30.5442 181584.0 q2 2652994 337697 1206049 2013730 30.2842 184894.3 q3 2688075 397216 1217604 2220098 30.1460 180112.7 q4 2454105 328140 1311562 1817403 31.0048 175123.8 2012 q1 2798211 355744 1317609 2038340 30.9973 179247.8 q2 2811487 368186 1337258 2098657 31.2885 174689.1 q3 2801625 442386 1334503 2224797 31.3531 183627.2 q4 2964026 378014 1409036 2167418 30.6748 181608.0 2013 q1 2999658 371474 1435458 2148647 29.7952 177802.9 q2 2955431 404666 1408188 2061985 29.8939 170841.1 q3r 2924215 481986 1397179 2286810 31.4804 172286.3 q4 3018145 384517 1492954 2255011 31.7307 167232.5 sources: g, x, and gdp: national economic and social development board; reserves and mb: the bank of thailand; e: http://fx.com table-2.the empirical results: dgdp/ dg dmb dx de* dres 1993 q1 4.82 upper lower 1.76 upper lower 0.80 upper lower 23.26 upper lower 0.61 upper lower q2 4.58 1.73 0.80 23.50 0.56 q3 4.47 5.79 4.16 1.93 2.02 1.69 0.89 1.09 0.72 23.94 24.53 23.11 2.74 6.06 -0.75 q4 5.38 6.00 4.23 1.92 2.02 1.74 0.94 1.12 0.77 24.06 24.66 23.45 3.97 6.47 0.41 1994 q1 5.62 5.98 4.32 1.93 1.95 1.89 1.08 1.11 0.87 24.35 24.91 23.75 5.40 6.09 2.64 q2 5.53 6.70 4.47 1.89 2.07 1.83 1.02 1.15 0.92 24.44 25.49 23.77 4.55 7.66 3.06 q3 4.74 6.87 4.58 1.92 2.12 1.84 1.02 1.20 0.97 24.86 26.12 23.90 5.17 9.96 3.04 q4 6.66 7.04 4.66 2.08 2.12 1.85 1.13 1.23 0.98 25.43 26.61 24.17 7.71 10.50 3.59 1995 q1 6.08 7.04 4.59 2.06 2.11 1.90 1.18 1.23 1.03 25.97 26.61 24.80 9.69 10.40 5.12 q2 6.23 7.26 5.26 1.98 2.10 1.95 1.17 1.21 1.12 26.26 26.53 25.44 8.13 10.07 7.18 q3 5.36 7.14 5.26 1.98 2.07 1.94 1.14 1.27 1.12 25.99 26.44 25.89 8.11 10.31 7.70 q4 6.99 7.28 5.33 2.04 2.07 1.94 1.20 1.39 1.08 26.26 26.57 25.97 9.48 10.58 7.61 1996 q1 6.35 7.26 5.22 1.96 2.10 1.95 1.27 1.47 1.10 26.33 26.68 25.97 9.61 11.00 8.11 q2 6.61 7.09 5.82 2.05 2.10 1.96 1.39 1.50 1.18 26.51 26.73 26.19 10.14 11.68 8.85 q3 5.91 6.74 5.91 2.07 2.15 1.82 1.41 1.47 1.26 26.54 26.83 26.00 10.43 11.82 9.29 q4 6.43 6.86 5.91 2.03 2.17 1.74 1.43 1.45 1.32 26.68 26.86 26.04 11.67 13.16 9.35 1997 q1 6.35 6.78 5.71 1.82 2.12 1.73 1.33 1.53 1.12 26.01 29.40 21.22 10.93 15.09 9.30 q2 6.65 7.19 5.77 1.80 2.08 1.75 1.36 1.56 0.90 26.52 30.37 16.46 13.09 18.25 9.16 q3 5.89 7.33 5.81 1.93 2.03 1.76 1.10 1.47 0.76 20.79 29.52 12.49 14.86 19.36 10.16 q4 7.09 7.33 5.79 2.00 2.03 1.75 0.93 1.36 0.71 17.06 26.70 11.50 17.97 18.65 12.15 1998 q1 6.89 7.73 4.61 1.93 2.04 1.74 0.87 1.09 0.78 14.65 20.71 13.33 16.94 18.54 12.44 q2 6.31 7.72 4.58 1.80 2.02 1.73 0.91 1.04 0.81 16.47 18.71 14.36 14.12 18.55 12.50 q3 4.66 7.32 4.64 1.78 1.94 1.72 0.86 1.06 0.81 16.14 19.23 14.28 13.56 16.90 12.54 q4 5.80 6.78 4.59 1.86 1.87 1.74 1.04 1.06 0.83 18.36 19.03 15.75 15.05 15.67 11.66 1999 q1 6.25 6.43 4.46 1.76 1.94 1.72 1.00 1.06 0.83 18.16 19.01 16.19 13.95 15.45 11.31 q2 5.39 6.36 4.98 1.82 1.95 1.69 0.92 1.05 0.85 17.83 18.47 17.33 11.67 15.47 11.32 q3 5.13 6.55 4.95 1.93 1.94 1.69 0.90 1.00 0.87 17.50 18.40 17.36 12.68 15.54 11.29 q4 5.77 6.41 4.99 1.73 1.97 1.72 0.91 0.94 0.88 17.65 18.25 17.25 13.63 15.54 11.29 2000 q1 6.22 6.45 4.84 1.82 1.99 1.73 0.94 0.98 0.78 18.25 18.43 16.60 15.15 15.51 12.47 q2 5.99 6.62 5.13 1.90 1.97 1.73 0.90 0.97 0.76 17.52 18.62 15.83 13.94 16.81 12.82 q3 5.13 6.81 5.18 1.90 1.94 1.82 0.78 0.97 0.76 16.66 18.44 15.41 14.58 17.53 13.36 q4 6.27 6.72 5.14 1.91 1.93 1.84 0.81 0.93 0.76 16.06 17.69 14.94 16.76 17.82 13.53 2001 q1 6.38 6.72 4.84 1.85 1.92 1.83 0.90 0.92 0.77 16.13 16.84 14.95 16.80 17.59 14.66 q2 5.89 7.00 5.18 1.85 1.91 1.83 0.86 0.95 0.80 15.20 16.41 15.08 16.30 17.58 15.85 q3 5.21 6.98 5.17 1.87 1.88 1.84 0.86 1.01 0.81 15.43 16.56 15.04 16.18 18.41 15.61 q4 6.68 6.94 5.17 1.87 1.89 1.81 0.94 1.02 0.82 15.91 16.79 14.96 17.53 18.46 15.18 2002 q1 6.21 6.93 5.06 1.84 1.89 1.80 1.00 1.02 0.85 16.32 17.13 15.30 18.24 18.48 15.04 q2 6.27 7.39 5.41 1.81 1.89 1.80 0.95 1.01 0.89 16.53 17.11 15.86 15.85 18.75 15.33 q3 5.60 7.67 5.36 1.81 1.88 1.79 0.90 1.02 0.89 16.90 17.24 16.22 15.99 19.84 14.98 q4 7.26 7.70 5.44 1.88 1.88 1.79 0.94 1.01 0.90 16.76 17.35 16.46 17.58 19.55 14.92 2003 q1 7.24 7.72 5.24 1.83 1.89 1.79 0.99 1.01 0.90 17.13 17.79 16.52 19.39 19.58 15.66 q2 6.48 7.97 5.75 1.81 1.92 1.80 0.98 1.01 0.93 17.21 18.98 16.17 17.35 19.98 16.65 q3 5.83 7.97 5.75 1.86 1.91 1.80 0.95 1.01 0.95 17.78 19.76 16.43 17.78 20.42 17.00 q4 7.49 7.78 5.56 1.90 1.91 1.80 0.98 1.01 0.93 18.99 19.88 16.97 19.48 20.29 17.01 2004 q1 7.26 7.79 5.36 1.85 1.90 1.82 0.99 1.01 0.90 19.37 19.65 17.72 19.56 20.21 17.86 q2 6.30 8.04 5.77 1.84 1.90 1.82 0.93 1.02 0.90 18.78 19.74 18.35 19.07 19.93 18.98 q3 6.00 7.76 5.75 1.86 1.88 1.80 0.91 1.05 0.89 18.51 20.47 18.16 19.30 20.18 18.94 q4 7.48 7.49 5.62 1.85 1.88 1.78 0.97 1.03 0.88 19.57 20.49 18.17 19.86 20.20 18.95 2005 q1 6.75 7.56 5.32 1.79 1.93 1.75 1.03 1.04 0.84 20.34 20.50 18.38 20.01 20.87 19.00 q2 6.27 7.84 5.54 1.79 2.01 1.73 0.93 1.05 0.86 19.46 20.44 19.05 19.64 22.31 18.76 q3 5.72 7.56 5.62 1.93 2.04 1.74 0.87 1.08 0.86 19.32 21.25 18.87 20.86 22.79 19.08 q4 7.23 7.49 5.57 1.99 2.06 1.80 0.98 1.06 0.86 20.04 21.92 18.68 22.32 22.79 19.05 http://fx.com/ economy, 2014, 1(1): 20-31 26 dg dmb dx de* dres 2006 q1 6.99 7.53 5.36 1.94 2.06 1.90 1.03 1.06 0.86 21.14 22.63 19.01 21.84 22.82 18.99 q2 6.45 8.00 5.68 1.98 2.11 1.92 0.99 1.05 0.93 21.56 23.56 19.68 19.95 22.80 18.47 q3 5.84 7.88 5.66 2.06 2.15 1.92 0.93 1.09 0.92 22.05 25.41 19.95 19.54 21.72 18.26 q4 7.70 7.77 5.55 2.09 2.14 1.99 1.02 1.09 0.92 23.32 26.87 20.46 19.53 20.48 17.92 2007 q1 6.87 7.81 5.22 2.10 2.15 2.05 1.06 1.09 0.93 25.33 28.32 21.37 19.11 20.46 16.74 q2 6.42 8.21 5.54 2.10 2.22 2.04 1.03 1.06 0.98 26.08 29.58 22.82 17.88 19.96 16.43 q3 5.75 7.94 5.60 2.15 2.22 2.06 1.00 1.08 0.98 27.43 29.93 24.72 16.93 20.15 14.03 q4 7.63 7.97 5.62 2.22 2.22 2.08 1.00 1.05 0.98 28.84 29.71 25.94 17.51 19.03 13.34 2008 q1 7.20 8.01 5.42 2.13 2.23 2.11 1.05 1.08 0.92 28.94 29.50 26.37 14.02 18.09 13.23 q2 6.97 7.87 5.84 2.16 2.31 1.96 1.01 1.09 0.92 27.82 29.98 25.05 14.58 17.55 12.28 q3 6.02 7.38 5.84 2.21 2.28 1.87 0.92 1.17 0.90 26.65 29.43 24.05 15.26 15.66 12.18 q4 6.46 6.99 5.82 1.95 2.26 1.81 1.04 1.24 0.88 25.34 27.94 24.11 13.21 15.73 11.33 2009 q1 6.39 6.81 5.34 1.93 2.19 1.81 1.15 1.25 0.90 24.95 26.85 24.57 12.54 15.28 10.51 q2 6.18 7.01 5.37 1.92 2.02 1.90 1.20 1.21 1.00 25.37 27.67 24.16 12.04 13.32 11.15 q3 5.33 7.18 5.34 1.98 2.08 1.89 1.06 1.22 1.04 26.24 29.35 23.94 11.42 12.90 11.33 q4 6.60 7.22 5.35 2.01 2.08 1.91 1.08 1.20 1.03 27.67 30.03 24.84 11.97 12.67 11.26 2010 q1 6.79 7.21 5.20 2.07 2.07 1.95 1.15 1.15 1.04 28.99 30.51 26.10 12.62 12.84 10.56 q2 6.52 7.19 5.82 1.98 2.07 1.95 1.10 1.15 1.06 28.91 32.01 26.90 11.78 12.91 10.20 q3 5.78 7.35 5.81 2.01 2.07 1.92 1.08 1.15 1.05 29.71 33.11 27.70 10.71 12.70 10.03 q4 6.82 7.30 5.80 1.98 2.02 1.92 1.11 1.12 1.05 31.96 33.61 28.44 10.70 11.79 10.03 2011 q1 6.98 7.34 5.43 1.95 2.02 1.91 1.08 1.14 0.97 32.44 33.61 29.88 11.03 11.12 10.31 q2 6.64 7.29 5.67 1.93 2.12 1.65 1.05 1.13 0.97 32.11 33.42 30.21 10.34 11.32 9.74 q3 5.73 7.24 5.67 1.94 2.09 1.64 0.97 1.14 0.97 32.49 33.53 30.24 10.80 11.73 9.63 q4 6.22 7.01 5.72 1.63 2.06 1.64 1.06 1.14 0.97 30.08 33.40 30.23 9.78 12.20 9.50 2012 q1 6.71 6.99 5.24 1.88 2.03 1.64 1.11 1.14 0.96 32.31 33.36 30.21 11.47 12.30 9.74 q2 6.52 7.21 5.43 1.86 2.00 1.64 1.09 1.15 1.01 32.09 34.13 29.94 11.85 12.82 9.79 q3 5.40 7.47 5.47 1.86 1.88 1.85 1.02 1.18 1.02 31.96 35.11 30.91 11.22 12.85 10.94 q4 6.75 7.36 5.41 1.88 1.88 1.86 1.12 1.21 1.01 33.73 35.69 31.23 12.23 13.31 11.07 2013 q1 6.97 7.39 4.85 1.87 1.88 1.86 1.15 1.21 1.00 34.96 35.61 31.52 12.70 13.46 11.25 q2 6.29 7.54 5.26 1.87 1.90 1.81 1.18 1.20 1.04 34.55 35.38 32.14 12.96 13.65 12.02 q3r 5.21 1.86 1.05 32.61 12.67 q4 6.78 1.81 1.10 32.95 13.61 *for the dgdp/de results, gdp was measured in units of 5 billion baht. this was done so that figure 5 would be easier to understand. as shown in table 2, dgdp/dmb was 2.03 in the fourth quarter of 1996, immediately prior to george soros’ speculative attack against the thai baht in the first half of 1997. this value means that for every one million increase in the monetary base for thailand, gdp increased by 2.03 million. this multiplier had fallen to 1.78 by the third quarter of 1998 for a 12.3 percent decline. the bottom line in figure 2 shows that the monetary base remained unusually constant between the third quarters of 1997 and 1999. this was due to the imf conditions imposed on thailand when thailand accepted an imf bailout in august 1997. by 2000, the monetary base began to steadily increase. the upper lines in figure 2 show that the dgdp/dmb multiplier was unusually stable during most of the thaksin administration (2001-2006), rose noticeably in the last year of thaksin’s administration (between the third quarters of 2005 and 2006), continued to rise after the coup that displaced thaksin and during the pro-thaksin samak/somchai regime. between the second quarter of 2005 and the third quarter of 2008, dgdp/dmb rose by 23.5 percent. under the democrats (first quarter of 2009 – second quarter of 2011), dgdp/dmb fell and became more unstable. the economic policies of the thaksin regime were more pro-equality than that of the democrats. a shift away from pro-equality policies will decrease the marginal propensity to consume (mpc) which should decrease all government multipliers. soon after thaksin’s sister, yingluck, was elected in july 2011, dgdp/dmb fell for one quarter, but then stabilized. figure-2. dgdp/dmb economy, 2014, 1(1): 20-31 27 leightner (2015) found that, for the usa and japan (between1980 and 2012), increases in the money supply were associated with declines in the money multiplier and that decreases in the money supply were associated with increases in the money multiplier. however, the thai results do not produce a similar pattern. indeed a comparison of the upper and bottom lines in figure 2 implies that the variations found in dgdp/dmb were not due to noticeable changes in the growth of the monetary base; instead these variations must be due to other factors like monetary policy interacting with other government policies or due to expectations. figure 3 and tables 1 and 2 show that both government consumption and the government consumption multiplier, dgdp/dg, exhibited an annual pattern where government consumption increased in the third quarter and dgdp/dg fell in the third quarter. this implies that cuts in government consumption (in the fourth quarter) have a stronger negative effect on gdp that increases in government consumption (in the third quarter) have a positive effect. leightner (2015) found a similar pattern for austria, brazil, cyprus, estonia, greece, luxembourg, portugal, and slovakia in recent years. for example, in thailand when government consumption increased by 74.2 billion baht in the third quarter of 2012 (442.4 – 368.2), dgdp/dg was 5.40, implying that gdp rose by 400.68 billion baht (74.2 x 5.40). however, when government consumption was cut in the fourth quarter of 2012 by 64.4 billion baht (378.0 – 442.4), dgdp/dg was 6.75 implying a decline in gdp of 434.7 billion baht (6.75 x 64.4). since 6.75 is twenty five percent bigger than 5.40, the fourth quarter decline in government consumption caused gdp to fall by 25 percent more than an equal increase in government consumption would cause gdp to rise. government consumption would be a much more effective tool if government consumption was smoothed throughout out the year instead of spiking in the third quarter and then being cut in the fourth quarter to reduce the deficit. figure-3. dgdp/dg if we eliminate this annual pattern by taking the annual average value for dgdp/dg, we find that annual dgdp/dg steadily grew from 4.81 in 1993 to 6.49 in 1997 for a 35 percent increase. however, after the baht collapsed on july 2, 1997 and thailand took out the imf loan in august 1997, annual dgdp/dg fell to 5.91 in 1998 and continued to decline to 5.63 in 1999 for a 13.3 percent decline. during the first half year of the thaksin regime (quarters 1 and 2 of 2001) there was a pending constitutional court case against thaksin for corruption, and this pending court case constrained what the thaksin administration could do. the annual dgdp/dg for 2001 was 6.04. between 2002 and 2008 (the remaining thaksin years, the year of the coup, and the pro-thaksin samak/somchai regime), annual dgdp/dg ranged between 6.33 and 6.77. however, annual dgdp/dg fell to 6.13 in 2009, the first year under the next democrat regime. the democrats in 2010 started to implement more pro-equality programs than they previously had and annual dgdp/dg rebounded to 6.48. again keynesian theory would predict a higher multiplier under pro-equality regimes (ceteris paribus) because increasing equality increases the marginal propensity to consume. under yingluck, thaksin’s sister, annual dgdp/dg slightly declined from 6.39 to 6.31. table 2 and figure 4 show the dgdp/dx results. notice that dgdp/dx for thailand is always much lower than dgdp/dg. furthermore, dgdp/dx for thailand was often less than one meaning that a one million baht increase in exports increased gdp by less than one million baht. from the perspective of a simple keynesian model, the thai results are surprising. since gdp = c + i + g + x – m (where c = private consumption, i = investment, g = government consumption, x = exports, and m = imports), one would expect dgdp/dx to equal dgdp/dg (because both g and x are added into gdp in the same way). there are several reasons why dgdp/dx would be less than dgdp/dg in a more complex keynesian model. government consumption is often done for the benefit of the country in contrast to exports which are done for the economy, 2014, 1(1): 20-31 28 benefit of private citizens and companies. thus government consumption is more likely to be pro-equality while exporting is often correlated with increased inequality. greater equality causes the marginal propensity to consume to raise causing government policy multipliers to increase. many asian countries, especially prior to 2008, embraced an export driven growth strategy which explicitly entailed greater inequality. for example china (prior to 2008) embraced an export driven growth model that employed a suppressed exchange rate, which leightner (2015) shows hurts consumers and helps producers, and the suppression of wages which further hurts consumers. please understand that we are not anti-trade. there are real gains from trade. however, many countries have tried to increase those gains by employing market distortions, like suppressed wage rates and exchange rates, and these distortions are no longer able to drive sustainable growth in today’s world. the remainder of section iii will explore the issues dealing with trade in more depth. figure-4. dgdp/dx figure-5. dgdp/de figure 5 shows the dgdp/de results where “e” is the baht/us dollar exchange rate and gdp is in units of five billion baht. the dgdp/de value of 23.26 in the first quarter of 1993 means that for every one baht increase in the baht per us dollar exchange rate, thailand’s gdp increased by 116.3 billion baht (5 billion x 23.26). notice that an increase in “e” is a depreciation of the baht and a decrease in “e” is an appreciation of the baht. thailand’s dgdp/de steadily increased from 116.3 billion baht in the first quarter of 1993 to 132.6 billion baht in the second quarter of 1997. the top line in figure 5 shows that when the thai baht was floated on july 2, 1997, the exchange rate (baht/dollar) immediately rose to 32.62 baht/dollar and kept rising until it hit 46.68 baht/dollar in the first quarter of 1998 (if we were to examine daily values of the baht, instead of quarterly values, the baht hit a high of 55.5 baht/dollar). this depreciation of the baht (dollars/baht falling or baht/dollar rising) is correlated with dgdp/de economy, 2014, 1(1): 20-31 29 falling from 132.6 billion baht in the second quarter of 1997 to 73.25 billion baht in the first quarter of 1998 for a 44.8 percent decline. this means that the immediate boost to gdp in 1997-1998 from the depreciation of the baht was 44.8 percent less than what the thais expected based on data immediately prior to the fall. figure 5 also shows that dgdp/de steadily rose during the thaksin years (2001-2006) and accelerated its increase in the year of the coup (2007) and during the pro-thaksin samak/somchai regime. however, when the democrats took over in 2008, dgdp/de initially fell but rebounded in 2009. during the yingluck years (2011-2013), dgdp/de was the highest it had been since 1993, but was also slightly more volatile. notice that when the baht/dollar exchange rate increases, dgdp/de falls, and that when the baht/dollar exchange rate decreases, dgdp/de rises. this means that the positive effects from the baht/dollar exchange rate rising are weaker than the negative effects of the baht/dollar exchange rate falling. for example when the exchange rate went from 31.04 baht/dollar in the first quarter of 2008 to 35.33 baht/dollar in the first quarter of 2009, dgdp/de went from 144.7 billion baht to 124.75 billion baht for a 20 percent decline. in contrast, when the exchange rate went from 35.33 baht/dollar in the first quarter of 2009 to 29.99 baht/dollar in the fourth quarter of 2010, dgdp/de rose from 124.75 to 159.8 billion baht for a 28 percent increase. therefore appreciations of the baht (baht/dollar falling) hurt the thai economy more than equal depreciations of the baht help. this asymmetric affect could be because negative news has a stronger effect on expectations than positive news has. many countries that embrace export driven growth models suppress their exchange rates below market clearing levels by printing more of their currencies and then exchanging their currencies for us dollars, us treasury bills, or other foreign currencies. when a country accumulates us dollars (for example) in order to drive down their exchange rate, they must forever hold those dollars, because if they ever use those dollars, then the value of the dollar would fall causing the value of their own currencies to rise, ceteris paribus. other countries wanting to accumulate us dollars, which they never use, has been a wonderful deal for the us – the us gets imports in exchange for printed dollar bills that never get used. it is like the world giving the us loan after loan and never asking to be repaid. [however, leightner (2015) discusses how china (who now holds almost 4 trillion dollars of foreign reserves as of april 2014) now has significant leverage against the usa because china can threaten to dump those reserves, of which more than ½ are us dollars.] this “accumulating us dollars to suppress the exchange rate and increase exports” deal “might” be worth it for the accumulating countries if dgdp/d(foreign reserves) exceeds the cost of the foreign reserves. we emphasize the word “might” because a complete analysis would need to analyze the opportunity costs involved. however, it is safe to say that if the resulting increase in gdp does not exceed the cost of the reserves, then accumulating the foreign reserves were not worth it as a growth strategy (however, it might be worth it as a strategy to reduce the risk of speculative attacks). table 2 and figure 6 depict the dgdp/d(reserves) results for thailand where gdp is measured in millions of baht and foreign reserves are measured in millions of us dollars at the end of the quarter. since dgdp/d(reserves), as shown in figure 6, never exceeds the baht/dollar exchange rate, as shown in figure 5, thailand’s accumulation of foreign reserves were not worth it as a growth strategy. in other words, for every dollar of reserves that thailand accumulated, thailand’s gdp increased by much less than a dollar. thailand gave the us a dollar worth of imports for printed paper (that it is illogical for thailand to ever cash in under an export driven growth model) but thailand got less than a dollar’s increase in gdp. figure-6. dgdp/d (foreign reserves) figure 6 shows thailand’s official holdings of foreign reserves (in units of 10 billion dollars); however, these official holdings of foreign reserves do not depict the true drop in foreign reserves that occurred in 1997. at the beginning of 1997 thailand had 38.7 billion dollars of foreign reserves. when george soros launched a speculative economy, 2014, 1(1): 20-31 30 attack against the thai baht in the first half of 1997, the thai government defended its fixed exchange rate by buying up surplus baht on the market. however, the thai government did not want the world to know how much of its foreign reserves it was using (because that knowledge would have caused more foreigners to sell their baht) thus, the thai government hid its defense of the thai baht by using forward contracts, the effects of which do not immediately show up in the official foreign reserves accounts. actually, in the first half of 1997, thailand spent approximately 35 billion dollars of foreign reserves (if the forward contracts are included) defending the baht (recall that in january 1997, thailand only had 38.7 billion dollars of foreign reserves). figure 6 shows that during the thaksin regime (2001-2006) thailand’s holdings of foreign reserves steadily increased at a relatively slow rate resulting in thailand’s foreign reserves of 32.3 billion dollars in the first quarter of 2001 increasing to only 58.1 billion dollars by the second quarter of 2006 for an 80 percent increase in six years. in contrast, in the six years between the coup that displaced thaksin (3 rd quarter of 2006) and when his sister, yingluck became prime minister (3 rd quarter of 2011), thai holdings of foreign reserves increased from 58.1 billion dollars to 184.9 billion dollars for a 218 percent increase. furthermore, during the thaksin six years, dgdp/d(reserves) rose from 16.8 to 19.95 for an 18.8 percent increase. in contrast, during the six years after the thaksin regime, dgdp/d(reserves) fell from 19.95 to 10.34 for a 48.2 percent decline. figure 6 also shows that when yingluck, thaksin’s sister, took over the thai government she stopped accumulating foreign reserves and dgdp/d(reserves) began to rebound. as leightner (2015) shows, accumulating foreign reserves to suppress an exchange rate in order to increase exports also increases the degree of inequality which reduces all government multipliers. thus, thaksin and yingluck not accumulating massive amounts of foreign reserves during their regimes was consistent with their pro-equality agendas. according to the keynesian model, government multipliers are higher when the marginal propensity to consume (mpc) is higher and the mpc increases under government policies that increase equality. 4. conclusion for a country to grow, there must be production increasing investment. investment requires two things – savings to fund the investment and the reasonable belief that what investment produces will sell (leightner, 2015). many of our growth models emphasize the role of savings to fund investment while ignoring the role of consumption in providing a reason to invest. leightner (2015) shows the world is currently suffering from a surplus of saving, which is currently either (1) sitting idle, (2) seeking a return from deception or rent, or (3) funding speculative bubbles and these three things are happening because there is insufficient consumption to justify investing that saving in the expansion of production. thailand suffered from a speculative bubble between 1993 and 1996, this bubble gave george soros the evidence he needed to successfully conduct a speculative attack against the thai baht. the collapse of the thai baht was devastating to the thai economy. the political rise of thaksin shinawatra was a direct consequence of the collapse of the thai baht and of the conditionality imposed by the subsequent imf bailout loan. the thaksin regime used a pro-equality strategy which is what is needed in a world suffering from a surplus of savings. the empirical results of this paper show that thaksin’s pro-equality economic policies were appropriate and good for the country. unfortunately, thaksin was corrupt, power hungry, condoned the killing of drug dealers and muslims, and undercut the institutions needed for democracy. the results of this paper are consistent with what leightner (2015) found for the 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use of the content. http://www.mdpi.com/2227-7099/1/3/49 http://www.mdpi.com/2227-7099/1/3/49 http://www.hindawi.com/journals/ads/2012/728980/ http://www.springerlink.com/content/p518x94h58261u59/abstract/?target=print economy issn(e) : 2313-8181 issn(p) : 2518-0118 vol. 3, no. 2, 74-78, 2016 www.asianonlinejournals.com/index.php/economy 74 the effects of inflation and its risk on interest rate: an empirical evidence from nigeria amaefula c. g1 1 department of mathematical, computer and physical science, faculty of science, federal university otuoke, yenagoa, bayelsa state, nigeria abstract the paper examines the effects of inflation and its risk on interest rate in nigeria. the data sets cover the period of 1995:m1 to 2014:m12. arch (1) and garch (1, 1) were used to measure inflation risk and the result indicates that garch(1, 1) measures inflation risk better than arch(1) model based on schwarz information criterion (sic), and adopting multiple regression method, the result reveals that inflation and inflation risk exact negative and positive impacts on interest rate respectively, but none is significant. this result implies that the direction of this interest rate by monetary policy rate (mpr) is not proactive enough to curb the rising inflationary pressure in nigeria. hence, there is a need for more proactive monetary policy rate that can cut back the rising inflationary pressure. keywords: arch (1), garch (1, 1), multiple regression, sic, inflation and interest rate. contents 1. introduction ......................................................................................................................................................................... 75 2. literature review ................................................................................................................................................................ 75 3. materials and method ......................................................................................................................................................... 75 4. data analysis and results ................................................................................................................................................... 76 5. conclusion and policy implications .................................................................................................................................... 77 references ................................................................................................................................................................................ 78 citation | amaefula c. g. (2016). the effects of inflation and its risk on interest rate: an empirical evidence from nigeria. economy, 3(2): 74-78. doi: 10.20448/journal.502/2016.3.2/502.2.74.78 issn(e) : 2313-8181 issn(p) : 2518-0118 licensed: this work is licensed under a creative commons attribution 3.0 license funding: this study received no specific financial support. competing interests: the author declares that there are no conflicts of interests regarding the publication of this paper. transparency: the author confirms that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: history: this study follows all ethical practices during writing. received: 12 september 2015/ revised: 29 december 2015/ accepted: 22 february 2016/ published: 27 june 2016 publisher: asian online journal publishing group http://creativecommons.org/licenses/by/3.0/ http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.2/502.2.74.78 https://orcid.org/orcid-search/quick-search?searchquery=amaefula c. g http://search.crossref.org/?q=10.20448/journal.502/2016.3.2/502.2.74.78 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.2/502.2.74.78 https://orcid.org/orcid-search/quick-search?searchquery=amaefula c. g http://search.crossref.org/?q=10.20448/journal.502/2016.3.2/502.2.74.78 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.2/502.2.74.78 https://orcid.org/orcid-search/quick-search?searchquery=amaefula c. g http://search.crossref.org/?q=10.20448/journal.502/2016.3.2/502.2.74.78 economy, 2016, 3(2):74-78 75 1. introduction inflation is considered to be one of the key economic targets and keeping inflation evenly low means a stable economic environment for investment, and therefore, creates the benign atmosphere for the best possible level of economic growth for a long period of time. prior to 1986 in nigeria, there was administrative fixing of interest rates, which failed to achieve the desired policy objective of promoting among other things, investment and growth in the real sector as a result of rising inflationary pressure necessitated by real low interest rates, thus discouraging savings and as such, the financial sector remained grossly underdeveloped. but with the deregulation of the financial sector in 1986 and the introduction of market determined interest rate and implementation of full deregulation of interest rate in 1996, banks were allowed to set their deposit and lending rates according to market condition. the monetary policy rate (mpr) was the principal instrument used to control the direction of interest rates and anchor inflation expectations in the economy. most measures of inflation moderated throughout the period in response to the policy measures implemented by the bank. year-on-year headline inflation decreased to 8.0 per cent in december 2013, from 8.4 per cent in june 2013 and 12.0 per cent in december 2012. food inflation also declined marginally to 9.3 per cent from 9.6 per cent over the same period. however, core inflation rose from 5.5 per cent to 7.9 per cent between june and december 2013 continued to contribute significantly to the robust performance of the economy after the shock of the global financial crisis in 2008 (on the one hand and the domestic banking crisis of 2009 on the other). in spite of these developments, output remained relatively high while inflation decelerated in 2013 (central bank of nigeria, 2014). in the recent years, interest rate has been raised to curtail the growing rate of inflation. the effect of inflation risk on interest rate has not been given much attention resulting to scanty literature on the subject matter. however, this paper differs from previous papers in the following dimensions; firstly, it investigates whether direct relationship exist between interest rate relative to inflation and inflation risk in nigeria as found in other countries. secondly, it measures inflation risk via the framework of autoregressive conditional heteroscedasticity models and selects the subclass of arch models that best describe inflation uncertainty. the rest of the paper is organized as follows; section 2 deals with the literature review, section 3 presents the materials and method, section 4 presents the data analysis and results and section 5 deals with the conclusion and policy implications. 2. literature review earlier studies have shown that inflation uncertainty have positive relationship with interest rate. many researchers like fama and schwert (1977); mishkin (1981); fama and gibbons (1982) and chan (1994) have provided empirical evidence for the positive relationship between expected inflation variation and the t-bill rates under different specifications such as asset pricing models. gul and ekinci (2006) investigated the interaction between nominal interest rates and inflation for turkey over the period of 1984-2003. their result supports the idea that there is a long-run relationship between interest rates and inflation for turkish markets. they also find that causality exists in only one direction from nominal interest rates to inflation. kugler (1982) investigated the dynamic relationship between short term interest rates and inflation for the us, the uk, france, germany, and switzerland for the period 1974-1980. the result strongly suggests the variation of the nominal interest rate and inflation help to predict the ex ante real interest rate. umoru and oseme (2013) examined the relationship between inflationary expectations and the variations in interest rate in nigeria using the generalized method of moment (gmm) estimator and their result indicated that the effect of interest rate variation on expected inflation in nigeria is negative and significant. berument (1999) studied the effect of inflation and uncertainty on interest rates in the uk with quarterly data from 1958:4 to 1994:4 and the result showed that both expected inflation and conditional variability of inflation positively affect the uk three-month treasurybill rate. herwartz and reimers (2006) employed a vec model to examine the relationship between inflation and interest rates for 114 economies over a 45 year period using monthly data. interest rates and inflation are found to exhibit a long-run equilibrium relationship for numerous economic states. however, in states with large positive changes of inflation, high inflation risk or high interest rates, a long-run equilibrium relationship may not exist. 3. materials and method this section provides information on source of data collection, variable measurement and definition, model specification and method of unit root test. 3.1. source of data collection the data sets on monthly consumer price index (cpi) and deposit rate were obtained from published central bank of nigeria (cbn) statistical bulletin of 2013 and march 2015. the data sets cover the period of 1995:m1 to 2014:m12. 3.2. variable measurement and definition one of the most commonly used surrogate to inflation is the cpi hence, this paper used cpi to measure inflation and monthly deposit rate (dr) is used to measure interest rate. and the variables are defined using first difference of natural logarithm of present and previous values of each variable multiplied by 100 and are presented as follows; inflation rate is defined as 100log 1        t t t cpi cpi ifr , interest rate is defined as 100log 1        t t t dr dr itr . moreover, since inflation risk is not directly observable, the better describing conditional heteroscedasticity model economy, 2016, 3(2):74-78 76 between autoregressive conditional heteroscedasticity (arch (1)) model and generalized arch (1, 1) model were adopted to measure inflation risk. in other words, inflation risk is measured using inflation volatility (conditional variance). according to engle (1982) given the mean equation of inflation as tt  inf the arch(1) is of the form; 2 1 2   tt  (1) were the nonnegativeness and stationarity of 2 t are guaranteed for ω > 0, 0 for and .1 hence, 2 t becomes a function of the previous squared shock, large shocks of either sign tend to be preceded by large shock and vice versa. though the arch (1) model can capture the stylized facts of volatility clustering and excess kurtosis, its short coming is that, it is unlikely that the model accommodates for the features related to the autocorrelation function of squared disturbances 2 t . and according bollerslev (1986) garch(1, 1) is of the form; 2 1 2 1 2   ttt  (2) where ),,0( 2 vt t   , the tail parameter v > 2 and t-distribution approaches normal distribution if v . according to the property of garch model, 1)( and 1 ,0   show that the model is covariance stationary. again, a large 2 1-t 2 1 or  t gives rise to a large 2 t . this means that a large 2 1t tends to be followed by another large 2 t , generating again, the well-known behavior of volatility clustering in financial time series. 3.3. ers unit root test elliot rothenberg, and stock point optimal (elliott et al., 1996) test is a unit root test that is based on the quasidifferencing regression       ttt aaxdayd     // (3) where,           1 t if y 1 t if )/( 1t t t t ay y ayd (4) and tx contains either a constant, or a constant and trend, )(a is the ols estimates from this regression and t is the residual. let  )(ˆ)( 2 aassr t be the sum squared residuals function. the ers fea i e point opti a te t tati ti of the nu that again t the a ternative that , i then defined a 0/))1()(( fssraassrpt  (5) where,          t t a ,1 xif 7/5.131 1 xif /71 t t (6) and 0f is an estimator of the residual spectrum at frequency zero. the estimator 0f can be estimated using autoregressive spectral density estimator at frequency zero based upon the residual variance and estimated coefficients from the auxiliary regression. tptptttt uyyxyy    111 '. (7) the ar spectral estimator of the frequency zero spectrums is defined as )ˆˆˆ1/(ˆ 21 2 0 puf   (8) and  tutu /ˆ 22 is the residual variance and ̂ ’ are e ti ate fro the auxi iary regre ion. 3.4. model specification the model specification for the effects of inflation and its risk on interest rate is based on multiple regression and it is given as follows ttifrtt eifritr  2 .210  (9) where )2,1,0( i i  are parameter coefficients, 2 .tifr  is the conditional variance of inflation (inflation risk) and t e is the disturbance term and ),0(~ 2ne t . 4. data analysis and results this section presents the unit root test as shown in table 1 below. table 2 presents the analysis of conditional variance of inflation as a measure of inflation risk via arch(1) and garch(1, 1) models and selects the appropriate model that describes inflation risk using sic and table 3 gives the estimates of the effects of inflation and inflation risk on interest rate as specified in equation (7). economy, 2016, 3(2):74-78 77 table-1. ers unit root test analysis variable test deterministic terms lags test value critical values remarks 1% 5% t ifr ers c 0 0.935938 1.925600 3.187550 i(0) c, t 0 1.297306 4.032450 5.652200 i(0) t itr ers c 1 0.281204 1.925600 3.187550 i(0) c, t 1 1.039423 4.032450 5.652200 i(0) source: computed by the author table 1 shows the result of ers unit root test of inflation and interest rate. the lag orders used were suggested by schwarz information criterion. the result indicates that inflation and interest rate are both integrated order zero, that is i(0), which shows that both variables are stationary. table-2. estimates of inflation volatility (risk) and diagnostic test using arch(1) and garch(1, 1) statistics coefficient z-statistic prob. remarks arch(1) conditional variance equation c 0.000167 9.805471 0.0000 significant at 1% 2 1t  0.409637 3.119283 0.0018 significant at 1% diagnostic test arch(lm 15lag) 0.280289 0.9966 no arch in the squared residuals up to 15th lag ljung-box q-statistics 4.6614 0.995 no serial correlation in the squared residuals up to 15th lag sic -5.306162 garch(1, 1) conditional variance equation c 1.27e-08 0.044802 0.9643 2 1t  0.226103 5.137666 0.0000 significant at 1% 2 1t  0.780375 29.56277 0.0000 significant at 1% arch(lm 15lag) 0.211851 0.9993 no arch in the squared residuals up to 15th lag ljung-box q-statistics 3.5950 0.999 no serial correlation in the squared residuals up to 15th lag sic -5.534332 source: computed by the author the comparison of the conditional variance of inflation as estimated using arch(1) and garch(1, 1) indicate that there is neither arch nor serial correlation in the squared residuals up to lag 15. however, comparing the two models using sic precludes that the garch(1,1) measure of inflation risk is preferable. 4.1. results and discussion the result of model specification of equation (9) is presented below. the values in brackets are the p-values. estimation is via ols 0016.0r , 2.059763 stat watson -durbin (0.8182) (0.5539) (0.9114) value-p [0.2301] [-0.5928] [-0.1114] 2 . 5905.21718.00008.0 2    statistict t e tifrt ifr t itr  the estimated regression model above shows that inflation has an insignificant negative effect on interest rate. this result differs from the findings of berument (1999); fama and schwert (1977); mishkin (1981); fama and gibbons (1982) and chan (1994) who find positive relation between inflation and interest rate. and inflation risk (measured using conditional variance of inflation) has positive influence on interest rate, but is not significant. this finding agrees with that of berument (1999) in the uk, though the effect of inflation risk in nigeria is not statistically significant. the durbin-watson statistic is approximately 2 suggesting absence of serial correlation in the model. the r² value of 0.0016 is very low; indicating about 0.2% variation in interest rate is explained by inflation and inflation risk. this result shows that other macroeconomic factors rather than inflation and inflation risk explained about 99.8% variation in interest rate. 5. conclusion and policy implications this paper examines the effects of inflation and inflation risk on interest rate in nigeria. the result reveals that inflation and inflation risk exact negative and positive impacts on interest rate respectively, but none is significant. the negative effect of inflation rate on interest rate is an indication of indirect relationship between the two variables. inflation risk although not significant, has a direct relation with interest rate. the insignificant effects of inflation and inflation risk on interest rate and a very low r² value imply that interest rate variation is influence by other macroeconomic factors rather than changes in inflation and inflation risk. however, the result also implies that building a measure to curb inflationary pressure based on monthly deposit rate economy, 2016, 3(2):74-78 78 may not be realistic. hence, a more practical direction of interest rate that can cut back the rising inflation by our mpr becomes a necessity. the findings of this paper also provide a lead way for further investigation on which measure of interest rate has strong relationship with inflation in nigeria. this is essential for the purpose of practical monetary policy that can control inflationary pleasure. references berument, h., 1999. the impact inflation uncertainty on interest rates in the uk. scottish journal of political economy, 46(2): 207218. bollerslev, t., 1986. generalized autoregressive conditonal heteroscedasticity. journal of econometrics, 31(3): 307-327. central bank of nigeria, 2014. monetary policy review. available from www.cbn.gov.ng. chan, l.k.c., 1994. consumption, inflation risk, and real interest rate: an empirical analysis. journal of business, 67(1): 69-96. elliott, g., t.j. rothenberg and j.h. stock, 1996. efficient test for an autoregressive unit root. econometrica, 64(4): 813-836. engle, r.f., 1982. autoregressive conditional heteroscedasticity with estimates of the variance of united kingdom inflation. econometrica, 50(1): 987-1007. fama, e. and m. gibbons, 1982. inflation, real returns and capital investment. journal of monetary economics, 9(3): 297-323. fama, e. and g. schwert, 1977. asset returns and inflation. journal of financial economics, 5(2): 115–146. gul, e. and a. ekinci, 2006. the causal relationship between nominal interest rate and inflation: the case of turkey. scientific journal of administrative development, 4(21): 54-69. herwartz, h. and h. reimers, 2006. modelling the fisher hypothesis: world wide evidence. german economic review, 7(1): 65-86. kugler, p., 1982. the dynamic relationship between interest rates and inflation: an empirical investigation. empirical economics, 7(1): 25– 137. mishkin, f.s., 1981. the real interest rate. an empirical investigation. carnegie-rochester conference series on public policy, 15(1): 151-200. umoru, d. and s.a. oseme, 2013. inflation expectations and interest rate variation in nigeria: an econometric assessment of the evidence. international journal of development and economic sustainability, 1(2): 1-12. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. http://www.cbn.gov.ng/ economy issn(e) : 2313-8181 issn(p) : 2518-0118 vol. 3, no. 2, 79-93, 2016 www.asianonlinejournals.com/index.php/economy 79 an analysis of the economic performance between nations that made up the 2004 enlargement of the eu alan bayham1 1uofp phoenix, arizona usa abstract the 2004 enlargement of the european union was the largest single acceptance of members to the organization at a single time in its history. many eu members were opposed to the enlargement because many of the nations that were being considered for acceptance were thought to have inferior economies to the other eu members, and 8 of the 10 were former communistic states. the hypothesis of this study was that acceptance to the eu was not beneficial for the member nations of the 2004 enlargement in relation to their annual gdp mean performance, which was found to be true. this article discusses the impact of the global financial crisis of 2008, and its impact on all eu members. it also discusses problems surrounding euro adoption of nations within the eurozone and the flawed design of the eu, specifically the ecb and the emu. keywords: gdp, eu, europe, economics, emu, financial, euro. contents 1. introduction ......................................................................................................................................................................... 80 2. purpose, rationale, and hypothesis .................................................................................................................................... 83 3. methods ................................................................................................................................................................................ 83 4. results .................................................................................................................................................................................. 83 5. discussion ............................................................................................................................................................................. 87 6. conclusion ............................................................................................................................................................................ 91 references ................................................................................................................................................................................ 93 citation | alan bayham (2016). an analysis of the economic performance between nations that made up the 2004 enlargement of the eu. economy, 3(2): 79-83. doi: 10.20448/journal.502/2016.3.2/502.2.79.93 issn(e) : 2313-8181 issn(p) : 2518-0118 licensed: this work is licensed under a creative commons attribution 3.0 license funding: this study received no specific financial support. competing interests: the author declares that there are no conflicts of interests regarding the publication of this paper. transparency: the author confirms that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: history: this study follows all ethical practices during writing. received: 25 june 2016/ revised: 4 july 2016/ accepted: 11 july 2016/ published: 15 july 2016 publisher: asian online journal publishing group http://creativecommons.org/licenses/by/3.0/ http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.2/502.2.79.93 https://orcid.org/orcid-search/quick-search?searchquery=alan bayham http://search.crossref.org/?q=10.20448/journal.502/2016.3.2/502.2.79.93 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.2/502.2.79.93 https://orcid.org/orcid-search/quick-search?searchquery=alan bayham http://search.crossref.org/?q=10.20448/journal.502/2016.3.2/502.2.79.93 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.2/502.2.79.93 https://orcid.org/orcid-search/quick-search?searchquery=alan bayham http://search.crossref.org/?q=10.20448/journal.502/2016.3.2/502.2.79.93 economy, 2016, 3(2): 79-93 80 1. introduction 1.1. gross domestic product the gross domestic product of a nation is used by economists as one of the primary economic indicators to measure the strength and health of countries economies (investopedia, 2016). the gdp represents the total monetary value of all goods and services produced by a nation over a period of time, and it should be thought of as a representation of the size of a country's economy. economists arrive at the figure of a country's gsp in one of two ways: by adding up the annual income of a nation or by adding up the money spent within a nation. the income approach is calculated by adding up employees' salaries, gross profits of companies within a nation, and taxes minus subsidies. the expenditure method, which is considered to be more common, is calculated by adding a nation's total consumption, investments, government spending, and net exports. a country's gdp figures, which show a nation's economic production and growth, impacts everyone within an economy because it reflects a country's economic health. significant changes in a nation's gdp has a large impact on its unemployment rate, wage increases, and stock markets. thus, poor gdp figures result in weakened economic growth for a nation, which results in fewer jobs, fewer profits, and lower stock prices. negative gdp growth is what investors use to determine the strength of a nation's economy and whether or not it has entered an economic recession. 1.2. the european union following world war ii, the european union formed out of an ideology that a single european government would end centuries of warfare on the continent among the nations. the eu began as the european coal and steel community in 1950 with six members: belgium, france, germany, italy, luxembourg, and the netherlands (investopedia, 2016). it soon evolved into the european economic community in 1957 following the treaty of rome, and its main focus in its early years was establishing a common agricultural policy and eliminating customs barriers. in 1973, the eec, now known as the european community, expanded, and denmark, ireland, the united kingdom, greece, and spain joined. six years later, in 1979, the first directly elected european parliament took office, which began to extend its powers over community members. this was legally established in 1986 when the single european act reinforced the powers over the community members by extending them and establishing the principles for foreign policy cooperation within ec. in 1993, the maastricht treaty took effect and the ec became the european union, which provided a single currency for the member nations and was initially intended to be a single currency for the eu. the euro, however, was not adopted by the united kingdom or denmark, and many newer eu members have failed to adopt the currency as well. in 1993, the european single market was also established by 12 european nations, which ensured the freedom of movement of goods, services, people, and money within these nations. the eu is presently a group of 28 nations that functions as an economic and political partnership, and their official currency, the euro, has been adopted by 19 of the 28 members. following the global economic crisis of 2008, the eu and the european central bank have bailed out greece, spain, portugal, cyprus, and ireland because of high sovereign debt (investopedia, 2016). as a result, the nations have adopted fiscal austerity as means to decrease their future debt, and the entire eu is suffering from increased lending to the aforementioned nations. unfortunately, some of the nations required second bail outs, and the multiple rounds of interest rate cuts and other stimulus measures have failed to remedy the economic situation. nations within the eu resent the financial drain by members who are not as economically prosperous, specifically germany, the united kingdom, and the netherlands. there is, however, a debate regarding the legality of removing member nations because it was not covered in the maastricht treaty when the eu was formed in 1993. 1.3. 2004 eu expansion following the end of the cold war, many countries in central and eastern europe applied for eu membership, but they were not initially accepted as a result of the lack of economic development within the nations (european, 2016). there was a great deal of opposition within the eurozone regarding the acceptance of countries from the region out of fear that an expansion of the eu would impede the development of the organization, specifically its foreign and security regulations. despite the opposition, the european union had its largest expansion to date in 2004 by admitting ten nations: cyprus, the czech republic, estonia, hungary, latvia, lithuania, malta, poland, slovakia, and slovenia. all of these nations were former communist states with the exception of cyprus and malta. 1.4. the creation of the euro in 1999, 11 european countries adopted the euro, and it fully replaced national currencies of these nations in 2002 after using the euro for common national currencies for trades and payments in the interim (frieden, 1998). the adoption of a single currency in the eurozone represented 25 years of political battles within the eu, and it was finally adopted by the eu in an attempt to stabilize the fluctuations of national currencies within its member states. opposition to the adoption of the currency resulted from both member states and within the eu itself because the organization is comprised of nations that vary significantly in their economic structures, productivity, and challenges. thus, those who opposed a currency adoption by all member nations of the eu recognized that economic policies that may be correct for one nation could be a disaster for another. those opposed to the adoption of the euro also felt that adoption of the currency would be politically intolerable because national attempts to fix economic problems would prove futile in comparison of the monetary policies of the ecb. in the end, the euro was fully adopted by nations within the eurozone, with the exception of the united kingdom and denmark, for political reasons (frieden, 1998). the goal of the eu in establishing the eurozone in 1999 and the ecb in 2002 was to help bring down inflation within the union, increase the integration of eu member nations, and to gain support by large corporations as a result of exchange-rate stability through the adoption of a single currency. the challenge for europeans following the adoption of the euro was to agree on a common monetary policy for the various member countries, regions within them, and political groups, which it has failed at, to date, in many ways. economy, 2016, 3(2): 79-93 81 the reality is that the variation of economic interests within the eu in the different member states has made the ecb's task of setting a monetary policy that works for all within the eurozone essentially impossible, and it could be easily argued that it was doomed to fail from the start. at a minimum, all monetary policies from the ecb have left individual national interests unconsidered, and it has resulted in subjecting many nations within the eurozone to austerity measures because creating a uniform monetary policy for 26 nations is fundamentally flawed. 1.5. refusing to adopt the euro of the 28 countries that are presently members of the eu, nine nations have not agreed to adopt the euro and decided to stick with their national currencies (seth, 2015). both the united kingdom and denmark are legally exempt from adopting the euro, but the other seven nations are required to adopt at some point in the future according to the criteria imposed on eu members. all nations in the eu, however, do have the right to postpone the adoption of the currency, and this has resulted in the seven nations that are members of the eu not formally adopting the currency to date. the problems regarding the adoption of the euro center on the national diversity, culture, and population sizes within the eurozone (seth, 2015). all nations in the eu are facing differing economic problems and have varied national challenges to address. the problem regarding the adoption of the euro by nations in the eu who have presently abstained from using it as a national currency is that it forces a uniformly applied central monetary policy across all member nations, which conflicts with national economic interests. therefore, most nations in the eu that refuse to use the euro have done so to remain economically independent. eu nations that do not use the euro can draft monetary policies that are separate from the ecb's, and a good example of this would be when the uk introduced a quantitative easing program because of the 2007-2008 financial crisis, which occurred 6 years prior to the ecb's qe program that began in 2015. every country in the eu has specific economic challenges, and, by using the euro, an eu nation is limited by the ecb's regulations. this has made it difficult for greece and other eu member nations using the euro to keep inflation low within their nations, but, in contrast, the uk has been able to keep interest rates low within its nation by not using the euro and as a result of the monetary policy of the bank of england. all nations' economies are sensitive to treasury bond yields, and nations that have not adopted the euro can act as a lender of last resort for their national debt through state central banks (seth, 2015). eu member nations that have the ecb as their central bank are at a disadvantage because the ecb will not buy national bonds of nations to increase liquidity in national markets, which raises bond yields. countries that are not in the eurozone cannot increase their interest rates when inflation rises because they do not have their own central banks and cannot have their own monetary policies with independent regulation. nations within the eurozone also cannot independently devalue their currency to combat economic challenges resulting from "high inflation, high wages, reduced exports, or reduced industrial production"(seth, 2015). devaluation of a currency is important when nations want to make their exports cheaper and competitive, and it also encourages increased foreign investment. unfortunately, for the 19 nations in the eurozone, this is impossible, and devaluation of the euro is solely controlled by the ecb. nations in the eurozone initially benefitted from the euro, and the ecb's monetary policies, which resulted in the elimination of exchange rate volatility (seth, 2015). they also gained increased access to a unified european market with price transparency. the eurozone and the eu have not fully recovered from the global financial crisis of 2008, and the crisis ultimately revealed some financial risks associated with being in the eurozone and even some economic risks associated with being an eu member. as a result of the ecb's ineffectiveness during the 2007-2008 crisis, many eurozone economies suffered, especially greece, spain, portugal, cyprus, and ireland. the future of the euro is unclear, and it is clear that nations under the eurozone will continue to economically suffer from the ecb's monetary policies until the ecb address the monetary policy in manner the meets individual economic challenges faced by nations within the eurozone. 1.6. financial crises the aftermath of financial crises has shown that there are deep and long-lasting effects on prices, output, and employment within the eurozone and throughout the world (carmen and rogoff, 2009). the high unemployment and steep decline in housing prices that is seen following a recession can last between five and six years. all financial crises do end, but employment and housing has historically suffered longer than other aspects of national economies like output, which has historically shown to only decline for an average of two years. most financial crises and recessions usually result in large government debt, but national central banks have shown to be more aggressive in economic downturns than in the past resulting from policy frameworks and more flexible monetary policies. this much needed aggressiveness from the banking and financial sector that was lacking in past economic downturns and recessions seen throughout the world caused longer on prices, output, and employment. the banking and financial sector were quicker to act in most nations throughout the world in comparison to past economic downturns. the world, however, has learned one important lesson from the 2008 financial crisis: world financial systems are not immune to contagions, and economic engineering cannot protect us entirely from business cycles resulting in financial downturns. although economic conditions have recovered throughout most of the world since 2008 global financial crisis, government debt in most nations will continue to rise to historically high levels, and the crisis will continue to persist for most states despite the tools that national policymakers and economics have at their disposal (carmen and rogoff, 2009). it is clear from the aftermath 2008 global financial crisis that most nations will not be able to repair their economies through increased output leading to higher employment rates within their nations and to increase spending within their nations through borrowing. most nations throughout the world will continue to suffer longlasting effects on pricing, high unemployment rates, and fluctuations in their output as they struggle to combat the effects of the 2008 global financial crisis, especially developing nations. most governments throughout the world had to increase their borrowing, and many will begin a perpetual borrowing cycle in which they default and have to economy, 2016, 3(2): 79-93 82 be bailed out. emerging markets will be hit by this cycle the hardest, and the trend of defaults occurring simultaneously with national banking crises will likely continue over the next decade. 1.7. the eu financial crisis the eu at its core is altruistic, but it is partially haphazard because the member states have their own personal interests (kiamba, 2013). despite being a utilitarian entity, its main goal is ensuring that the eu's members and institutions are engaged in the prosperity and well-being of the eu, and, at its core, there is a hierarchal structure within the organization, which was created to ensure the eu is preserved and not the states that make it. the ecb has a record of ineffectively dealing with financial crises in the eurozone, and the inability for many eu members to control their national banks has resulted in negative effects on prices, increased unemployment, and decreased output at the state level. for current member nations and nations under consideration for membership, it is clear that they will have to protect themselves from national shocks resulting from contagions in global financial systems, and member nations already accepted should proceed with affiliation to the organization with serious caution. new member nations would be wise to question using the euro and the ecb's true motives. clearly, there interest lies at the regional level and not the national level, which has resulted in economic catastrophe for all in the eurozone. the 2008 global financial crisis demonstrates that it is impossible to protect world markets from economic downturns. nations, however, that have the ability to set their own monetary policy and regulate their own currencies have fared much better than member organizations stuck in the eurozone. the result of the mismanagement by the eu and the ecb of the effects of the 2008 global financial crisis has left many nations in the eurozone without the ability to protect themselves from economic downturns (kiamba, 2013). the result of the current eurozone policies and the dominance of the european monetary union have threatened the entire european economy and nations' economies, especially greece's, spain's, portugal's, cyprus', and ireland's. the inaction of the ecb during the economic downturn during 2008 global financial crisis and thereafter has left the european economy in a precarious and fragile condition, and the lack of response from the ecb elongated the financial crisis in the region and resulted in a prolonged economic downturn, which threatens to become a normative economic state throughout the eurozone and the rest of europe. the result of the ecb's lack of swift and savvy economic action regarding the financial crisis, which correctly reacted years after the fact, has reinforced many critics opinions regarding the organization's inadequacies ability to properly assist eurozone member nations in resolving their fiscal needs. supporters of the ecb ascertain that the european monetary union must strengthen the mechanisms that it uses to regulate economic systems within the eu, but the reality is that the system can be construed as flawed, especially in consideration of what has happened to 26% of its members, greece, spain, portugal, cyprus, and ireland, following the 2008 global financial crisis (kiamba, 2013). the eu has described itself as a system without boundaries, but this is unrealistic because it is made up of integral parts or states, which have faced and are continuing to face economic threats as a result of the ecb's inaction and present regulatory policies. the result of the current economic crisis in europe has not only weakened the eurozone, but it has caused states within the eurozone and the wider group of eu members to be labeled as either economically stable or unstable. it is quite possible that these labels would not have created hegemons within the organization, like germany, if nations within the eurozone were able to manage their own central banks and maintain their own stability through quick national action as a result of national monetary tools and more state-specific economic policies. 1.8. challenges facing the eu advocates of the eu's present make up maintain the ecb and the european monetary union are not fully to blame the stagnant economies throughout the eurozone, and they argue that the suffering of 26% of the member nations within the eurozone is a result of the provisions agreed upon in the maastricht treaty of 1992, which crafted the current outlined the current monetary policies within the eurozone and were signed by the majority of the nations who have joined the eu (craig, 2015). most of these nations signed the treaty in 1992, so it is believed by ecb supporters that the treaty adequately reflects what member nations were willing to give up to have the benefits of the eurozone. unfortunately, however, the maastricht treaty of 1992 and the emu were centered around having a single currency and creating the eurozone, which were based, in part, on german economic beliefs regarding the division of labor. this was later reinforced in 2007 by the provisions of the lisbon treaty, and it stated that "countries that subscribed to the euro" were within "the exclusive competence of the european union" (craig, 2015). the maastricht treaty of 1992 permitted nations within the eurozone to retain economic control over their state budgets with limited oversight from the ecb, but, as a result, member states retained national liability for their debt, which did allow the eu to bail countries out. this resulted in nations within the eurozone not having the proper monetary tools because of the joint currency to manage their economic problems within their states and their national debt. the economic policies put forth within the maastricht treaty of 1992 remained nearly unaltered in the lisbon treaty of 2007, and, from 1992 until the global financial crisis in 2008, the majority of eu members states were unwilling to endorse fully the national economic oversight of the organization, which effectively weakened the ecb within the eurozone (craig, 2015). when the global financial crisis in 2008 began to affect the eurozone, member states became more willing to accept the economic regulations put forth by the eu, which resulted in the organization tightening centralized control over national budgets through enacted regulatory measures. the global financial crisis of 2008 ultimately led to increased economic support for nations within the eurozone by the ecb out of necessity and increased acceptance of the eu's control over national monetary policies of member nations within the union. both member states and the eu are accountable for how the financial crisis was dealt with because the maastricht treaty of 1992 was agreed on by both states and the organization. the ecb, however, should have been more proactive following the 2008 global financial crisis toward member nations in the eurozone and the economic obstacles that were presented to all. economy, 2016, 3(2): 79-93 83 the economic crisis in the eu is the result of regulatory failures because of both debt and problems in the banking sector (craig, 2015). the sovereign debt crisis of 2009 resulted from the ecb's weak control over member states economic policies, and the problems within the banking sector also resulted from regulatory failure in which too much national discretion was left up to the member states. both problems arose as a result of the maastricht treaty of 1992, and the lack of regulatory changes implemented and agreed upon in the lisbon treaty of 2007. reforms following the financial crisis have changed the role of national regulation in relation to economics within the eurozone for future economic contractions, but the current crisis has not finished and the austerity measures being implemented within 26% of the eu's member states have resulted in tremendous economic hardship, which has threatened the existence of member states and the eu as well. the eu, as a result of the global financial crisis of 2008, increased supervision of member states' economic sectors, provisions regarding accounts, and national transportation, which was needed long before in consideration of the fact that 19 nations are using the same currency. the eurozone, however, is flawed in design, and nations will either have to adopt their own currencies to survive within the eurozone, or the eurozone will have to become a single state. 2. purpose, rationale, and hypothesis the purpose of this study was to investigate the annual gdp mean performance for the group of countries that made up the 2004 enlargement of the eu. the rationale behind the study was to investigate the subsequent economic improvement of joining the eu or lack thereof. the 2004 enlargement of the eu is substantial because it represents the largest addition to nations of the eu since its inception. there are 50 countries within europe, so the addition of ten nations in 2004 was substantial because it assisted in making the use of the euro widespread by almost 40% of the nations within europe, and it helped to perpetuate the ecb's monetary policy throughout europe for nations within the eurozone. the addition of the ten nations in the 2004 enlargement of the eu was opposed by many eu members and other countries throughout europe because 8 of them were former communist states, and the ten nations added were believed to be economically inferior to other nations who were already accepted to the eu. the hypothesis for this investigation was that the 2004 enlargement negatively impacted the annual gdp mean performance of the 10 member states because of the economic problems within the eurozone that have persisted since the 2008 global economic crisis and as a result of the eu's lack of response to the crisis, specifically monetary policies set by the ecb in conjunction with the forced adoption of the euro. 3. methods the annual gdp mean performance for all eu members that joined in 2004 was collected for two time periods: 1993 to 2003 and 2004 to 2014. each country's annual gdp mean performance was individually averaged, and the percentage of change was calculated. the percentage of change between the nations that joined the organization in 2004 was then averaged. the annual gdp mean performance for all 28 eu member states for the two time periods, 1993 to 2003 and 2004 to 2014, was collected. each country's annual gdp mean performance was individually averaged, the percentage of change was calculated for each time period, and both time periods were collectively averaged. all members of the eu who joined after 1992 were removed from the data set from 1993 to 2003 to maintain statistical integrity, and all members who joined after 2003 were removed from the data set from 2004 to 2014 statistical integrity. for the second time period, from 2004 to 2014, averages were calculated holistically, and, then, they were calculated separately between the nations that were accepted to the eu prior to 2005, which included the nations in the 2004 enlargement of the eu. bulgaria, romania, and croatia were not included in either analysis to maintain statistical integrity because both bulgaria and romania were accepted into the eu in 2007, and croatia was accepted into the eu in 2013. finally, for comparative purposes, the annual gdp mean performance was collected for two smaller and separate time periods, 2001 to 2003 and 2004 to 2006, for the nations that were part of the 2004 enlargement of the eu. the annual gdp mean performance was calculated individually for each nation as well as the percentage of change between the two periods. the average annual gdp mean for each time period and percentage of change was calculated for the group as a whole as well. 4. results the annual gdp mean performance for the group of countries that made up the 2004 enlargement of the eu was collected for the 1993 to 2003 time period and, then, averaged. country name average annual gdp mean 1993-2003 cyprus 3.796677206 czech republic 2.410692236 estonia 6.346587033 hungary 2.834918222 latvia 5.987018225 lithuania 5.928891572 malta 3.956201707 poland 4.480466911 slovenia 3.871732661 slovak republic 4.095448681 4.370863445 the world bank group (2016) the annual gdp mean performance for the group of countries that made up the 2004 enlargement of the eu was collected for the 2004 to 2014 time period and, then, averaged. economy, 2016, 3(2): 79-93 84 country name average annual gdp mean 2004-2014 cyprus 0.98968046 czech republic 2.406916208 estonia 3.022497801 hungary 1.288961652 latvia 3.161499646 lithuania 3.516577597 malta 2.04655117 poland 3.95450475 slovenia 1.601334333 slovak republic 4.048585687 2.60371093 the world bank group (2016) the percentage of change for annual gdp mean performance for the group of countries that made up the 2004 enlargement of the eu was then calculated. country name average annual gdp mean 1993-2003 average annual gdp mean 2004-2014 % of change cyprus 3.796677206 0.98968046 -0.739329839 czech republic 2.410692236 2.406916208 -0.001566367 estonia 6.346587033 3.022497801 -0.523760127 hungary 2.834918222 1.288961652 -0.54532669 latvia 5.987018225 3.161499646 -0.471940868 lithuania 5.928891572 3.516577597 -0.406874362 malta 3.956201707 2.04655117 -0.482697971 poland 4.480466911 3.95450475 -0.117390034 slovenia 3.871732661 1.601334333 -0.586403692 slovak republic 4.095448681 4.048585687 -0.011442701 4.370863445 2.60371093 -0.404302843 the world bank group (2016) the annual gdp mean performance for all 28 countries within the eu was collected for the 1993 to 2003 time period and, then, averaged. country name year of acceptance average gdp mean 1993-2003 austria 1995 2.225557802 belgium 1958 2.044756376 bulgaria 2007 1.994782261 croatia 2013 3.931479422 cyprus 2004 3.796677206 czech republic 2004 2.410692236 denmark 1973 2.295871482 estonia 2004 6.346587033 finland 1995 2.834918222 france 1958 3.55319407 germany 1958 2.024914055 greece 1981 1.256391767 hungary 2004 3.143585514 ireland 1973 2.834918222 italy 1958 7.640565401 latvia 2004 1.488405249 lithuania 2004 5.987018225 luxembourg 1958 5.928891572 malta 2004 4.311953598 netherlands 1958 3.956201707 poland 2004 2.866268693 portugal 1986 4.480466911 romania 2007 2.306600926 slovakia 2004 2.532676629 slovenia 2004 4.095448681 spain 1986 3.871732661 sweden 1995 3.147438752 united kingdom 1973 2.725417777 3.293955819 the world bank group (2016) the annual gdp mean performance for all 28 countries within the eu was collected for the 2004 to 2014 time period and, then, averaged. economy, 2016, 3(2): 79-93 85 country name year of acceptance average gdp mean 2004-2014 austria 1995 1.430515043 belgium 1958 1.463274711 bulgaria 2007 3.122937201 croatia 2013 0.659732998 cyprus 2004 0.98968046 czech republic 2004 2.406916208 denmark 1973 0.601409823 estonia 2004 3.022497801 finland 1995 1.000792003 france 1958 1.040742648 germany 1958 1.303959665 greece 1981 -1.318715745 hungary 2004 1.288961652 ireland 1973 2.232949795 italy 1958 -0.293601523 latvia 2004 3.161499646 lithuania 2004 3.516577597 luxembourg 1958 2.793174893 malta 2004 2.04655117 netherlands 1958 1.078605567 poland 2004 3.95450475 portugal 1986 -0.030562194 romania 2007 3.277250112 slovakia 2004 4.048585687 slovenia 2004 1.601334333 spain 1986 0.76883826 sweden 1995 1.948207332 united kingdom 1973 1.442331122 1.73424825 the world bank group (2016) the percentage of change for annual gdp mean performance between the two time periods, 1993 to 2003 and 2004 to 2014, for all member countries of the eu was then calculated. country name year of acceptance average gdp mean 1993-2003 average gdp mean 2004-2014 % of change austria 1995 2.225557802 1.430515043 -0.357233031 belgium 1958 2.044756376 1.463274711 -0.284376991 bulgaria 2007 1.994782261 3.122937201 0.565552924 croatia 2013 3.931479422 0.659732998 -0.832192178 cyprus 2004 3.796677206 0.98968046 -0.739329839 czech republic 2004 2.410692236 2.406916208 -0.001566367 denmark 1973 2.295871482 0.601409823 -0.738047261 estonia 2004 6.346587033 3.022497801 -0.523760127 finland 1995 2.834918222 1.000792003 -0.646976765 france 1958 3.55319407 1.040742648 -0.707096593 germany 1958 2.024914055 1.303959665 -0.35604197 greece 1981 1.256391767 -1.318715745 -2.049605529 hungary 2004 3.143585514 1.288961652 -0.589970864 ireland 1973 2.834918222 2.232949795 -0.212340667 italy 1958 7.640565401 -0.293601523 -1.038426675 latvia 2004 1.488405249 3.161499646 1.124085257 lithuania 2004 5.987018225 3.516577597 -0.412632889 luxembourg 1958 5.928891572 2.793174893 -0.528887506 malta 2004 4.311953598 2.04655117 -0.525377274 netherlands 1958 3.956201707 1.078605567 -0.727363353 poland 2004 2.866268693 3.95450475 0.379669938 portugal 1986 4.480466911 -0.030562194 -1.006821207 romania 2007 2.306600926 3.277250112 0.420813664 slovakia 2004 2.532676629 4.048585687 0.598540311 slovenia 2004 4.095448681 1.601334333 -0.608996606 spain 1986 3.871732661 0.76883826 -0.801422689 sweden 1995 3.147438752 1.948207332 -0.381018191 united kingdom 1973 2.725417777 1.442331122 -0.470785311 3.42976473 1.73424825 -0.494353582 the world bank group (2016) the annual gdp mean performance for the nations accepted to the eu prior to 1992 was collected for the 1993 to 2003 time period and 2004 to 2014 time period. the annual gdp mean performance was both individually calculated and, then, averaged for the group of nations. the percentage of change was calculated both individually and for the group of nations as well. economy, 2016, 3(2): 79-93 86 country name year of acceptance average gdp mean 1993-2003 average gdp mean 2004-2014 % of change belgium 1958 2.044756376 1.463274711 -0.284376991 denmark 1973 2.295871482 0.601409823 -0.738047261 france 1958 3.55319407 1.040742648 -0.707096593 germany 1958 2.024914055 1.303959665 -0.35604197 greece 1981 1.256391767 -1.318715745 -2.049605529 ireland 1973 2.834918222 2.232949795 -0.212340667 italy 1958 7.640565401 -0.293601523 -1.038426675 luxembourg 1958 5.928891572 2.793174893 -0.528887506 netherlands 1958 3.956201707 1.078605567 -0.727363353 portugal 1986 4.480466911 -0.030562194 -1.006821207 spain 1986 3.871732661 0.76883826 -0.801422689 united kingdom 1973 2.725417777 1.442331122 -0.470785311 3.551110167 0.923533919 -0.743434646 the world bank group (2016) the annual gdp mean performance for the nations accepted to the eu prior to 2005 was collected for the 2004 to 2014 time period. the annual gdp mean performance was calculated both individually and for the group of nations, and the percentage of change was calculated both individually and for the group of nations. this measurement only includes 25 of the 28 eu member nations because bulgaria and romania were both accepted into the eu in 2007, and croatia was accepted into the eu in 2013. country name year of acceptance average gdp mean 19932003 average gdp mean 20042014 % of change austria 1995 2.225557802 1.430515043 -0.357233031 belgium 1958 2.044756376 1.463274711 -0.284376991 cyprus 2004 3.796677206 0.98968046 -0.739329839 czech republic 2004 2.410692236 2.406916208 -0.001566367 denmark 1973 2.295871482 0.601409823 -0.738047261 estonia 2004 6.346587033 3.022497801 -0.523760127 finland 1995 2.834918222 1.000792003 -0.646976765 france 1958 3.55319407 1.040742648 -0.707096593 germany 1958 2.024914055 1.303959665 -0.35604197 greece 1981 1.256391767 -1.318715745 -2.049605529 hungary 2004 3.143585514 1.288961652 -0.589970864 ireland 1973 2.834918222 2.232949795 -0.212340667 italy 1958 7.640565401 -0.293601523 -1.038426675 latvia 2004 1.488405249 3.161499646 1.124085257 lithuania 2004 5.987018225 3.516577597 -0.412632889 luxembourg 1958 5.928891572 2.793174893 -0.528887506 malta 2004 4.311953598 2.04655117 -0.525377274 netherlands 1958 3.956201707 1.078605567 -0.727363353 poland 2004 2.866268693 3.95450475 0.379669938 portugal 1986 4.480466911 -0.030562194 -1.006821207 slovakia 2004 2.532676629 4.048585687 0.598540311 slovenia 2004 4.095448681 1.601334333 -0.608996606 spain 1986 3.871732661 0.76883826 -0.801422689 sweden 1995 3.147438752 1.948207332 -0.381018191 united kingdom 1973 2.725417777 1.442331122 -0.470785311 1985.8 3.512021994 1.659961228 -0.527348852 the world bank group (2016) the annual gdp mean performance for the group of countries that made up the 2004 enlargement of the eu was collected for the 2001-2003 time period and, then, averaged. country name 2001 2002 2003 average mean cyprus 3.576056688 3.220606243 2.788196717 3.194953216 czech republic 3.051521283 1.64694964 3.601842545 2.766771156 estonia 6.328672643 6.07641942 7.416210542 6.607100868 hungary 3.849141606 4.480838685 3.843903617 4.057961303 latvia 6.457260341 7.111753025 8.424604182 7.33120585 lithuania 6.524430875 6.760749533 10.53856477 7.941248394 malta -1.549888586 2.811588371 0.132087471 0.464595752 poland 1.2053016 1.443499193 3.562532958 2.070444584 slovenia 2.949355156 3.836311613 2.842102933 3.209256567 slovak republic 3.316465879 4.522790656 5.418717306 4.419324614 4.20628623 the world bank group (2016) economy, 2016, 3(2): 79-93 87 the annual gdp mean performance for the group of countries that made up the 2004 enlargement of the eu was collected for the 2004-2006 time period and, then, averaged. country name 2004 2005 2006 average mean cyprus 4.379398998 3.863109461 4.516829031 4.253112497 czech republic 4.947456257 6.4422623 6.87654427 6.088754275 estonia 6.294727029 9.373736784 10.27186523 8.646776348 hungary 4.937714375 4.354623581 3.806359977 4.366232645 latvia 8.341507485 10.70157261 11.90219148 10.31509052 lithuania 6.550083027 7.727407918 7.406444355 7.227978434 malta -0.503224546 3.66560275 2.223906402 1.795428202 poland 5.135655776 3.547057816 6.192727097 4.95848023 slovenia 4.351785441 4.002988098 5.656016806 4.670263448 slovak republic 5.258838117 6.397286236 8.485509504 6.713877952 5.903599456 the world bank group (2016) the percentage of change for annual gdp mean performance between the two time periods, 2001 to 2003 and 2004 to 2006, for the group of countries that made up the 2004 enlargement of the eu was then calculated. country name average mean 2001-2003 average mean 2004-2006 % of change cyprus 3.194953216 4.253112497 0.331197113 czech republic 2.766771156 6.088754275 1.200671444 estonia 6.607100868 8.646776348 0.308709602 hungary 4.057961303 4.366232645 0.075967048 latvia 7.33120585 10.31509052 0.407011443 lithuania 7.941248394 7.227978434 -0.089818367 malta 0.464595752 1.795428202 2.86449552 poland 2.070444584 4.95848023 1.394886716 slovenia 3.209256567 4.670263448 0.455247765 slovak republic 4.419324614 6.713877952 0.519209051 4.20628623 5.903599456 0.403518242 the world bank group (2016) 5. discussion the first measurement calculated annual gdp mean performance of the 10 member nations which made up the 2004 enlargement of the eu was compared between the 1993 to 2003 time period and the 2004 to 2014 time period. the annual gdp mean performance for the 10 member nations of the 2004 enlargement of the eu decreased by .40 between the two time periods analyzed. as can be seen in the chart above, the annual gdp mean performance of the ten nations added to the eu during the 2004 enlargement decreased by over 40%, which is a substantial shift, and shows that membership to the eu has not benefitted these nations. this data also suggests that the adoption of the euro and addition of these nations to the eurozone was not economically beneficial to these nations. it can also be concluded that the ecb's monetary policies have not been effective at the national level for these nations, which is clearly represented in the lack of economic performance by the group and more specifically in the decline of the annual gdp mean performance of the ten nations from the 2004 enlargement of the eu. the growth of eurozone was high in its first two years of circulation during 2003 and 2004, but it later fell as many of the countries within the eurozone fell into recession (gough, 2013). growth rates for the currency picked up in 2007, and they fell once again during the 2008 global financial crisis. some positive growth was seen again later in 2010, but "the currency weakened again in 2011" (gough, 2013). there were uneven performances in the early part of the decade by nations within the eurozone, which saw slow growth in major economies throughout the eurozone, like germany, france, and italy, and high growth within smaller economies within the eurozone. even performances were seen throughout the eurozone later in the decade, but this shifted dramatically when the global financial crisis hit in 2008 for all nations within the eurozone, which resulted in a variation between economic performances across the region once again. this fluctuation in performance has continued to persist into the present economy, 2016, 3(2): 79-93 88 day with many eurozone nations suffering from austerity measures and ineffective policies being implemented by the ecb. the result has been that 26% of the eurozone member nations have been subjected to austerity measures, and multiple countries that have adopted the euro have now put their nation's economic systems in the control of non-national organization, which cannot possibly consider all the individual economic interests of eurozone member nations. the second measurement compared the annual gdp mean performance from the 1993 to 2003 period against the 2004 to 2014 time period of the ten nations that made up the 2004 enlargement of the eu. in the above graph, series 1 represents the annual gdp mean performance from 1993 to 2003, and series 2 represents the annual gdp mean performance from 2004 to 2014. the year 2004 was substantial at both the national level and for the eurozone because it represented the eventual surrender of the above nations national banks to the ecb's monetary policies, and it also represents the largest expansion of eu membership and an agreement to adopt the euro in a single year in the history of the organization. there was a percentage of change in the annual gdp mean performance of the group of nations between the 1993 to 2003 and 2004 to 2014 by 40% collectively. cyprus suffered the worst annual gdp mean performance change at 74%, and the nation the had the lowest annual gdp mean performance change was the czech republic at less 1%. the data clearly shows that the majority of countries from the 2004 enlargement of the eu are suffering from an annual gdp mean performance contraction, which can be seen through an analysis of the lack of growth within these nations economies and the contractions that they have incurred as a result of the current monetary system used in the eurozone and the regulatory measures, or lack thereof, taken by the ecb. the eu and the ecb lacked the financial foresight to properly assist member nations during the 2008 global financial crisis, and there must be a mechanism within banking systems to intervene and recapitalize banks with insufficient resources during these economic periods (grauwe, 2013). the only existing system within the eu that could have filled this role prior to the 2008 global financial crisis was the european stability mechanism, but it is doubted by many members of the eurozone that this institution within the eu had sufficient resources to deal with the systemic banking crisis unfolded throughout the entire eurozone. therefore, it was impossible for the ecb to implement measures to counteract the effects of the 2008 global financial crisis to properly assist the individual economic crises happening at the national level within the member states. the ecb did act as a lender of last resort when it was forced to increase liquidity to save itself, but it failed to act as a lolr to sovereign nations within the eu in 2010 during the debt crisis suffered by many member nations within the eurozone. the ecb did finally act decide to act as a lolr to nations within the eu following the double dip recession suffered by the eurozone in 2012, but most economists feel that this move by the eu was not sufficient and did not guarantee the survival of the monetary union within the eurozone. the ecb acting as lolr has clearly reduced the risk of financial implosion within the banking systems throughout the member states within the eurozone, but it has not reduced the ongoing social and political problems individual member states have with the eu and ecb throughout the eurozone, espcially in southern europe. the third measurement compared the annual gdp mean performance of all eu member nations that were accepted prior to 1992 between the 1993 to 2003 time period and 2004 to 2014 time period. in the above chart, series 1 represents the 1993 to 2003 time period, and series 2 represents the 2004 to 2014 time period. the percentage of change for the entire group of eu nations shown was 74%, which shows a dramatic economy, 2016, 3(2): 79-93 89 annual gdp mean performance contraction in all longtime member nations of the eu between the two time periods. greece suffered the worst annual gdp mean performance change at 205%, and the nation the suffered the lowest annual gdp mean performance change was belgium at 28%. the data shows a systemic economic problem within the eu, specifically in the core nations that make up the organization. it is clear from the data and the variation in the annual gdp mean performance changes between the nations that the economic problems within each nation are individualized, and these problems are most likely directly linked to the ecb and its monetary policies for the eurozone because all of the nations listed shown on the chart use the euro with the exception of the united kingdom and denmark. the nations that showed the largest annual gdp mean performance change are greece, italy, portugal, and spain, and they all use the euro and are economically governed by the ecb's monetary regulations. this data shows that there are serious national economic problems in many longtime members of the eu, and a contributing factor to these national economic problems is the lack control at the national level of the banking industry, which is a result of having adopted the euro. the eu members who have adopted the euro are generally in agreement that a single currency will contribute to the stabilization of the economy in the eurozone, and economic supporters of the adoption of the euro within eu member nations believe that euro can offer increased stability to the eurozone in times of global economic instability (davulis, 2009). the reality is that the adoption of the euro in nations within the eurozone that have large and prosperous economies, like germany, did not have a significant effect on prices within their nations when their currencies switched from their national currency to the euro. unfortunately, however, price shock has been inevitable for smaller economies within the eurozone, which has negatively impacted domestic economics, wages, and employment. the maastricht treaty of 1992 set forth criteria for candidate countries to meet specific economic indexes for acceptance into the eu, which was clearly not been stringent enough. it did not anticipate the effects of the adoption of the euro by most member nations, and the role the ecb would have to play in relation to governing economics within the eurozone, especially in relation to the global financial crisis in 2008 and the sovereign debt crisis since the end of 2009 within the eu. the 2008 global financial crisis and the sovereign debt crisis of 2009 continues to plague the eurozone and economies within it. the fact that the core nations of the eu have been some of the most negatively impacted in relation to annual gdp mean performance contraction shows that their is a banking problem and a currency problem within the eurozone, which has not been properly dealt with to date by the eu. the fourth measurement compared the two time periods, 1993 to 2003 and 2004 to 2014, for all eu member nations that were accepted into the organization prior to 2003. in the above chart, series 1 represents the 1993 to 2003 time period, and series 2 represents the 2004 to 2014 time period. the percentage of change for the entire group of eu nations shown was 70%, which represents a dramatic annual gdp mean performance contraction in all longtime member nations, member nations who were accepted in the 80s, member nations who were accepted in the 90s. greece suffered the worst annual gdp mean performance change at 205%, and the nation the that suffered the lowest annual gdp mean performance change was the belgium at 28%. this data is quite similar to the data in the third measurement, and not only do we see a dramatic percentage change for the two time periods measured, but there are also annual gdp mean performance contractions for nations that were accepted into the eu during the 80s and 90s. this data shows that nations that have been members of the for decades have dramatically suffered when comparing the annual gdp mean performance between the two time periods measured. early on in the adoption of the euro, eu member nations experienced more growth and decreased inflations rates, and, for candidates of the eu, the aforementioned incentives were enticing in conjunction with increased trade opportunities within the eurozone that is only possible for emu members (dandashly, 2015). the adoption of the euro today is less alluring in comparison to previous economic periods in the eurozone because it cannot be said that the economic situation is presently stable or flourishing within the region. eu membership has proven to be disastrous for all nations with contracted economies across the eurozone because the final stage of joining the emu following acceptance to the eu is forfeiting a nation's central bank's ability to alter exchange rates as needed with market fluctuations impacting state economies, which is a major monetary policy instrument needed by nations to manage national economies and debt. in joining the eu and the emu, this power is ultimately surrendered to the ecb, and nations essentially give up their ability to set independent monetary policies for a single vote among the governing members within the ecb. this often results in emu members not being allowed to use currency devaluation or revaluation in necessary instances needed to maintain economic stability within their nations. for the fifth measurement, the eu members that joined prior to 2005 annual gdp mean performance was compared between the 1993-2003 time period and 2004 to 2014 time period. economy, 2016, 3(2): 79-93 90 in the above chart, series 1 represents the 1993 to 2003 time period, and series 2 represents the 2004 to 2014 time period. the percentage of change for the entire group of eu nations shown was 53%, which shows a dramatic annual gdp mean performance contraction in nearly all the nations in the eu and eurozone. latvia was the only nation to be unaffected by the 2008 financial crisis and the 2009 sovereign debt crisis throughout the eu, and its annual gdp mean performance increased by 112% when comparing the two time periods from 1993 to 2003 and 2004 to 2014. the czech republic also was minimally affected by the 2008 financial crisis and the 2009 sovereign debt crisis, but the data shows that its economy did not grow when comparing the two periods in relation to its annual gdp mean performance. the nations that had the highest negative percentage change between the 1993 and 2003 time period and the 2004 and 2014 were greece, italy, portugal, spain, and denmark. the percentage of change of greece's annual gdp mean performance was 205%, the percentage of change of italy's annual gdp mean performance was 104%, the percentage of change of portugal's annual gdp mean performance was 101%, the percentage of change in spain's annual gdp mean performance was 80%, and the percentage of change of denmark's annual gdp mean performance was 74%. all of these nations economies have sharply contracted between the two periods measured, and five of these nations makeup the 26% of the eu that has had to adopt national austerity measures as a result of the ecb's poor reaction to the 2008 global financial crisis in offering protection eu members who had adopted the euro or had postponed adoption of it. it is interesting that denmark appears among the nations with the largest percentage change in its annual gdp mean performance between the two periods because it is legally exempt from having to adopt the euro as its currency. in consideration of the lack of monetary tools that nations have within the eurozone, it is probable that the economic contraction experienced in the 2004 to 2014 period would have been greater for denmark if it was unable to use the tools at its disposal as a result of having a central bank within its state. during the global financial crisis in 2008, the entire eu was economically impacted, but the effects of the crisis were not dispersed evenly among the 28 member nations. full emu members were forced to apply to the ecb for money to bail out their by 2010 because they essentially suffered a monetary catastrophe after recapitalizing their banks in 2008 (campbell and hall, 2015). this occured for many nations throughout the eu, like ireland, because they had grown dependent on the ecb and without having their own currency they had very few economic tools at their disposal. denmark is also a small eu nation, but it was able to deal with the global financial crisis in 2008 and the sovereign debt crisis much better than other small eu nations because it has its own currency. it was still negatively impacted by the systemic economic problems throughout the eurozone, which can be seen in its annual gdp mean performance contraction between the two periods analyzed in this study. in comparison between denmark and ireland, the end result of the financial bailout and intiatives within the countries between the 2008 and 2013 was that denmark ultimately made the banks pay for the bail outs, and ireland, like many other small nations in the eu, made their tax payers and bond holders from other nations within the eurozone pay for its sovereign debt. the conclusion that can be drawn from this comparison is that all nations within the eurozone are ultimately reliant on the ecb as a result of using the euro, and they have limited financial instruments in their national banks as a result of being full members of the emu. the ecb was slow to react to the 2008 global financial crisis because the eurozone is a flawed design, and, in reality, there is not instituation better suited to deal with national economic problems than a national bank, which needs the ability to devalue and revalue its national currency as a tool within its state to deal with sovereign debt and global financial downturns. for the fifth measurement, the annual gdp mean performance was compared between the 2001 to 2003 time period and 2004 to 2006 time period for the eu members that were accepted during the 2004 enlargement. economy, 2016, 3(2): 79-93 91 in the above chart, series 1 represents the 2001 to 2003 time period, and series 2 represents the 2004 to 2006 time period. the percentage of change for the entire group of eu nations shown was 40%, and there was a moderate increase in annual gdp mean performance by the entire group with the exception of lithuania. lithuania, however, showed strong annual gdp mean performance between the two periods at 3.75 above the annual gdp mean performance for 2001 to 2003 and 1.32 above the annual gdp mean performance for 2004 to 2006. therefore, it can be concluded that the 2004 enlargement was beneficial for the majority of nations that joined the eu in their initial years as members from 2004 to 2006. the nations that saw the largest positive percentage change between the two periods were malta, poland, and the czech republic. malta had a positive percentage change of 286%, poland had a positive percentage change of 139%, and the czech republic a positive percentage change of 120%. the global financial crisis began in 2007, and its effects were felt throughout the eu and the rest of the world in 2008. the united states entered a recession in the third quarter of 2008, and, by the end of the year, it became apparent that the recession in the us was going to impact the entire developed world as a result of globalization and trade interdependence (grigor'ev and salikhov, 2009) economic analysts anticipated a 40% drop in gdps throughout the world, and, in many developed economies, the impact was much larger, especially in some nations within the eurozone. the situation in the financial sector needed to be stabilized to increase trade and to end protectionism during this period, but it required actions to be taken by banks that were coordinated, especially to avoid steep economic downturns within large markets throughout the world. times of economic recession result in budget problems for governments, and they lead to decreased stability within nations because there is a universal slowdown within countries in dealing with social problems, which can lead to dangerous sociopolitical positions. the causes of the 2008 global financial crisis are attributed to the high economic growth rates in the early twenty-first century coupled with savings imbalances, negative interest rates in developed nations, and a weakening of regulation within the banking industry in conjunction with an increased use of financial instruments. the result of the poor annual gdp mean performance by the majority of nations in the 2004 enlargement of the eu between the 1993 and 2003 time period in comparison to the 2004 to 2014 time period can be attributed to the global financial crisis. there are, however, banking and structural issues in the eu that must be considered, which contributed to the lack of economic tools at the national level and, ultimately, resulted in austerity measures being adopted by 26% of the eurozone's members. 6. conclusion from the first measurement, it can be concluded that the 2004 eu enlargement negatively impacted the annual gdp mean performance of the nations that took part in it when comparing the annual gdp mean performance of the ten nations between the two time periods analyzed: 1993 to 2003 and 2004 to 2014. in the second measurement in this study, the data shows that the annual gdp performance of the eu member nations from the 2004 enlargement showed an annual gdp mean performance decrease of 40% between 1993 and 2003 time period and the 2004 and 2014 time period. in the third measurement in this study, the data showed a 74% decrease in the annual gdp mean performance for the nations accepted to the eu prior to 1992 between the 1993 to 2003 time period in comparison to the 2004 and 2014 time period. although the decrease of the annual gdp mean performance of the nations accepted prior to 1992 is almost double that of the nations accepted into the eu during the 2004 enlargement, it can be concluded that 2008 global financial crisis impacted both groups economically, the design of the eu and the ecb is flawed, the eu and ecb are not fit to assist nations in dealing with global economic crises, and nations within the eurozone may not benefit at the national level from adopting the euro. the above chart shows a comparison of the average gdp mean performance of the 2004 enlargement group and the eu members who were accepted prior 1992 between the two time periods, or the second and third measurements in this study. it is clear that there was a decreased performance trend between the two groups for the time periods measured, which can be attributed to the aforementioned reasons. the data shows that the annual gdp mean performance of the 2004 enlargement of the eu decreased by 1.77 between 1993 and 2003 in comparison to 2004 to 2014, and the annual gdp mean performance of the eu members who were accepted prior 1992 decreased by 2.63 between 1993 and 2003 in comparison to 2004 to 2014. in comparing the second and the fourth measurements within this study, it is apparent the nations who made of the 2004 enlargement in comparison to the nations that were accepted prior to 1992 share a similar annual gdp mean performance decreases between the two time periods as can be seen in the comparison between the first and second measurements. in the second measurement in this study, the data shows that the annual gdp performance of economy, 2016, 3(2): 79-93 92 the eu member nations from the 2004 enlargement showed an annual gdp mean performance decrease by 40% between 1993 and 2003 time period and the 2004 and 2014 time period. in the fourth measurement in this study, the data showed a 70% decrease in the annual gdp mean performance for the nations accepted to the eu prior to 2003 between the 1993 to 2003 time period in comparison to the 2004 and 2014 time period. the above chart shows a comparison of the average gdp mean performance of the 2004 enlargement group and the eu members who were accepted prior 1992 between the two time periods. it is clear that there was a decreased performance trend between the two groups between the time periods measured, which can be attributed to the 2008 global financial crisis, the design of the eu and the ecb's handling of economics in the eurozone, and the loss of economic control nations have within the eurozone that results from the adoption of the euro. the data shows that the annual gdp mean performance of the 2004 enlargement of the eu decreased by 1.77 between 1993 and 2003 in comparison to 2004 to 2014, and the annual gdp mean performance of the eu members who were accepted prior 2003 by 2.36 between 1993 and 2003 in comparison to 2004 to 2014. this is a significant annual gdp mean performance decrease for both groups, but it is apparent that the margin is less significant than the comparison of the second and third measurements in this study in relation to performance loss. this suggests that the economic problems in the eurozone were systemic and affected older eu members more greatly, and, in consideration of the sovereign debt crisis of 2009, the ecb was slow to react to all eu members national needs in relation to economic support. in the fifth and final measurement in this study, the data shows that the annual gdp mean performance improved significantly for the eu member nations who were part of the 2004 enlargement between 2001 to 2003 time period when compared to the 2004 to 2006 time period. in the above chart, series 1 represents the 2001 to 2003 time period, and series 2 represents the 2004 to 2006 time period. the annual gdp mean performance for the entire group of eu nations increased by 1.70, and there was a moderate increase by the entire group with the exception of lithuania. lithuania, however, showed strong annual gdp mean performance between the two periods at 3.75 above the annual gdp mean performance for 2001 to 2003 in comparison all member of the 2004 eu enlargement and 1.32 above the annual gdp mean performance for 2004 to 2006 in comparison all member of the 2004 eu enlargement. it can be concluded that the 2004 enlargement was beneficial for the nations that joined the eu in their initial years as members from 2004 to 2006. the impact of the global financial crisis of 2008 and the sovereign debt crisis of 2009 coupled with the ecb's ineffective response to the systemic economic problems in europe proved the hypothesis in this study to be true. the 2004 enlargement negatively impacted the annual gdp mean performance of the 10 member states, but the economic problems within the eurozone that have persisted since the 2008 global economic crisis and ecb's poor handling of the economic problems within have not affected them all equally. economy, 2016, 3(2): 79-93 93 country name average mean 1993-2003 average mean 2004-2014 gdp shift cyprus 3.796677206 0.98968046 -2.806996746 czech republic 2.410692236 2.406916208 -0.003776028 estonia 6.346587033 3.022497801 -3.324089232 hungary 2.834918222 1.288961652 -1.54595657 latvia 5.987018225 3.161499646 -2.825518579 lithuania 5.928891572 3.516577597 -2.412313975 malta 3.956201707 2.04655117 -1.909650537 poland 4.480466911 3.95450475 -0.525962161 slovenia 3.871732661 1.601334333 -2.270398328 slovak republic 4.095448681 4.048585687 -0.046862994 4.370863445 2.60371093 -1.767152515 the world bank group (2016) the nations that showed the largest annual gdp mean negative performance shift from the 2004 enlargement of the eu between estonia at 3.32, latvia at 2.83, and cyprus at 2.81. the nations that showed the smallest annual gdp mean negative performance shift from the 2004 enlargement of the eu between the time periods measures were the czech republic at .004, the slovak republic at .05, and poland at .53. all of the nations with the smallest gdp shift out of the members of the 2004 enlargement of the eu are former communist states. the conclusion that can be drawn from this study is that the eu has not benefitted member nations over the last decade, specifically following the 2008 global financial crisis. the current design of the eu and the emu is flawed, and it essentially leaves members nations at the mercy of the ecb's ineffective monetary policies, which cannot possibly meet the needs of the 26 individual nations who either use the euro as their currency or will adopt it in the future. both the united kingdom and denmark suffered during the 2008 global financial crisis, but they had the ability to devalue and revalue their currencies unlike the other 19 member nations of the eu that had already adopted the euro as their national currency. this was a huge advantage and allowed them to manage their sovereign debt better than other nations within the eu. all nations who currently have member status in the eu should attempt to renegotiate their monetary agreements with the eu, similarly to the united kingdom, to maintain national control over their economies. the ecb has proved to be ineffective in navigating large financial problems and slow to respond to member nations' economic needs within the eurozone, and, as a result of the mismanaging of the 2008 global financial crisis and its effect on the eurozone, the sovereign debt crisis of 2009 resulted and the subsequent economic problems within eu member states. the effects of the ecb's inefficiency during the 2008 global financial crisis should have resulted in greater protectionism by member states, but they were part of the emu, which has resulted in contracted annual gdp mean performances throughout europe and austerity measures being forced on 26% of the members of the eurozone. the free trade that eu membership permits within europe is beneficial to the entire continent, but the adoption of the euro and the power of the ecb has over emu members have proven to be disastrous. despite the exchange rate savings that the euro brings large corporations within the eu, there is little benefit for the nations and individuals using it, especially in consideration of the lack of power their national banks have over state economies as a result. references campbell, j. and j. hall, 2015. small states, nationalism and institutional capacities: an explanation of the difference in response of ireland and denmark to the financial crisis. european journal of sociology, 59(1): 143-174. carmen, r. and k. rogoff, 2009. the aftermath of the financial crisis. american economic review, 99(2): 466-471. craig, p., 2015. the financial crisis, the european union institutional order, and constitutional responsibility. indiana journal of global legal studies, 22(3): 243-267. dandashly, a., 2015. the political impediments to euro adoption in poland. problems of post-communism, 62(1): 287-298. davulis, g., 2009. problems of the adoption of the euro in lithuania. intellectual economics, 2(6): 107-115. european, u., 2016. encyclopedia britannica. available from http://academic.eb.com.contentproxy.phoenix.edu/ebchecked/topic/196399/european-union. frieden, j., 1998. the euro: who wins? who loses? available from http://scholar.harvard.edu/jfrieden/publications/euro-who-wins-who-loses. gough, j., 2013. the eurozone: whatever happened to convergence?. world economics, 15(2): 53-72. grauwe, p., 2013. design failures in the eurozone: can they be fixed? available from http://www.lse.ac.uk/europeaninstitute/leqs%20discussion%20paper%20series/leqspaper57.pdf. grigor'ev, l. and m. salikhov, 2009. financial crisis 2008: entering global recession. problems of economic transition, 50(10): 35-63. investopedia, 2016. european union. available from http://www.investopedia.com/terms/e/europeanunion.asp. investopedia, 2016. what is gdp and why is it so important to economists and investors? available from http://www.investopedia.com/ask/answers/199.asp. kiamba, a., 2013. crisis in the system of states: the financial crisis in the european union. geopolitics, 18(1): 730-735. seth, s., 2015. why these european countries don't use the euro. available from http://www.investopedia.com/articles/investing/050515/whythese-european-countries-dont-use-euro.asp#ixzz4bxe9uv9f. the world bank group, 2016. data. available from http://data.worldbank.org/. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. http://academic.eb.com.contentproxy.phoenix.edu/ebchecked/topic/196399/european-union http://scholar.harvard.edu/jfrieden/publications/euro-who-wins-who-loses http://www.lse.ac.uk/europeaninstitute/leqs%20discussion%20paper%20series/leqspaper57.pdf http://www.investopedia.com/terms/e/europeanunion.asp http://www.investopedia.com/ask/answers/199.asp http://www.investopedia.com/articles/investing/050515/why-these-european-countries-dont-use-euro.asp#ixzz4bxe9uv9f http://www.investopedia.com/articles/investing/050515/why-these-european-countries-dont-use-euro.asp#ixzz4bxe9uv9f http://data.worldbank.org/ economy issn: 2313-8181 vol. 1, no. 1, 5-7, 2014 www.asianonlinejournals.com/index.php/economy 5 interest rate derivatives in india: challenges and opportunities p. k. mishra 1 --s. k. mishra 2 1 assistant professor in economics, central university of jharkhand, brambe, ranchi, jharkhand 2 lecturer in economics tite, bhubaneswar, odisha, india abstract this work is licensed under a creative commons attribution 3.0 license asian online journal publishing group 1. introduction risk taking has become the order of the globalised and integrated financial markets. and, indian financial market is no exception. since a long time india has opened up its market, and allowed prices to change with prevailing and changing market conditions in a dynamic path thereby making the estimation of costs and revenues very hard on the part of the corporate houses (gakhar and meetu, 2013). this generates the spirals of risk and uncertainty in the economy. and, the derivatives provide an efficient and effective ways to deal with the problems of such risks and uncertainties that arise in an emerging market economy like india due to fluctuations in interest rates, exchange rates, stock market prices, crude oil prices, domestic commodity prices, gold prices, and so on so forth. thus, derivatives market now plays an important role in giving a proper shape and position to the risk management system while addressing different types of risk such as credit risk, operational risk, interest rate risk, liquidity risk, price risk, and foreign exchange risk, etc (srivastava and srivastava, 2010). of this basket of risks, interest rate risk has drawn a considerable attention of the researchers, market participants, and policy maker as well. and, the outcome is the interest rate derivatives came to lime light in early sixties. an interest rate derivative is a financial derivative instrument in which the underlying asset is the right to pay or receive a notional amount of money at a give interest rate. in the world level, the interest rate derivatives market is considered largest in comparison to other financial markets. according to bis estimates, the notional amount outstanding as of june 2012 was usd 494 trillion for otc interest rate contracts, and usd 342 trillion for otc interest rate swaps. according to an estimate of isda, about 80% of the world’s top 500 companies as of april 2003 risk taking has become the order of the globalised and integrated financial markets. and, indian financial market is no exception. in recent years, due to high employment, inflation, and increased demand for durable consumer as well as producer goods, the interest rate in india has become more volatile thereby making the debt market relatively risky and uncertain. the risk arising from the unfavourable changes in interest rate has repercussions on financial, corporate and household sectors. this interest rate risk has the evidence of adversely influencing the market value of banks’ assets as well as the earnings from assets, fees and the cost of borrowed funds. necessity is the mother of invention. and, it has came into being with flying colors when the effective risk management process in india has made a path breaking contribution by introducing interest rate derivatives – 10 year notional coupon-bearing g-sec in 2009, and 91-day t-bill in 2011 so as to hedge interest rate risk. but the challenge is to maintain the glamour. it is due to certain structural factors like lack of liquidity in the underlying cash market, prescription of statutory liquidity ratio, and the facility of held to maturity, the activities in the interest rate derivatives market have not yet been very attractive in india. lack of significant buy-side interest and market hesitancy to take a view on long-term interest rates are among other factors hindering lucrative market activities. the opportunities lie in widening the investor base, and encourage participation of investors with diverse views on future outcomes. keywords: interest rate risk, debt derivatives, interest rate derivatives, india. http://creativecommons.org/licenses/by/3.0/ economy, 2014, 1(1): 5-7 6 used interest rate derivatives to control their cash flows vis-à-vis 75% for foreign exchange options, 25% for commodity options, and 10% for stock options. in the world market, the attractiveness of the exchange-traded interest rate futures may be due to the factors including low capital requirement, ability to short the asset freely without need to borrow the same, daily settlement and a ccp framework that eliminated counterparty credit risk. in indian financial market, the interest rate derivatives in the form of forward rate agreements (fras) and interest rate swaps (irs) were first introduced in march 1999 to facilitate banks, pds and afis to manage their interest rate risks arising out of asset-liability mismatches. similarly, the interest rate futures were introduced in 2003, and reintroduced on 31 st aug 2009. these interest rate futures contract offers market participants a standardized product taking a view of the future directions of the market, hedging and creating income strategies. now, india plans to launch trading of government bond futures to deepen its financial markets. these interest rate futures are expected to enable the banks and other financial firms in india to assess expectations for borrowing costs, and hedge the risks of rate changes to their bond portfolios. thus, the main objective of this paper is to analyze the challenges and opportunities ahead for interest rate derivatives in india. it is with this backdrop, the paper proceeds to focus on the development of interest rate derivatives in india in section-2, and the underlying challenges and opportunities in section-3 in this article. 2. interest rate derivatives in india in recent years, due to high employment, inflation, and increased demand for durable consumer as well as producer goods, the interest rate in india has become more volatile thereby making the debt market relatively risky and uncertain. the risk arising from the unfavourable changes in interest rate has repercussions on financial, corporate and household sectors. this interest rate risk has the evidence of adversely influencing the market value of banks’ assets as well as the earnings from assets, fees and the cost of borrowed funds. the summarized picture of the interest rate volatility in debt and money markets in india is presented in table-1 in which volatility is measured in terms of standard deviations. it has been observed that the interest rate volatility was a bit hard to be managed during 2000 and 2005 in debt market as well as money market. during 2005 and 2010, similar kind of situation remained prevalent in indian financial markets. however, the interest rate volatility has been substantially reduced during last three years. this may be attributed to the interest rate derivatives traded in india’s derivatives market. table-1. interest rate volatility in debt and money markets in india (standard deviations) period call 91-dtb cp cd 1yr yld 5yr yld 10yr yld 2000-05 1.91 1.78 2.03 1.94 1.93 1.93 2.09 2005-10 2.26 1.62 2.13 1.77 1.36 0.75 0.65 2010-13 1.44 1.43 1.65 1.31 1.00 0.39 0.31 source: reserve bank of india publications no doubt, india is having active derivatives markets in currencies and equities. but it has struggled a lot to bring liquidity in debt derivatives thereby neglecting banks and other financial firms’ interest in hedging opportunities. in india, banks, insurance companies, primary dealers, and provident funds own about 90% of goi bonds. similarly, the turnover of exchange traded equity based derivatives is about 14 times that of cash markets. all these reflect the potential demand for interest rate derivatives in india. the market for otc interest rate derivatives in india is predominated by interest rate swaps with almost no activity in forward rate agreements. the total outstanding in terms of notional amounts as of end-march 2012 was rs.1971859cr for mibor-based swaps, rs.293310cr for mifor-based swaps, and rs.25910cr for inbmk-based swaps. this shows that mibor-based swaps are most sought after interest rate derivatives in indian market which constitutes for about 90% of the total trades. but, the most unfortunate aspect is that about 80% market participants are foreign banks with virtual absence of nationalized banks. this may be a reason why indian financial market is exposure to global financial crises. on the other hand, the interest rate futures which were introduced as exchange traded interest rate derivatives in 2003 in the form of 10-year notional g-sec with a coupon of 6%, 10-year notional zero-coupon g-sec and 91-day tbills, failed to attract the attentions of enough market participants, and soon became non-operational. again to provide liquidity, vk sharma committee recommended reintroducing the interest rate futures, and thus futures contract on 10-year notional g-sec with a coupon of 7% was reintroduced in aug 2009. this was followed with the introduction of cash-settled futures on 91-day t-bills, 2-year and 5-year notional g-sec with a coupon of 7% in dec 2011. in spite of this elegancy, there has not been much activity in the futures market since reintroduction. certain structural factors like lack of liquidity in the underlying cash market, prescription of statutory liquidity ratio, and the facility of held to maturity; lack of significant buy-side interest and market hesitancy to take a view on long-term interest rates are among other factors hindering lucrative market activities. therefore, the challenge is maintaining the continuum of the glamour of the interest rate derivatives market. 3. challenges and opportunities it has been observed that the interest rate derivatives in india have not yet been so successful in achieving the inherent objectives of providing liquidity and managing risks exposure. the challenges are posed by the ill-defined and unclear expectations of market participants. the reason is that such expectations create bids/asks that always mismatch thereby obstruct trading among the participants. thus, the opportunities lie in widening the investor base, and encourage participation of investors with diverse views on future outcomes. high and satisfactory trading activity in futures market is a function of presence of market participants with well-defined but diverse expectations of future interest rates. the most important problem in indian interest rate derivatives market is the predominance of homogeneous opinion of the participants that hold back liquidity particularly in the futures market. in this context, it economy, 2014, 1(1): 5-7 7 may be suggested that the participation of fiis should be permitted in the interest rate futures market. however, it poses a challenge that the fiis would assume the short term position in the g-sec market through interest rate future for which they are not permitted. another opportunity lies in improving the liquidity position in the underlying cash market. this may be possible through the introduction of new products, and popularizing them among participants. this calls for leading role of the stock exchanges in india. availability of the larger number of products always creates more and more opportunities for trading, which in turn result in the better price discovery and efficiency in the system. the role of regulators is also important in bringing about a vibrant interest rate derivative market. they should ensure proper disclosures and the transparency in the operations of the market participants. the participants should be given freedom to explore the value creation opportunities in such a market, of course within the given framework. last but not the least, necessary steps should be facilitated so as to bring the nationalized banks into forefront. in this respect, standardization and transparency in the product design, market microstructure, and trading and settlement system shall go a long way thereby deepening the interest rate derivatives market in india. references gakhar, k. and meetu, 2013. derivatives market in india: evolution, trading mechanism and future prospects. international journal of marketing, financial services and management research, 2(3): 38-50. srivastava, s. and d. srivastava, 2010. interest rate derivatives in indian banks. serbian journal of management, 5(1): 111-125. bibliography bansal, m., 2003. interest rate futures. annual capital market review, bse, 3: 122-125. charumathi, b., 2009. on the determinants of interest rate swap usage by indian banks. proceedings of the world congress on engineering, july 1-3, london, uk., ii. patnaik, i. and a. shah, 2004. interest rate volatility and risk in indian banking. imf working paper no. wp/04/17: 28. rbi, 2009. report of the rbi-sebi standing technical committee on interest rate futures. reserve bank of india. rbi, 2012. report of the working group on enhancing liquidity in the g-sec and interest rate derivatives markets. reserve bank of india. sebi, 2003. report on exchange traded interest rate derivatives in india. sebi’s group on secondary market risk management. srivastava, d. and s. srivastava, 2013. success and failure of interest rate futures in india. advances in management, 6(6): 56-59. sy, a., 2005. managing the interest rate risk of indian banks’ government securities holdings. imf working paper no. wp/05/78: 18. views and opinions expressed in this article are the views and opinions of the authors, economy shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. economy issn(e) : 2313-8181 issn(p) : 2518-0118 vol. 3, no. 2, 102-107, 2016 www.asianonlinejournals.com/index.php/economy 102 willingness to pay for preserving national park biodiversity: a case study mohammad younus bhat1  apra sinha2 ( corresponding author) 1,2 research scholar, department of economics, jamia millia islamia, jamia nagar new delhi-india abstract this paper employs a stated preference environmental valuation method i.e. contingent valuation method to estimate the willingness to pay for the conservation of the dachigam national park as well as value estimates crucial to the development of the park acquisition and management policy. a contingent valuation study is conducted with 301 visitors and the data are analysed using the binary logit model. results show that the majority of the tourists (benefitted from the use values of the park) were willing to pay (wtp) for its improvement. respondents‘ willingness to pay for the conservation of the park ranges from rs. 110 to rs. 140 per year with a mean of around rs. 125 per year. with the use of the benefits transfer method, this case study is expected to provide policy-makers, corporate players, stakeholders with useful information for the conservation of biodiversity in the indian sub-continent, as well as in other countries. keywords: contingent valuation method, dachigam national park, conservation, willingness to pay. contents 1. introduction ....................................................................................................................................................................... 103 2. case study .......................................................................................................................................................................... 103 3. methodology....................................................................................................................................................................... 103 4. results and discussion ....................................................................................................................................................... 104 5. conclusion .......................................................................................................................................................................... 106 references .............................................................................................................................................................................. 106 citation | mohammad younus bhat; apra sinha (2016). willingness to pay for preserving national park biodiversity: a case study. economy, 3(2): 102107. doi: 10.20448/journal.502/2016.3.2/502.2.102.107 issn(e) : 2313-8181 issn(p) : 2518-0118 licensed: contribution/acknowledgement: this work is licensed under a creative commons attribution 3.0 license all authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. history: received: 25 october 2016/ revised: 16 january 2017/ accepted: 20 january 2017/ published: 25 january 2017 ethical: this study follows all ethical practices during writing. publisher: asian online journal publishing group http://creativecommons.org/licenses/by/3.0/ http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.2/502.2.102.107 https://orcid.org/orcid-search/quick-search?searchquery=mohammad younus bhat https://orcid.org/orcid-search/quick-search?searchquery=apra sinha http://search.crossref.org/?q=10.20448/journal.502/2016.3.2/502.2.102.107 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.2/502.2.102.107 https://orcid.org/orcid-search/quick-search?searchquery=mohammad younus bhat https://orcid.org/orcid-search/quick-search?searchquery=apra sinha http://search.crossref.org/?q=10.20448/journal.502/2016.3.2/502.2.102.107 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.2/502.2.102.107 https://orcid.org/orcid-search/quick-search?searchquery=mohammad younus bhat https://orcid.org/orcid-search/quick-search?searchquery=apra sinha http://search.crossref.org/?q=10.20448/journal.502/2016.3.2/502.2.102.107 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.2/502.2.102.107 https://orcid.org/orcid-search/quick-search?searchquery=mohammad younus bhat https://orcid.org/orcid-search/quick-search?searchquery=apra sinha http://search.crossref.org/?q=10.20448/journal.502/2016.3.2/502.2.102.107 economy, 2016, 3(2): 102-107 103 1. introduction international union for conservation of nature and natural resources (iucn) defines national park as ― a place where the ecosystem is not materially altered by human exploitation and occupation, where the park is protected by the highest competent authority of the country and where visitors are allowed for inspirational, educative, cultural and recreational purposes‖ (dobson, 1996). national parks play a decisive role in conservation and preservation of biodiversity and provision of other benefits associated with the maintenance of ecological integrity (stolton and dudley, 2010). national parks like other environmental resources and public goods have several benefits for humans in a multiplicity of ways. in addition to their ecological functions, national parks can be used as ecotourism sites for recreational gains which will positively contribute to national income, simultaneously society around the area of national park can obtain economic advantages. national parks system is a national museum. its purpose is to preserve forever certain areas of extra ordinary scenic magnificence in a condition of primitive nature. its recreational value is also very great, but recreation is not distinctive of the system. the function which alone distinguishes the national parks is the museum function made possible only by complete conservation (runte, 1997). in the beginning, national parks were living embodiment of aesthetic values. passionate admirers of nature recognized national parks as storehouses of thrill and wonder which can fulfil the visitors‘ recreational needs. in the developed countries the protected areas, particularly national parks, which have utility, were objects having a market. in the countries of latin america, africa, india, quite a reverse to the developed, the establishment of national parks was essentially for the preservation of biological diversity both qualitatively and quantitatively. hence, respectively monumentalism and environmentalism were the driving impetus behind the setting up of national parks in these countries. presently national parks and reserved areas are at the forefront of the global conservation programmes and policies with the integral objective of continuation of ecological integrity by placing the constraints on the degree of human interaction and exploitation. national parks preserve areas of natural beauty and cultural heritage, maintain genetic diversity and ecological processes, contributing toward sustainable livelihood strategies and additionally make possible recreational, educational and scientific opportunities (mcneely, 1994; stolton and dudley, 2010). as an economic good, national parks are subjected to a number of market failures because of the fact that they exhibit varying degrees of non rivalry and non excludability, generating positive externalities in the form of ecosystem services. recreation and tourism are one of the many benefits associated with national parks and protected areas. with the exception of areas managed for strict wilderness and nature protection, most protected areas allow for recreational and tourism activities. some of these activities will yield indirect returns in the form of increased regional economic activity. further, the preservation of biological diversity and ecological integrity is considered as the primary objective of national parks and protected areas in present day world. the understanding of the economics of the national parks has always been hindered by a lack of tangible economic values for these environmental assets. national parks exhibit public good characteristics and generate significant externalities. the resulting market failure ensures the benefits associated with the national parks are not subject to formal market exchange mechanisms making their valuation extremely hard. despite this, national parks provide a range of economic benefits in terms of ecosystem services and various other use and non values. the quantification of these values in monetary terms is therefore necessary to ensure that policy and management decisions maximize societal welfare through allocative efficiency. this has traditionally been achieved through the use of non market valuation techniques such as the contingent techniques and travel cost valuation methods. 2. case study dachigam national park is situated 18 km north-east of srinagar. it is divided into lower and upper dachigam areas. harwan reservoir and new theed village form its base, while mahadev peak is the topmost among surrounding mountain range. it is one of the most important protected areas in jammu and kashmir. since dachigam national park has last viable population of hangul (cervus elaphus hanglu) in world as well as the largest population of asiatic black bear, it has become a famous tourist destination. the national park besides gives shelter to a variety of floral and faunal elements, viz., himalayan brown bear, himalayan black bear, musk deer, leopard, hyena, birds (150 species), vascular plants (661 species) etc. dachigam being very close to srinagar, summer capital of jammu & kashmir, receives a large number of tourists in summer because of natural beauty. every year 10,000-15,000 tourists visit the park which includes students, naturalists, scientists, conservation activists, etc. therefore, dnp yields a range of onsite and offsite benefits. given that park is managed for high levels of visitor use, recreational and tourism value of dachigam is likely to be significant. other economic benefits are likely to include ecosystem services such as water purification, soil conservation and landscape stability (management plan, 2011-2016). despite extensive range of economic benefits provided by dachigam national park, most of these benefits have never been defined in monetary terms. 3. methodology 3.1. contingent valuation method (cvm) 3.1.1. contingent valuation method (cvm): theoretical background cvm has been used as a standard and flexible tool for valuing non-marketed environmental resources (hanemann, 1994). it is a stated preference technique used to quantify economic value of non-marketed goods and services, by measuring individuals‘ consumer surplus (mitchell and carson, 1989). it attempts to allocate values for public goods by people‘s maximum amount of willingness to pay (wtp) to obtain non-market goods and service or minimum amount willing to accept (wta) to compensate for loss of environmental resources. both these approaches are very useful to measure the welfare change. however, wtp is preferred to wta because the latter is economy, 2016, 3(2): 102-107 104 considered not to be consistent with convergent validity as it does not adequately measure economic surplus (venkatachalam, 2004). cvm is a survey based technique, where a hypothetical market situation is created to elicit people‘s preference by using different payment vehicles 1 . often used payment vehicles like voluntary payment, taxes, utility bills, entrance fee etc are likely to be familiar to most respondents (mitchell and carson, 1989). despite its appeal cvm has also been widely faulted (see hausman (2012)) 2 . in response to these objections, improvements and refinements have been proposed and tested. these in turn have further enhanced the credibility of its technique (carson, 2012; haab et al., 2013) 3 . be that as it may, method despite its limitations is one of the effective methods to place value to public goods especially in case of passive use values. hence, we preferred cvm to estimate benefits of improved dachigam national park and analyse factors that determine the stated wtp for improvement. 3.2. econometric method logit model or probit model is generally used for analyzing data collected by using cvm (loomis, 1987; fix and loomis, 1998). in the present study, data collected via cvm had one dependent variable with qualitative and binary choice (yes or no type of answers) nature. a ‗binary logistic regression model‘ has been employed for analysis of respondents wtp for improvement or maintenance of park‘s goods and services. probability (p i) reveals that one accepts to pay a maximum amount (in rupees) for improving and maintenance of dachigam national park. a linear expression of the model is as follows: ( ) ( ) ( ) above model variables are explained in chapter-v. it was specified by using the following hanemann (1984) formulation: ( ) * ( )+ * ( ( ))+ ( ) where represents the probability of answer ‗yes‘, ( ) is cumulative distribution function (cdf) which explains behavior of dichotomous dependent variable with a standard logistic distribution and includes some of the socio-economic factors, s is a vector of socio-economic characteristics, (includes respondents monthly income, age, education and earning members of his family), is intercept, , , and are estimated coefficients. it is expected that signs of may be positive or negativedepending upon socio-economic variable ( ). variables income, education and earning members of family is expected to be positive. for age the sign of coefficient can be either positive or negative. parameters of logit model were estimated, by ‗maximum likelihood estimation method‘ (lehtonen et al., 2003) using stata 12.0. 4. results and discussion 4.1. descriptive statistics of variables out of the total respondents/questionnaires 336 envisaged, only 285 were used for contingent valuation analysis. 20 questionnaires were rejected on the on the basis of providing incomplete or partial information whereas 31 questionnaires showed incentive compatibility or hypothetical market rejection. the descriptive statistics of variables used in demand function of contingent valuation analysis is based on 285 respondents (shown in table4.1.1) are discussed below: table-4.1.1. descriptive statistics (n=285) variable obs mean std. dev. min max age 285 35.7193 10.5889 18 70 edu 285 4.96842 1.44222 0 7 erm 285 2.36491 1.34799 1 9 mi 285 33415.8 20869.1 3000 150000 source: field survey data (2015) wtp as the dependent variable was regressed on set of independent variables i.e. monthly income of respondent (tmi), age of the respondent (age), education of respondent (education) and total earning members in family (erm) in the present study. wtp:about 84.82 % of the respondents were wtp for the improvement of park services and only 15.18 % of the respondents having zero wtp. 1 payment vehicle in a cv study plays a very crucial role in determining the wtp/ wtac for any change in environmental resources. studies across the developed world prefers ‗additional income tax‘ as a payment vehicle than other frequently used tools like ‗donation to a charitable organization‘, ‗compulsory or voluntary fees‘, etc (see for example, bateman, richard, brett, michael, nick, tannis, michael, graham, susana, ece, david, robert and john (2002). kwak, seung-hoon and chung-ki (2007). but in developing and lower income countries, where income tax is not a very relevant option generally prefer other options like ‗donation‘, etc. this study has adopted ‗donation to a charitable organization‘ run jointly by a reputed non-profit ngo along with local people as a means of payment vehicle. rationale for choosing ‗donation‘ over ‗income tax‘ in this study can be justified on the ground of unfamiliarity and irrelevance of income tax as most of households in this areas generally do not pay income tax to government due to lower income. in such circumstance putting an ‗additional income tax‘ is meaningless. 2hausman (2012). after reviewing the contingent valuation method (cvm) literature for twenty years concludes that cvm would still face problems such as: hypothetical bias/overstatement, disagreement between willingness to pay and willingness to accept, problems of scope and embedding. he said that cvm has many flaws in practicing and have zero weight in public decision-making. 3 a counter argument had been put-forth by haab, interis, petrolia and whitehead (2013). they opined that hausman was entirely made debunk cvm once and for all. they completely agreed with the carson (2012). who concludes ―the time has come to move beyond endless debates that seek to discredit contingent valuation and to focus instead on making it better‖. economy, 2016, 3(2): 102-107 105 tmi: total monthly income (tmi) is a continuous variable representing the household‘s monthly income from all sources in rupees. the monthly income of the respondents varies from rs. 3000 to rs. 150,000 with mean tmi of rs. 32951.8. age: ageis a continuous variable representing the age of adult respondents in years (above 18 years). it ranges from 18 to 70 years with a mean value of 35.7193 years. education: education is a categorical variable taking values from 1 to 7. the major portion of the sampled population having highest attained education level (postgraduates and above) were found to be 42.11%. about 26.73% visitors were graduates only 1.05% visitors had up to primary (i.e. class i-v) level of education, 3.86% had up to middle school (i.e. class vi-viii) level of education, 7.72% sampled visitors had up to high school (i.e. class ix-x) and 17.19% sampled visitors had up to secondary school (i.e. class xi-xii) level of education. around 1.4 % visitors were found to be illiterates erm: earning members of the family (erm) was continuous variable ranges from 1 to 9 members. the average number of earning members was 2.36 members. 4.1.2. results from econometric model for cvm estimated results of cvm were obtained by using multiple regression model in econometric software stata 12.0 for estimating the parameters of variables. the results are shown in table4.1.2.1. the results document the expected affect of variables on wtp. three out of five variables were found significantly associated with the willingness to pay. the expected relationship between the significant variables with the wtp was in line with the economic theory. the coefficient of household monthly income (tmi) was found positive as expected showing that an increase in the monthly income would increase wtp for park improvement. a one percent increase in income would increase willingness to pay by an average of 0.00011 percent. table-4.1.2.1. logit model estimates dependent variable: p(yes ) for wtp variables coefficient std. err. p>|z| tmi 0.00011 0.000020 0.023* age 0.01135 0.3243 0.557 education 0.67893 0.2673 0.007** erm 2.09327 0.25843 0.010** constant 0.3175 1.7728 0.858 log pseudolikelihood -76.566 wald chi2(7) 25.07 prob> chi2 0.0003 pseudo r 2 0.3703 number of obs 285 source: field survey data (2015) * and** shows significance at 5% and 1% respectively 4.1.3. wtp and its influencing factors the positive sign of education means that an increase in number of years of education would increase their wtp. more specifically, a one percent increase in years in education would increase willingness to pay for the improvement of the national park by 0.67893 percent. the results of this variable was in line with the jaffrey et al. (2012) and bhatt et al. (2014) in which it was found that educated people would pay more for the conservation of environmental sites. income and education are among the most popular variables to describe the socio-economic characteristics of a sample. in this study income and education were found to be significant variables in influencing the wtp. in the present study, age was found positive but was not significant and did not explain wtp. the positive sign of the variable (age) implied that the older the person the more he/ she was willing to pay for improving the quality of the park. earning members of the family (erm) having positive sign as was expected, which implied that more the earning members in family more the benefits from the park greater will be their willingness to pay for improvement. 4.1.4. willingness to pay for dachigam national park improvement scheme and welfare estimates dachigam national park has potential use and non-use values. however, the economic exploitation by the locals and the stress of tourist appeared beyond the park‘s carrying capacity. thus, it is therefore imperative requirement to use the park in a sustainable manner. in the present study, cvm was used to estimate the conservation and management value of park by using open-ended questionnaire format for elicitation of responses of wtp (yes/no) and other related questions. the analysis done on the basis of responses from two main questions asked during cv survey i.e. “are you willing to pay for conservation of dachigam national park?” and “how much you are willing to pay for if entry fee is increased from its current levels?” results showed that the majority (84.82%) of the tourists (benefitted from the use values of the park) were wtp for its improvement. respondents‘ willingness to pay for the conservation of the park ranges from rs. 110 to rs. 140 per year with a mean of around rs. 125 per year. generally, wtp estimates may be affected by level of effectiveness, reliability and trust of managing institutions (bateman et al., 2002) the aggregate tourist‘s wtp for improvement of dachigam national park was computed as rs. 35,625, which was calculated by multiplying the mean wtp by the total number of sampled tourists (excluding the protesting economy, 2016, 3(2): 102-107 106 respondents). after excluding the protest zero‘s 4 (1913) 5 , the total number of visitors with expected valid responses in the study area was 10841 in 2015. therefore, the total aggregate value of the park improvement for all the tourists was (125 x 10841) rs. 13, 55,125. even though in monetary terms the value was not quite high, but given the acceptance rate of the hypothetical preventive treatment, nearly 85% suggests that interventions are highly desired and demanded in this case area. total wtp of tourists for enhancing recreational facilities worked out to be rs. 13 lakhwhich is 27 %of the annual budget outlay for the conservation of national parks in the state. on the basis of visitor‘s willingness to pay (wtp) for benefits and preference for quality improvement decision makers should design recreational projects and other enhancement programmes which don‘t cause any negative effect to natural environment. it includes viz. creating separate tourist zone, eco-friendly restaurants and more attractions for migratory and local birds. the park authority should increases the current levels of entry fee which will generate additional funds to the park authority. this enables the concerned authority to have a higher income to support improvement and expansion in quality of the recreational services. 4.1.5. not willing to pay for improvement after excluding the protest zeros, about 51(15.18%) respondents among the sample (336) 6 were providing zero willing to pay for proposed improvement or conservation programme. almost in all the cv studies a proportion of respondents gave various reasons for not paying any amount for such programmes of environmental goods and services. in the present study, visitors gave multiple reasons for rejecting to pay for proposed project. according to them there is no need to pay as the park is being funded by national and international organizations. they also said that the national park is a public good and it is government‘s duty to maintain and improve the quality of the park‘s ecosystem as numerous national and international agencies funded for it. a certain percentage of respondents opine that they do not trust such management scheme, as they believed that despite the huge investment on the various projects/programmes, the health of the park is still far from satisfactory. 5. conclusion cvm was used to estimate the conservation value of dachigam national park and worked out to be rs. 13.55 lakh per year as additional revenue to the park management in the form of increased entry fee from current levels. wtp value of the study, although small, induces policy makers and corporate players through public private partnership (ppp) to make 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https://scholar.google.com/scholar?hl=en&q=willingness-to-pay%20for%20borivli%20national%20park:%20evidence%20from%20a%20contingent%20valuation http://dx.doi.org/10.1016/s0921-8009(96)00094-8 https://scholar.google.com/scholar?hl=en&q=the%20hangul%20in%20dachigam:%20a%20census http://dx.doi.org/10.1017/s0030605300009121 1 economy vol. 5, no. 1, 1-7, 2018 issn(e) 2313-8181 / issn(p) 2518-0118 doi: 10.20448/journal.502.2018.51.1.7 determining issues of the economic essence and methodology of foresight lamara qoqiauri1  nino qoqiauri2 1doctor of economics sciences, academician of georgian economics academy, senior research scientistcoworker at the national institute of economic (aaep), united kingdom 2master of sokhumi state university, georgia ( corresponding author) abstract the article discusses key issues of the origin, development and essence of modern foresight. there is explained three main program of foresight. in scientific –technical programming is the foresight a new event or not, how is it possible to positioning the foresight in strategic planning , is its methodology used at regional level or not, in the paper there are also given the stages of formation of foresight, the parallelization is given between forecast and foresight and it is justified that the participants of foresight create real possibilities not only for forecast, also they discuss the future possible alternatives and develop strategies to implement more promising projects. methodological issues of foresight are also studied, in particular, normative and exploratory approaches, a wide range of methods used for foresight: creativity, expertise and forecast, analysis, interaction –delphi – methods of survey establishment on quality information. keywords: determinants, foresight, delphi method, strategic management, explanatory approach. citation | lamara qoqiauri; nino qoqiauri (2018). determining issues of the economic essence and methodology of foresight. economy, 5(1): 1-7. history: received: 24 october 2017 revised: 22 december 2017 accepted: 3 september 2018 published: 10 january 2018 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group contribution/acknowledgement: both authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ......................................................................................................................................................................................... 2 2. review of literature ........................................................................................................................................................................... 2 3. main part .............................................................................................................................................................................................. 2 4. conclusion ............................................................................................................................................................................................ 6 references ................................................................................................................................................................................................. 7 bibliography ............................................................................................................................................................................................. 7 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2018.51.1.7&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ https://orcid.org/orcid-search/quick-search?searchquery=lamara qoqiauri https://orcid.org/orcid-search/quick-search?searchquery=nino qoqiauri https://orcid.org/orcid-search/quick-search?searchquery=lamara qoqiauri https://orcid.org/orcid-search/quick-search?searchquery=nino qoqiauri https://orcid.org/orcid-search/quick-search?searchquery=lamara qoqiauri https://orcid.org/orcid-search/quick-search?searchquery=nino qoqiauri economy, 2018, 5(1): 1-7 2 1. introduction the world experience of the development of economics in the different fields of business truly proved that to develop economical business subjects effectively and in a stable way can be reached by total usage of innovations. in today‟s conditions different kinds of enterprises are functioning in quite difficult, indefinite, dynamically changeable space of social-economical environment. innovations themselves support to reach favourable, strategic, competitive conditions in the market. nowadays the country‟s main goal of modern social-economic development is its movement towards innovative road, maximal usage of principally new factors of economical growth that is common for postindustrial informative era. this task is very important for modern georgia. the necessity of movement to innovative road of the county‟s economics requires strong activization of innovative business. so to emphasize innovative sphere in the basis of development of its new directions will make it possible to overcome the problems of georgia‟s big and traditionally increasing position of being behindhand ( in comparision with the world‟s highly developed countries in different field of economics.) to manage effective innovative politics we consider the necessity of management of enterprises and innovations, new mechanisms of planning and prognosis formation, strategic projection of the county‟s dominant trends, to reveal factors of trends change.) obviously, it is important to work out an acting plan on the basis of possible future development. the above mentioned problems are not well studied in economical literature. in our article we aimed to study world experience of technological foresight research, its main point, aim and tasks. besides we searched materials of foresight and principle features and stages of future prediction, combination of different methods of foresight, about the spheres of foresight usage. 2. review of literature composition of prognosis of development of the county‟s scientific technical sphere, to study technological foresight requires definite logical succession. we used vienna and brussels ec bureaucracy materials, as well as about scientific technological foresight in economical literature. we also used european developed countries – austria, belgium, bulgaria, finland, germany, italy, spain, great britain‟s etc, exiting materials abut foresight development organizations business. during the work on the article we also based on papers of: (barker and smith, 1995; saritas and oner, 2004; linstone, 2011; kastro et al., 2012). 3. main part the concept foresight represents innovation for world, which is confirmed by the dynamics of distribution of this term and foresight works. herewith, this is one of rare cases, when innovation is first tested in the region and then – in the center. the word „foresight‟ foresees “looking into the future”. in the most general form, foresight represents the system of forecasting. the most cited determination of foresight is that of american expert b. martin, focused on the forecasted side of foresight, it focus on identification of strategically and socially important development zones. however, we consider this determination not to reflect all opportunities of foresight and its social-humanitarian sides (unido technology foresight manual. 2005)1. of course, single determination cannot cover all sides of foresight, as practical objective of the article is theoretical development of the content of his term for the purpose of regional foresight, in this article we are interested in three main directions. first – does foresight represent new phenomenon compared to the scientifictechnical forecasting, taking place in our country; second – how can foresight be positioned in the field of strategic planning or, in wider sense, strategic management of the region; and third – foresight methodology is applied to the regional level. regarding the first issue, there are two opinions of the issue. one is that the foresight appeared in the 50s of last century in the company rend corporation2, which developed delphi method and applied it for the purpose of forecasting. this point of view, in fact identifying the term forecast and foresight, is represented in several foreign sources and sometimes is reproduced in the native publications. another method of approach exists in the fact that foresight, as the system of forecasting was registered only at the end of 80s of 20th century. the matter is not the distinction in time, but in the principle of change. foresight represents particular methodology, the essence of which is not only in forecasting of the future and in the agreed development of decisions regarding future in the field selected for foresight. it in fact solves the problems of achieving consensus in relation with the future through agreement of the interests of different social layers of public society, and in the active activity-related form. thus, to our mind, it becomes not only prognosis, but also – social and humanitarian technology. in such a holistic form as the socio-humanitarian technology of foresight was formed only at the end of the last century and this process is not yet completed. the first foresights were carried out exceptionally for scientific-technical domain, due to which they were called the technological foresights. after this, from the field of defense, foresight tools was migrating social domain and policy to the economy and were being transformed into the market-oriented foresights. social and cultural outcomes of occurrence and introduction of technologies (for example, influence of internet on the family, political institutes and organization of labor) were evaluated in them. under modern conditions, foresight has been being concentrated to the discussion of different actual universally valid problems, such as the problem of hanger, poverty, security etc. when transferring to the third stage, foresight is becoming the technology for elite communication, forming consensus regarding view of the future in society. 1 technology forecasting first came to prominence in the late 1950 s in the united states deference sector and in work by consultants such an the ranzd corporation. the latter were responsible for developing some of the principal fools of technology forecasting, such us the delphi questionnaire survey and scenario analysis. larger forecasting exercises ware carricd out during the 1960 s by the united states navy and the united states air force 2 delphi method – is considered one of the central method. economy, 2018, 5(1): 1-7 3 currently, foresight uses system instruments of influence in formation of the future, allowing foreseeing possible changes in all fields of social activities: science and technologies, economy, social, public relations, and culture. this is the reason for common use of “foresight” without the adjective “technological”. frameworks for occurrence of foresight in world are observed by the specialists differently as well. for example, there is the opinion regarding the fact that there already were “full foresights” performed 10 years ago, and “the first complete foresight in georgia was evaluation of the conditions and prospects of development of critical technologies, performed in 1997-1998”, in which delphi-surveys are applied. next foresight in these series is “scenario forecast of development of science and technologies before the year 2010”. essentially, the opinion that the forecasting works carried out in our country in 50s represented foresights may be the option of this position. of course, occurrence of foresight in russia may be classified only in case of identification and forecasting. to our mind, these processes are similar, but different and distinction between them may be demonstrated through analysis of the principles of foresight and forecasting (see the table 1). let us review stipulated issues in details. let us review consistently – integral characteristic of foresight, for which we refer to the history of different forecasts. as known, forecasting was originated long ago and, surprisingly, forecasts of scientists are much more exact, than those made by science fiction writers, giving rise to the idea of one-sidedness of scientific forecasts. examples of unfulfilled technological forecasts are quite numerous; both in terms of denying the prospects of many of today's technical achievements that have entered our life, and, conversely, reassessing technical prospects. however, a number of technological forecasts can be considered erroneous only by implementation dates. based on this, we can conclude that one-time technological forecasts should be systematically refined. table-1. distinction of forecasting and foresight parameter forecast foresight 1. content the formulation of scientifically grounded judgments about possible states in the future of some object on the basis of current trends, without taking into account the particular interests of the players developing a vision for the future, identifying areas of research and the emergence of technologies that can bring the greatest economic and social benefits based on the desired future. 2. participants and experts scientists, politicians representatives of all key participants of development: scientific-technical field, business, government, society 3. destination predicting options of the future development of the image of the future; concentration of resources on the directions necessary for its achievement 4. method of realization enforcement of administrative orders or convictions encouraging the implementation of selected paths based on the adoption of agreed upon interests solutions 5. influencing processes recognizes existing trends shows possible ways of adjusting existing trends 6. results reports reports can be compared with the actual result reports reports can be compared with the actual result source: kovalev (2013). systematical forecasting of social and political processes is much more important, which has not been done within the framework of scientific-technical forecasting. upon discussing the issue of distribution of foresight, v. a. nikonov stated that none of the real historic issues, overturning the fate of russia and science was not forecasted; that preferences of scientific-technical policy often depend on political decisions; and the fact, how political management represent preferences from the point of politics, and not from the point of –technology. it is interesting that within the framework of the foresight; in particular, in the development of foresight of the company shell, its futurists foresaw the collapse of the soviet union. the history of development of foresight, as the determined methodology demonstrates gradual shift from single forecasting to the systematic process of forecasting; from foreseeing opinions of the scientists to the foreseeing of the opinions of different layers and representatives of society; from forecasting technological processes to the prediction of social outcomes and the results of technical progress, and, in particular regard, to the forecasting of social processes. thus, if the prognosis is completed document3, which may be foreseen upon expiration of particular term, it may be possible to distract from such necessity, then the foresight represents permanent corrected process of forecasting, and developed as a result of foresight, the documents are reviewed depending on the changes, taking place in the society. following distinction touches upon participants. forecasting is mainly performed by a corporation of scientists. different layers of society participate in formation of the foresight as experts. based on the international practice of development of foresights, not only the representatives of science, but also those of business field, public organizations and power structures, municipal formation, public movements, civil unions, and societies of scientists and experts perform the role of experts. their opinion, their experience and interests are reflected in the discussions about possible state of the future. besides this, establishment of the network of high-qualified and the participant concerned is important not less than the forecasting itself, in the result of foresight. these are the networks comprising of active citizens of different layers of society being able to form due response on the political, economic, social and other calls, as they, as participants of the process, have premonition to measures of precise preventive action and being ready to use the resources owned by them. 3 thus, if the prognosis is completed document. economy, 2018, 5(1): 1-7 4 hence, forecast – this is the working of the grounded judgments about possible states of some objects in the future, based on the formed trend of its development. foresight is comprised of the elements of active influence upon future, in the form of agreement of particular interests of different social layers of civil society, their aspirations and requests as direct participants of these processes. foresight is more sensitive to these interests, being able to be concentrated on the cultural forecasting of changes in the society. when allocating zones of prospective investigations and denoting the emergence of key technologies, which may have the economic and social profit, foresight forms reference points for all active participants of public society. if the forecast is greatly citing objective processes and shows the options and versions of the future, foresight foresees opportunity for selecting the option of action depending of the “vision” of future, i.e. actually is directed towards designing of future and searching of the methods of its achievements; it also shows possible methods of their adjustment (popper, 2007). correspondingly, foresight stops being just a set of forecasting tools, i.e. obtains projection prospects for public changes. next purpose of foresight is “sawing” opinion about different participants of social-economic life, in order to develop agreed opinions about future in the field, which is under foresighting. hence we may consider that foresight, according to its purpose, supports development of the experience of interaction and cooperation of state and scientists. important adverse product of the foresight is also named the mechanism of evaluation of technologies, project of programs, and political institute. what is the position of foresight in the system of strategic management of a region? it shall be noted that formulation of strategic management of a region itself is quite new. it is related with the theoretical assumptions regarding the fact that the region is an independent business entity. despite significant theoretical progress in this direction, there also are the arguments regarding the fact that a region is not a business entity; it is only administrative-territorial formation within a country, carrying out federal regional policy. we used to ground the position regarding the fact that market economic system is based on the federal system of state structure, in which, market-safety grounds of which is competition of strategic economic units – regions. this is conditioned by the development of global competitive processed and those of global regionalization, where regions become subject not of only domestic, but also – international competition, and the regions of different levels of configuration. in this regards, foresight serves to develop a vision for the future of the region, taking into account national and global priorities, on the one hand, and resource, national-cultural, social and even mental peculiarities of the participants of regional economies. it shall be noted that institutionally, forming of the system of strategic management of regions commenced long ago. state institute of regional management in person of the ministry of regional development was established only in 2004. currently methodological recommendations on development of the strategies of development of the subjects of federation have been developed. the strategies, in their turn, are considered and are subject to agreement with the working bodies of the ministry. agreement assignment includes determination of correspondence of strategies of development with of the subjects of the federation and sectorial strategies. at the same time, yet development of regional strategies do not represent mandatory mechanism. moreover, institutional status of regional foresight is not determined. there is the issue of conformity of the strategy and foresight. “our” foresight, to our mind, is comprised of the detailed development of the conducting of the fields, which are the most important for the region and selected for the regional foresight at the first stage of its conducting. outcomes of foresight make foundation for development of a strategy. on the other hand, foresight may solve the issues of development of separate field in more details, which are not foreseen in the strategy. besides this, foresight solves the issues of widening circle of stakeholders, involved in the development of a strategy, improving methodology and technology of development of strategy, including a system of methods of its preparation, which are specific, characterizing for the foresight (for example, forming experts‟ panels, conclusion of mental maps) and documents (for example, technological road maps, etc.). let us review methodological side of foresight. foresight foresees particular methodology, allowing realization of its principles and achieving desired results, which does not represents completely lineal, strongly structured and formalized ones. methodology of foresight is based on two methods of approach: normative and exploratory (search). normative method of approach towards forecasting means orientation to the mission of subject (organization), requirements and objectives, achievement of which is the purpose of subjects. normative method of approach begins from the determination of the options of desired future. it gives answer to the questions: which trends and events shall bring us to this future. normative forecasting is confirmed by the movement in space of technologies from the technologies of higher level to the technologies of lower level, i.e. from requirements and purposes to the means of their realization. example of regulatory forecasting may serve to the forecasting in the field of space, when forecasted proved is represented in the form of continuous movement of technologies from the understanding of the problem of space to the field, which shall solve in favor of a human, up to the particular means of its solution – conditions for nuclear fission and amount of the energy released, etc. exploratory method of approach (in russian literature it is also called surveying, researching or searching one) begins from the present and responds to the questions: which will happen in the future, in case of continuing essential trends. searching foresight is based on the orientation towards the further opportunities, determination of the trends of development of the situations on the basis, upon development of the forecasted information. example of searching foresight may be forecasting in the field of electronics, when forecasted process is represented in the form of the consistent technology transfer, starting from the quantum electrodynamics and completed with the instantaneous global communication. the set of the methods used for foresight, is quite extended, they may be systematized through several criteria: per the type of foresight: normative (building desired future) or searching (formation of the image of the future based on the identified trends); per purposes (development of ideas or analyze), per tools (quantitative or economy, 2018, 5(1): 1-7 5 qualitative), per methods of working with experts (full-time and part-time, surveys and direct personal interaction); per the degree of traditionalism and innovation. methodology instrument of foresight currently includes diverse methods of development of buildings in different sciences and applied fields, as traditional methods of forecasting, analyzing and development of ideas, so new creative methods developed in course of performing foresight works. main methods, used today in course of conducting foresights, reflect its reasonable functions – forecasting (forecasting trends), analytical (analyzing existed situation), and creative (development of new ideas regarding the future). particular methods, along with the stipulated functions, provide interaction of developers. correspondingly, entire set of the methods may be divided into 7 groups. in the materials of the united nations industrial development organization, all the methods are presented in the form of a diamond, on the angles of which there are characteristics of creativity (creative potential), expertise and forecasting, analyses and interaction are concentrated. several methods may be used as for different purposes – for forecasting, learning environment and analyzing of trends, for development of the ideas regarding future and receiving ideas regarding current objectives of foresight (and correspondingly, they will be repeated in different groups). fig-1. diamond of the methods of foresight source: popper (2007). correspondingly, we may count in this set 17 quantitative methods, 10 semi-quantitative and 6 qualitative methods. methods of forecasting (expertise):  delphi method,  scenario development,  determination of critical technologies,  trend extrapolation,  simulation modelling,  critical/key technologies,  method of historic similarity,  other methods based on the analyze of exact empiric data. analyzing methods:  swot (strengths, weaknesses, opportunities, threats-analysis),  steepv,  cross-impact analysis,  environmental scanning,  expert panels,  essay preparation,  cross impact analysis,  relevance trees,  balance score card. methods of developing ideas (creative methods):  experts‟ discussions,  focus-groups,  brainstorming,  conferences,  essay preparation,  morphological analysis. economy, 2018, 5(1): 1-7 6 new creative methods:  wild cards,  technology road mapping, trm,  relevance trees. of course, some methods may serve as for the analysis, so – development of ideas. normative methodology is mostly uses delphi-surveys and methods, basing on the qualitative information. particularly, method of expert panels received extensive development, which were greatly oriented towards a work with not only quantitative, but also – qualitative information, received directly from experts. qualitative information usually is represented in the form of verbal descriptions, when evaluations were obtained through verbal or verbally figurative scales, when there is information only about comparative assessments of alternative options. so-called “success scenario” and compiling “desired scenario of collective activities” are used, where participants are trying to establish a shared vision of the future, which represents as desirable, so – probable, and identification of the methods through which it might be achieved. for searching foresight other methods are more suitable, which are based on the analysis of the exact empiric data, in which preference is given to quantitative information. using qualitative (non-quantitative) information in the searching foresight is also possible. example of this is the use of intuitive methods of the same method of scenario or the method of expert curves, allowing determination of the scheduled trends of changing situation, basing not only on the empiric data, but also on the experience of high-qualified specialist experts. the trends and influences are analyzed, investigations for determination of cross impacts are carried out, ordinary delphi-method and some applications of the models. selection of the methods for particular program of foresight, as a rule, is individual depending on the purposes and financial terms and conditions. criteria for selection of the methods:  available resources (time, money, experience);  nature of desirable participation;  appropriateness for the combination with other methods;  desired methods for performance of foresight (for example, document or process);  quantitative/qualitative requirements of methods to the data;  methodology competence. it is clear that methodology competence will become key factor in course of selection of methods. for example, at baikal forum in the report h. funning they stated that they were carrying out foresight of own land (regions in federal republic of germany are called land), determining problems and desired vision under the method of disney, which is not included into the diamond of the methods of foresight, and it may also be allocated to the creative methods. the definition of appropriate methods for the region requires special development. 4. conclusion so, the foresight is system of expert assessment methods for strategic directions of social economic and innovative development, to find out technological breakthroughs that have the ability to influence the economy and in the medium and long term perspective. expert assessments are the bases for assessing future options. the foresight‟s methodology has been selected to do a number of traditional and rather new products. at the same time, their constant perfection, methods and procedures are developed, which ensures the improvement of the perspectives of scientific-technical and socioeconomic development perspectives. the main sector of methodology development is aimed at more active and purposeful use of experts‟ knowledge of the project participants. usually in every foresight project, is used the combination of different methods, among these are the expert panels, the delphi (expert survey in two stages). swat analysis, mental storms, construction of scenarios, technological road maps, relevance trees mutual analysis and etc. in order to foresee possible options and get a full picture a large number of experts are invited. for example in the development of long-term forecasts of scientific-technical development in japan, which is conducted in every five years, more than two thousand experts participate, they represent all important directions of science technology and techniques. and at the last korean foresight project more than then thousand experts participated. foresight is focused not just for alternatives, but also the choice of the advantageous ones. selection criteria are used to select a comparatively advantageous option. for example criteria for achieving growth can be used when choosing critical technologies and for the field , when building road maps-identify potential market marks and reveal and to choose those technologies which enable to work out competitive products for forming market as fast as possible. choice of development strategy is carried out on the basis of order of wide expert consultations, that makes it possible to predict the most unexpected ways of development of events and possible “underwater cliffs”. foresight thinks that desirable variant of future is greatly depended on sections that should be carried out today, so choice of variants are going on by working out those events, that will support optimal traecroty of innovative development. most foresight projects, as a central component, includes perspectives of science and technological development. as a rule, these topics are subjects of judgement not only for scientists but also for politicians, businessmen, practician, specialists from different spheres of economics. the result of such discussions is formation of new ideas, which are connected to perfection of management mechanisms, to integration of science, education and economics and last, to increase of the state branch or the region competitiveness. besides, the very “ future prediction” – systematical efforts organization conditions formation of higher culture of management and finally, formation of more argumentative, scientifictechnical and innovative politics. foresightprojects are oriented not only to get new knowledge as a form of speeches, set of scripts, recommendations, etc. its main result is development of informal interrelations among their participants and formation of the same opinion on the situation. economy, 2018, 5(1): 1-7 7 in some projects horizontal branch areas are formed, in the frames of which scientists, businessmen, high school representatives and neighbouring sphere specialists systematically discuss common problems and it is understood as one of the main effects. foresight is formed as systemic process, which should be thoroughly arranged and organized. as a rule, foresightprojects are carried out quite regularly , sometimes by repeated scheme (as japanese long-term prognosis, which has been carried out in every five years since1971.) in other cases research is made as order of interrelated projects, that are aimed for solving interrelated tasks and about long – term perspectives on formation of agreed representation of technologies, innovations and community development. foresight is more important approach than a complex compared to the traditional speech. first of all, forecasts as a rule are established by a narrow circle of experts and in most cases it is associated with less predetermined events. (for example, forecast of auction course, weather, sports results). i the frames of foresight there is discussed the evaluation of possible perspectives of innovative development, which are related on science and technology forecasts, there are possible technological horizons, with can be achieved during the investing funds and during the systematic world. it is also probable effects for economy and society. secondly, many experts are always involved in foresight (often through intensive interaction) from different fields of activity, which are related to the themes, of foresight projects and sometimes on the survey of a certain group of population (the inhabitants of the region, the youth…etc.), which are connected to solve problems. third, the difference between the foresight and forecast is orientation on development of practical measures for approaching selected strategic orientation. references barker, d. and j.h.d. smith, 1995. technology foresight using roadmaps. long range 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regional level – a participatory methodological framework. journal of management and strategy, 4(2): 1. view at google scholar | view at publisher asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. https://scholar.google.com/scholar?hl=en&q=technology%20foresight%20using%20roadmaps http://dx.doi.org/10.1016/0024-6301(95)98586-h http://dx.doi.org/10.1016/0024-6301(95)98586-h https://scholar.google.com/scholar?hl=en&q=three%20eras%20of%20technology%20foresight http://dx.doi.org/10.1016/j.technovation.2010.10.001 http://www.foresight-network.eu/files/reports/efmn_mapping_2007.pdf http://www.foresight-network.eu/files/reports/efmn_mapping_2007.pdf 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http://dx.doi.org/10.5430/jms.v4n2p1 economy issn: 2313-8181 vol. 2, no. 1, 1-9, 2015 www.asianonlinejournals.com/index.php/economy * corresponding author 1 ethiopia and the brics: an assessment of trade and investment flows maxwell ekor 1* --oluwatosin adeniyi 2 --jimoh saka 3 1 preston consults, abuja, nigeria 2 department of economics, university of ibadan, nigeria 3 department of economics, lagos state university, nigeria abstract this work is licensed under a creative commons attribution 3.0 license asian online journal publishing group contents 1. introduction ................................................................................................................................................................................. 2 2. overview of brics investment flows ...................................................................................................................................... 4 3. brics investments in africa ..................................................................................................................................................... 5 4. trade flows and intensity between ethiopia and the brics ................................................................................................. 7 5. summary and policy implication of findings .......................................................................................................................... 9 references ........................................................................................................................................................................................ 9 ethiopia is the 83 rd largest economy in the globe according to the world bank figures for 2013. the country is considered to have huge but untapped potentials in the sub saharan africa region as well as one of the attractive investments destinations on the continent. this study therefore examined the investment flows and intensity of trade between ethiopia and the individual brics for the period 1995 to 2011. a striking finding is that not a significant proportion of the brics investments in africa go to ethiopia. with respect to trade flows, ethiopia recorded trade deficit with all the brics countries in the period under review, while its trade intensity index with all of them was less than one. arising from these findings a number of relatable policy implications are documented. first, given that ethiopia is considered as one of the recent success stories in africa, the brics in general and south africa in particular may explore areas of potential benefits by improving bilateral economic relationship with the country. second, given that ethiopia is experiencing massive developments in its infrastructure, south africa may take advantage to invest in some of the projects. third, the relatively low trade intensity with ethiopia means that going forward there are possible areas of opportunities that may exist which may ultimately boost trade flows between ethiopia and the brics. keywords: real gdp, foreign direct investment, trade intensity, policy, brics, ethiopia. jel codes: c32, c51, f14, f52. http://creativecommons.org/licenses/by/3.0/ economy, 2015, 2(1): 1-9 2 1. introduction ethiopia is considered one of the countries in africa that is recording steady progress in its economic transformation process. blessed with natural resources such as gold, platinum, copper, potash, natural gas, and hydropower, ethiopia’s gross domestic product (gdp) as shown in figure 1 has increased from $11.4 billion in 1981 to $94 billion in 2011. the real gdp growth as depicted in figure 2 indicates that ethiopia recorded average growth of 4.8% between 1980 and 2011 and this was partly due to the negative growths recorded in some years in the 1980s as well as in the early 1990s. however, since 2004 the country has witnessed robust real gdp growth which averaged approximately 11% between 2004 and 2011. with respect to the gdp composition, the ethiopian economy is mainly agrarian, with the agriculture sector contributing on average 46% to the gdp between 2002 and 2011 whereas the service sector is the second highest contributor of average 42%. while the industrial sector contributed approximately 12% to the gdp in the period, the manufacturing sector had the least share of average 4.7%. given the strategic importance of the agriculture sector and the need to ensure food security and sufficiency, the government has continued to consolidate on its relationship with donors in the area. this has strengthened the country’s agricultural resilience thereby contributing to the reduction in the share of the population prone to starvation. the downside, however, is that real income continues to be eroded by inflation given that the consumer price index averaged 8.9% between 1982 and 2011 while growth in gdp per capita averaged 8.9%. nevertheless, the integration of the ethiopian economy into the global system has improved consistently since 1993 with trade (% of gdp) averaging 38% between 1993 and 2011, higher than the average 17% recorded between 1981 and 1992. given the progressive stance of the ethiopian economy, it may in the near future be strengthening and consolidating its bilateral relationship with key countries, not just in africa but also on the global stage. to this end and given the rising relevance of the brics (brazil, russia, india, china and south africa) countries as highlighted in studies such as de castro (2012), it may be interesting to see how ethiopia is currently relating with these countries, especially with respect to trade and investment. the brics presently account for about 43% of global population, 18% of international trade and 25% of the world’s gdp in purchasing power parity terms. ethiopia is currently the 8th largest economy on the continent of africa and one of the fastest growing. this means that a consolidated relationship between the individual brics and ethiopia may be beneficial to all parties involved and the african continent at large. of particular interest is the relationship between south africa and ethiopia due to suggestions that for the former to improve and consolidate its involvement in the brics group, it must improve on its bilateral trading and investment relationships with other key countries on the african continent. therefore, following from the above, the goal of this paper is to provide some evidence on the trading and investment relationship between ethiopia and the individual brics countries. fig-1. ethiopia’s nominal gdp (1981-2011) (million) source: world development indicators (2012) fig-2. ethiopia’s real gdp growth (%) (1981-2011) source: world development indicators (2012) economy, 2015, 2(1): 1-9 3 fig-3. ethiopia’s gdp composition (% of gdp) (1981-2011) source: world development indicators (2012) fig-4. growth in gdp per capita and inflation source: world development indicators (2012) fig-5. ethiopia’s trade balance (% of gdp) (1981-2011) source: world development indicators (2012) economy, 2015, 2(1): 1-9 4 fig-6. ethiopia’s current account balance (% of gdp) source: world development indicators (2012) 2. overview of brics investment flows the aggregate inflows, outflows and consequently the net-flows of the brics investments in the period 1992 to 2011 are shown in figure 7. the picture shows that china leads the pack with an average foreign direct investment (fdi) outflow of $16.9 billion and inflows of $60.4 billion, resulting in a net-flow of $43.5 billion in the period. brazil recorded the second highest flows of fdi with an estimated average outflow of $3.9 billion compared with inflow of $22.6 billion, resulting in net-flow of $18.7 billion. while russia’s average inflow and outflow of fdi are estimated at $17.8 billion and $17.2 billion resulting in a net flow of only $579 million, india recorded a net flow of $5.9 billion. south africa had the least flows of fdi but its inflows outperformed the outflows making the country record a net flow of $1.6 billion. fig-7. average fdi flows of the brics 1992 2011 source: unctad statistics http://unctad.org/en/pages/statistics.aspx when the brics fdi outflows are considered as percentage of gdp, figure 8 shows that russia outperformed the other brics members with its fdi outflow averaging 1.8% of gdp in the period. this is followed by south africa’s 0.9% of gdp, while brazil and india both recorded an average of 0.5%. china recorded the least fdi outflow of 0.4% of gdp in the period. with respect to fdi inflows as percentage of the gdp, figure 9 shows that china recorded the highest as the fdi inflow into the country averaged 3.6% of gdp, while brazil and russia followed with averages of 2.1% and 1.9%. south africa recorded average 1.3% in the period and india had the least inflows in the period with its fdi inflow averaging only 1.1% of gdp between 1992 and 2011. brazil russia india china s/africa inflows 22,594.43 17,814.83 11,390.94 60,385.82 2,616.45 outflows 3,944.26 17,235.44 5,414.89 16,932.74 930.09 netflows 18,650.17 579.39 5,976.04 43,453.08 1,686.36 10,000.00 20,000.00 30,000.00 40,000.00 50,000.00 60,000.00 70,000.00 $ m il li o n economy, 2015, 2(1): 1-9 5 fig-8. brics fdi outflow as a % of gdp source: oecd statistics http://stats.oecd.org/ fig-9. brics fdi inflow as a % of gdp source: oecd statistics http://stats.oecd.org/ 3. brics investments in africa although ascertaining the exact volume and value of fdi flows from the brics to specific countries in africa is challenging due to data constraint, figure 10 provides an indication that angola is a key beneficiary of brazil’s investment flows into africa. in addition, figure 11 shows that most of the loans by brazil into africa has flowed more to angola relative to other countries on the continent. fig-10. main brazil’s fdi investment in africa source: world bank (2012) 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 brazil russia india china south africa 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 brazil russia india china south africa 2001 2002 2003 2004 2005 2006 2007 2008 2009 angola 265 18 22 24 17 20 73 58 124 south africa 8 0 2 0 50 100 150 200 250 300 us $ m illi on economy, 2015, 2(1): 1-9 6 fig-11. main brazil’s intercompany loans to africa source: world bank (2012) russia’s investments in africa as shown in table 1 indicate that the country’s areas of interest are in oil exploration, mining, aluminum and power. the countries that have benefited from this preference and choice of investments include south africa in the area of mining and exploration (oil, gas, diamonds and copper), while botswana had russia investing about $2.5 billion in 2007 in its mining and processing industry. also, russia’s rusal invested about $250 million in nigeria’s alscon in the aluminum refining sector through acquisition. angola benefitted from russia’s investments in 1992 and 2006 when russia’s alrosa and sintez made investments in greenfields. table-1. major investments of russian companies in africa source: african development bank (2011) india is one of the top investors in africa, with investments in joint ventures and wholly owned subsidiaries. the bulk of these investments flow into the chemicals, plastic and rubber sectors which accounts for about 31% of the country’s investments in the continent. other sectors that india’s investors find attractive in africa include marketing, sales, and distribution (17%) and the food, beverage and tobacco (fb&t) sector (12%). the agriculture, fish and natural resource sector has approximately 6% share, while professional services and financial intermediaries had 5% share of inflows from india. sectors categorized into other sectors had 24% of the shares of investments from india. with respect to the destination of china’s investments in africa, figure 13 shows that south africa and nigeria had the largest shares of 20% each between 2003 and 2007, followed by sudan and algeria with 12% each. angola had only 2% share of the total investments of china in africa while ethiopia had 1% in the review period. in terms of infrastructure financing by chinese investors in 2007, approximately 24% of the total share went to nigeria followed by angola’s 20% and ethiopia’s 10%. fig-12. india’s investments by subsectors in africa source: kpmg research (2012) 2001 2002 2003 2004 2005 2006 angola 9 12 3 10 1 1 south africa 0 0 1 0 2 4 6 8 10 12 14 u s $ m ill io n economy, 2015, 2(1): 1-9 7 fig-13. china’s fdi flows to africa by destination source: china ministry of commerce report (2008) 4. trade flows and intensity between ethiopia and the brics the trade flows between ethiopia and the brics countries in figures 14 – 18 indicates that all the members of the group recorded trade surpluses with ethiopia in the period 1995 to 2011. from figure 14, brazil’s export to ethiopia was significantly higher than its imports from ethiopia. specifically, while exports averaged $24.1 million, imports from ethiopia averaged only $0.2 million between 1995 and 2011. this means that brazil recorded trade surplus of $23.9 million with ethiopia in the review period. fig-14. brazil – ethiopia trade balance source: unctad statistics http://unctad.org/en/pages/statistics.aspx fig-15. russia-ethiopia trade balance source: unctad statistics http://unctad.org/en/pages/statistics.aspx similarly, figure 15 shows that russia maintained a trade surplus of $52.0 million with ethiopia given that its exports averaged $55.9 million and imports $3.9 million. with respect to india’s trading relationship with ethiopia, nigeria 20% s/africa 20% sudan 12% algeria 12% zambia 8% angola 2% guinea 2% ethiopia 1% mauritius 2% egypt 2% congo, dem, rep 4% niger 4% others 11% economy, 2015, 2(1): 1-9 8 figure 16 shows that india’s exports to ethiopia between 1995 and 2011 averaged $121.6 million while imports averaged $11.9 million, giving a trade surplus of $109.7 million. fig-16. india – ethiopia trade balance source: unctad statistics http://unctad.org/en/pages/statistics.aspx fig-17. china – ethiopia trade balance source: unctad statistics http://unctad.org/en/pages/statistics.aspx in terms of the relationship with china, figure 17 explains that while china’s exports to ethiopia averaged $405.8 million, imports averaged only $70.4 million, bringing the surplus in the period to $335.4 million. figure 18 shows that south africa also exported more to ethiopia compared with its imports from that country and ended up with an average trade surplus of $20.9 million. fig-18. s/africa – ethiopia trade balance source: unctad statistics http://unctad.org/en/pages/statistics.aspx economy, 2015, 2(1): 1-9 9 although ethiopia recorded trade deficit with all the brics countries between 1995 and 2011, it is pertinent to find out how intensive the trading activities were in the period. therefore, in line with the study by de castro (2012) who examined the trade intensity between the individual brics and selected countries in the european union, the trade intensity index is defined as: trade intensity = where = country exports to country = country total exports = world exports to country = total world exports. the results of the computation as shown in figure 19 depicts that ethiopia’s trade intensity index is less than one with all the brics countries, implying that trade with ethiopia is relatively small when compared with what these countries individually carried out with the rest of the world. however, in relative terms, the trade intensity index is highest with india, followed by china and then south africa. the implication of this is that although trade with ethiopia is relatively small when compared with the rest of the world, india and china have found ethiopia an attractive destination for trade. fig-19. ethiopia’s average trade intensity with the brics, 1995 2011 source: authors’ estimations 5. summary and policy implication of findings the study examined the investment flows of the brics as well as attempted to provide an insight into countryspecific destinations of these investments, with specific focus on ethiopia. also, the trade relationship between ethiopia and the individual brics is analyzed for the period 1995 to 2011 with a view to examining the level of trade intensity. two main issues stand out from the findings. first, not a significant proportion of the brics investments in africa go to ethiopia. second, the country is getting a fair share of infrastructure finance investments from the brics. with respect to the trade flows, ethiopia recorded trade deficit with all the brics countries, while its trade intensity index was less than one in all cases. however, in relative terms, its trade intensity index was highest with india, followed by china and then south africa. a number of policy implications can be deduced from the study. first, given that ethiopia is considered as one of the recent success stories in africa, the brics in general and south africa in particular may explore areas of potential benefit by improving bilateral relationship with the country. second, given that the country is experiencing massive developments in its infrastructure, south africa may take advantage to invest in some of these projects. third, the relatively low trade intensity with ethiopia means that there are possible areas of economic engagement which may ultimately boost trade flows between ethiopia and the brics. references african development bank, 2011. russia’s economic engagement with africa. africa economic brief, 2(7). available from http://www.afdb.org/fileadmin/uploads/afdb/documents/publications/russia's_economic_engagement_with_africa.pdf [accessed august 14th 2012]. china ministry of commerce report, 2008. available from http://gzly.mofcom.gov.cn/website/comment/foreign/message/js [accessed august 14th 2012]. de castro, t., 2012. trade cooperation indicators: development of bric bilateral trade flows. international review of business research papers, 8(1): 211-223. kpmg research, 2012. india investing in south africa and africa. available from http://www.kpmg.com/za/en/issuesandinsights/articlespublications/doing-business-withindia/documents/india%20investing%20in%20south%20africa%20and%20africa.pdf [accessed august 14th 2012]. world bank, 2012. bridging the atlantic’ south-south partnering for growth. available from http://siteresources.worldbank.org/africaext/resources/africa-brazil-bridging-final.pdf [accessed august 17th 2012]. world development indicators, 2012. available from data.worldbank.org/sites/default/files/wdi-2012-ebook.pdf [accessed august 10th 2012]. views and opinions expressed in this article are the views and opinions of the authors, economy shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. http://www.afdb.org/fileadmin/uploads/afdb/documents/publications/russia's_economic_engagement_with_africa.pdf http://gzly.mofcom.gov.cn/website/comment/foreign/message/js http://www.kpmg.com/za/en/issuesandinsights/articlespublications/doing-business-with-india/documents/india%20investing%20in%20south%20africa%20and%20africa.pdf http://www.kpmg.com/za/en/issuesandinsights/articlespublications/doing-business-with-india/documents/india%20investing%20in%20south%20africa%20and%20africa.pdf http://siteresources.worldbank.org/africaext/resources/africa-brazil-bridging-final.pdf economy issn: 2313-8181 vol. 3, no. 1, 31-39, 2016 www.asianonlinejournals.com/index.php/economy 31 the perceived relations between development reforms, stock market performance and economic growth in nigeria: 1984-2014 okoroafor o.k david1  yelwa mohammed2 1,2 department of economics, university of abuja, federal capital territory, abuja, nigeria ( corresponding author) abstract economic indicators and the stock market performance in nigeria have been one area of wide debate among the academia as well as the policy makers and implementers. the nigerian economy and in particular the capital market have witnessed several developmental reforms in the past three decades. many believe the reforms have rather had negative impact, while others believe otherwise. in view of the above, this recent study was embarked upon to ascertain empirically the relations between the reforms, stock market performance and economic growth over the periods of 1984 to 2014. the study employed the generalized method of moment (gmm) among other technics for the analysis. our result revealed that the reforms over the period of the study had positive significant impact on the stock market performance, and the stock market also had significant and positive effects on economic growth in nigeria. the study concluded on the need to intensify reforms in the areas of market security, sensitization and widening the market participation zones to incorporate rural dwellers, as well as small and micro firms. keywords: relations, development, reform, performance, growth, market, nigeria, economy, indicators. contents 1. introduction ......................................................................................................................................................................... 32 2. literature review ................................................................................................................................................................ 32 3. analytical methodology ....................................................................................................................................................... 35 4. empirical analysis ............................................................................................................................................................... 36 5. summary and conclusion ................................................................................................................................................... 38 references ................................................................................................................................................................................ 38 citation | okoroafor o.k david; yelwa mohammed (2016). the perceived relations between development reforms, stock market performance and economic growth in nigeria: 1984-2014? economy, 3(1): 31-39. doi: 10.20448/journal.502/2016.3.1/502.1.31.39 issn(e) : 2313-8181 issn(p) : 2518-0118 licensed: contribution/acknowledgement: this work is licensed under a creative commons attribution 3.0 license all authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the author declares that there are no conflicts of interests regarding the publication of this paper. transparency: the author confirms that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: history: this study follows all ethical practices during writing. received: 12 january 2016/ revised: 16 february 2016/ accepted: 20 february 2016/ published: 24 february 2016 publisher: asian online journal publishing group http://creativecommons.org/licenses/by/3.0/ http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.1/502.1.31.39 http://search.crossref.org/?q=10.20448/journal.502/2016.3.1/502.1.31.39 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.1/502.1.31.39 http://search.crossref.org/?q=10.20448/journal.502/2016.3.1/502.1.31.39 economy, 2016, 3(1): 31-39 32 1. introduction the importance of investment finance in the performance of any nation economy cannot be overemphasized. it is as important as blood is to the circulatory system of human body. whenever there is lack of blood or inadequacy of blood in the human system, death becomes inevitable; so is finance to any nation‟s economy. the capital market is a major conduct that provides finance, particularly long term investment finance to the economy. and because of the importance attached to finance, inter-alia the capital market, many government are now sensitive to the happenings in their capital market, and engages in periodic reforms to improve the soundness, stability and the overall efficiency of the market at all time. the nigerian government in particular has put in place various reforms measures to regulate the capital market and make it more relevant in the achievement of the nation overall macroeconomic objectives. the capital market thrives in an environment where market forces are allowed to play their roles of ensuring efficiency in the allocation of financial resources which ensures sustainable economic growth and development through the formation of fixed capital. in addition, the existence of market intermediaries, well developed accounting, auditing and financial disclosure standard together with enforced legal and regulatory framework for investors protection are absolutely critical for the effective contribution of capital market to economic growth (audu, 2015). reforms have been the widely acclaimed measures to stimulate capital market development. de la torre and schmukler (2007) have identified four category of reform: (1) reforming the enabling environment for capital market in the area of strengthening macroeconomic stability and enforcement of property rights; (2) reforming to enhance the efficiency of market discipline in the entire financial system through capital account liberalization; (3) reforming the associated and supporting institutions of capital market operation such as pension reforms and privatization programme; and (4) specific reforms for the development of regulatory and supervisory framework and improvement in securities clearance and settlement system. nigeria had measured significantly virtually in all the four categories of reforms mentioned. for instance, between 1972 and 1977, it had the nigeria enterprises promotion degree reform that indigenized most foreign enterprises which allowed nigerians have some equity ownership of these enterprises. most of these enterprises were quoted at the stock exchange. again in 1986, the government introduced the structural adjustment programme (sap) as an economic policy reform, targeted to reform the financial sector, deregulate the foreign exchange and interest rate to promote domestic savings, and improve domestic and foreign investment flows. there was also in 1988, the privatization and commercialization of public enterprises with the aim of creating favourable investment climate for both domestic and foreign investors and enhance private sector led growth of the economy. all these were made with the intent to promote capital market development. furthermore, in 1995 investment promotion and foreign exchange decree were promulgated in order to remove the hiccups to foreign investors‟ participation in the nigerian capital market. with this, investors in the capital market can repatriate dividends on investment, transfer foreign loans provided for investment in the country, sale or liquidate enterprise or any interest attributable to investment. also in 1999, there was investment and securities act enactment that enables security and exchange commission (sec) to pursue investor protection and capital market development by regulating investments and securities business in nigeria other giant strides in the capital market reforms to enhanced stock market development are the introduction of electronic business (e-business) with automatic access to central securities clearing system (cscs) in 1999. there was also the introduction of trade alert information system that alerts stock holders of any transaction in their stock within 24 hours. again in 2001, the nigerian stock exchange (nse) introduced organizational structural reform of its self to boost performance. another remarkable reform that has significant impact to the capital market development was the pension reform act of 2004 and the banking sector recapitalization reform of 2005. the pension act in particular stipulated investment of pension fund in bonds, bills and other securities guaranteed by the federal government and central bank of nigeria. the commercial banking sector recapitalization reform itself opened way for many banks to access the capital market to raise needed developmental funds. nigeria like other developing and developed countries of the world has embarked on capital market reform as a veritable tool to enhance the performance of the economy. she has followed after other nations that reformed their capital market such as: china in 1979, turkey in 1980, ghana in 1983, india in 1992, cuba in 1995 and pakistan in 1999. many of the reforms from these countries have yielded attendant results. however, for nigeria, the ensuing economic predicaments manifest in forms of debt burden, sluggish savings mobilization and slow growth rate, particularly in the financial sectors have called to question the effectiveness of the reforms over the years. more so, the reforms have not been limited to the capital market but have included monetary and fiscal policies reforms and other sectorial reforms. in view of numerous reforms pursued, several questions have been raised by investors, practitioners, academics and policy makers as to how effective capital market reforms are to the advancement of the economy? is capital market development reforms positively or negatively related to stock market development and economic growth in nigeria? empirically, is the impact of reforms on stock market development and the nigerian economy significant? this study is poised to provide needed answers to the questions raised above. in lieu of the issues raised, the remaining part of this study is structured into four sections. the second section will provide the literature review. the third section considers the methodology. while the fourth and fifth sections respectively will give empirical analysis of data and summary of the study. 2. literature review the importance of reviewing literature in a research work is enormous. basically, it provides knowledge of what previous authors or researcher have done in the related field of study; the theories on which previous work was based economy, 2016, 3(1): 31-39 33 on and the empirical findings from such works. in this guise, we highlight the conceptual, theoretical and empirical views of authors in this field. 2.1. conceptual review conceptually, capital market is seen as an institution that plays the role of channeling resources, promoting reforms to modernize the financial sector and link deficit sectors to the surplus sectors. it is also seen as veritable tool in the mobilization and allocation of savings to critical growth sectors of the economy (alile, 1996). capital market is an institution that offers variety of financial instruments with attractive yields, liquidity and risk characteristics that encourages savings in financial form essential for government and other institutions in need of long term funds (nwankwo, 1999). in a related conceptual explanation, ekundayo (2006) see the capital market as a means through which a nation attains sustainable economic growth and development through local and foreign investment. to osaze (2000) capital market is the major driver of any economy to growth and development, as it is vital for long term capital formation, savings mobilization and channeling of same to profitable investments. the capital market provides the necessary lubricant that keeps turning the wheel of the economy. in its allocative function, the market affects liquidity, acquisition of information about firms, risk diversification, savings mobilization and cooperate control (anyanwu, 1998). furthermore, the functioning of the capital market alters the rate of economic growth (ekuakun, 2005). to okereke-onyiuke (2000) cheap sources of fund from the capital market remain a critical element in sustainable development of the economy. she further enumerated the advantage of capital market financing to include: no short repayment period as funds are held for medium and long term period; funds to state and local government are held without pressures and there is ample time to repay loans. in the reasoning of al-faki (2006) capital market is a network of specialized financial institutions, series of mechanisms, processes and infrastructure that facilitates the bringing together of suppliers and users of medium to long term capital for investment in socio-economic developmental projects. to sule and momoh (2009) the capital market has two faces (the primary and secondary market); concerning nigeria, they maintained that activities of the secondary market have impacted more on per capital income by assisting to grow stock market earnings through wealth than the primary market. 2.2. theoretical review there are large volume of theoretical literature which suggests that the functioning of stock markets affects liquidity, information acquisition, risk diversification, savings mobilization, corporate control and economic growth. there are also debates on whether stock market development has positive or negative effect on economic growth. as revealed by demirgue-kunt and levine (1996); bencivenga et al. (1996) and levine and zervos (1996) stock markets may affect economic activity through the creation of liquidity. a number of profitable investments require long term capital, but investors are often reluctant to relinquish control of their savings for long period. it is the stock market that make investment less risky and more attractive as it allows savers to acquire equity which it can sell quickly and cheaply whenever they have need to access their savings. companies at same time enjoy permanent access to raise capital through equity issue. this action facilitates more long term profitable investment, improves capital allocation and enhanced prospect for long term economic growth. there are other alternative views about the effect of liquidity on long term economic growth. three channels are identified through which increase in liquidity can affect economic growth. first, it is reported that by increasing return-to investment, greater stock market liquidity might reduce saving rates through income and substitution effects. secondly, that stock market liquidity might adversely affect corporate governance. this is because liquid stock market makes it easy for dissatisfied investors to sell-off investments. this action invariably weakens investor commitment and incentives to exert corporate control by overseeing managers and indirectly hurts economic growth (demirgue-kunt and levine, 1996). thirdly greater stock market liquidity reduces uncertainty associated with investment and savings. and less uncertainty makes an investment more attractive to risk averse agents. the stock market also affects the incentives for acquisition of information about a firm by investors (holmstrom and tirole, 1993; levine and zervos, 1996). in a larger and liquid stock market investors got information easier to trade at posted prices. this enables an investor to make money before the information become widely available and price changes. the ability to profit from information stimulates investors to research and monitor firms. the end result of this is improved resources allocation that spurs economic growth. the stock market development may also influence saving mobilization that set feasible investment projects: projects that require large capital injection are made ease through resources mobilization in the stock market with concomitant economic efficiency and accelerated long run economic growth. stock market also may impact on economic growth through changes in incentives for corporate control. efficient stock market makes it easier to tie manager compensation to stock performance (jensen and stiglitz, 1990). it helps to align the interests of managers and owners. this induces managers to maximize a firm‟s equity price (scharfstein, 1988). a well-functioning stock market promotes efficient resource allocation and economic growth by providing a boost to domestic savings and increasing the quantity and quality of investment. stock market can encourage economic growth by providing the avenue for companies to raise capital at lower cost. companies in developed stock market are less dependent on bank financing which can reduce the risk of a credit crunch. critics of the stock market have equally argued that operation of the pricing and take over mechanism in stock markets lead to short termism and lower rates of long term investment particularly in firm specific human capital. it also generates perverse incentive, rewarding managers for their success in financial engineering rather than creating new wealth through organic growth (singh, 1997). further criticism was that stock market liquidity may negatively influence corporate governance because very liquid stock market may encourage investor myopia. this may prompt investors to sell their shares, weakening investors‟ commitment and incentive to exert corporate control (bhide, 1993). it is argued that these problems are further magnified in emerging market countries with weaker regulatory economy, 2016, 3(1): 31-39 34 institutions and greater macroeconomic volatility. these serious limitations of the stock market have led many analysts to question the importance of the system in promoting economic growth in emerging markets (audu, 2015). there is further argument among researchers and economists as to the relevance of the financial system in economic growth and development. many believe that finance plays an inconsequential role in economic growth and development of nations lucas (1988) and stern (1989). however, an opposing view among researchers and economists held that financial system of a country plays an important role in economic growth (ojo, 1984). it is also theorized that capital market development may influence economic growth through risk diversification (devereaux and smith, 1994). risk diversification is discovered to influence growth through the shifting of investments into high return projects. and projects with high expected return tend to be comparatively riskier. thus better risk diversification through internationally integrated stock markets fosters investment in projects with very high returns; this invariably influences growth positively. 2.3. empirical review there are volumes of empirical literatures on how the functioning of stock market affects liquidity, acquisition of information about a firm, risk diversification, saving mobilization, corporate control and rate of economic growth. however debate exists over the signs of this effect. some of the studies suggested that stock market development has positive effect on growth, while others predict a negative relationship between stock market development and economic growth demirgue-kunt and levine (1996); levine and zervos (1996); nyong (1996); anyanwu (1998); adam and sanni (2005); ezeoha et al. (2009); ohiomu and godfrey (2011); kolapo and daramola (2012) and okoroafor (2014). for instance, levine and zervos (1996) examined whether there was a strong empirical relationship between stock market development and long run economic growth. they found a strong correlation between stock market development and long run economic growth. demirgue-kunt and levine (1996) studied stock market development and economic growth of 44 countries over the period of 1986 to 1993. they found that different measures of stock exchange size are strongly correlated to other indicators such as level of financial banking and non-banking institution as well as insurance and pension funds. they concluded that countries with well-developed stock markets tend to also have well developed financial intermediaries. furthermore, levine and zervos (1998) using pooled cross-country data of 47 countries from 1976 to 1993 evaluated whether stock market liquidity is related to growth, capital accumulation and productivity. they towed the line of demirgue-kunt and levine (1996) by including measures such as stock market size, liquidity, integration with world market and index of stock development. the rate of gross domestic product (gdp) per capital was regressed on a variety of variables designed to control for political instability, investment in human capital and macroeconomic conditions and index of stock market development. they found empirically that the measures of stock market liquidity were strongly related to growth, capital accumulation and productivity; while stock market size does not seem to correlate with economic growth. meanwhile, harris (1997) did not find supportive evidence that stock markets activity affects the level of economic growth. the work by atje and jovanovic (1998) show that stock market development is strongly correlated with growth rates of real gdp per capital. more importantly they found that stock market liquidity predicts the future growth rate of the economy. also, rousseau and paul (1998) examined and found that stock market-growth nexus exhibited positive causal relationship between stock market development and economic activity. mohtadi and agarwal (2001) argue that financial sector development facilitates capital market development, and in turn raises real growth of the economy. pedro and erwan (2004) asserted that financial market development raises output by increasing the capital used in production. bekaert et al. (2005) indicated that capital market development has contributed to the economic growth of egypt. for belgium, nieuwerbugh et al. (2005) investigated the long run relationship between growth and financial market development. the authors used a new set of stock market indicators to argue that financial market development substantially affects economic growth, especially in the period of 1973 to 1993. liu and hsu (2006) reported a positive impact on economic growth of stock market development in taiwan, korea and japan. yartey (2008) in his study “the determinants of stock market development in emerging economies: is south africa different”, examined the institutional and macroeconomic determinants of stock market development using a panel data of 42 emerging economies for the period of 1990 to 2004. his result indicates that macroeconomic factors such as income level, gross domestic investment, banking sector development, private capital flows, and stock market liquidity are important determinants of stock market in emerging markets. the result also indicated that political risk, law and order, and bureaucratic quality are important determinants of stock market development because they enhance the viability of external finance. in nigeria, several authors have equally examined stock market development and economic growth relationship. for instance, nyong (1996) looked at the relationship between long run economic growth in nigeria and aggregate index of capital market development. the study employed time series data from 1970 to 1994. it was found that capital market development is negatively and significantly correlated with long-run economic growth in nigeria. anyanwu (1998) also applied aggregate index of capital market development to determine its long run relationship with economic growth in nigeria. the result indicated that nigerian stock market development positively and robustly associates with long run economic growth in nigeria. also osinubi and amaghionyeodiwe (2003) examined the relationship between nigeria stock market and economic growth during the period of 1980-2000; using ordinary least square (ols), their result showed positive relationship between the stock market and economic growth and they suggested the pursuit of polices that geared towards the development of the stock market. also, adam and sanni (2005) investigated the role of stock market on nigeria growth, using granger causality test and regression analysis. their result showed a one-way causality between gdp growth and market economy, 2016, 3(1): 31-39 35 capitalization, and market turnover. they also observed a positive and significant relationship between turnover ratio and gdp growth. they concluded that government should encourage the development of the capital market since it has a positive effect on economic growth. obamiro (2005) investigated relations between stock market and economic growth in nigeria. the result showed significant positive effect of stock market on economic growth. ewah et al. (2009) studied capital market efficiency on economic growth in nigeria using time series data on market capitalization, money supply, interest rate, total market capitalization and government development stock, 19612004. they applied multiple regressions and ordinary least squares estimation techniques. the result showed capital market in nigeria has the potential to induce growth. however, that it has not contributed meaningfully to economic growth in nigeria because of low market capitalization, low absorptive capacity, illiquidity, misappropriation of funds among others. in addition, ezeoha et al. (2009) examined the nature of relationship between stock market development and level of investment (domestic private investment and foreign private investment) flows in nigeria. the author discovered that stock market development promotes domestic private investment flow. the result equally showed that stock market development has not been able to encourage the flow of foreign private investment in nigeria. abu (2009) examined if stock market development in nigeria raises economic growth. he employed error correction approach, and the result indicated that stock market development (market capitalization-gdp ratio) increases economic growth. pat and james (2010) contended that the capital market indices have not impacted significantly on the gdp. from kolapo and daramola (2012) study on impact of capital market on economic growth, the result reveals that the activities in the capital market tend to impact positively on the economy. again idowu and babatunde (2012) studied the effect of financial reforms on capital market development in nigeria. they applied the chow-breaking point test, and result reveals that financial reform of 1995 impacted significantly on the capital market development in nigeria. also the study by okoroafor (2014) on the efficiency of the nigerian capital market and the stock price volatility, confirmed that stock prices in nigerian stock market is highly volatile and in addition with public holidays influences negatively the capital market performance. again audu (2015) reported that the instituted capital market reforms in nigeria impacted positively on capital market development and economic growth in nigeria. 3. analytical methodology the method adopted in arriving at solution to research question is very vital to empirical studies. previous empirical studies as reviewed have suggested a connection between capital market development and economic growth. most of the relationship posted is a causal one, with no unified model where impact of capital market reforms on stock market development and economic growth are examined simultaneously. this being the fact, the question “do capital market reforms have effect on the development of stock market and economic growth in nigeria remains unanswered. to provide the required answers to the stated problem of this study, we employed generalized method of moment (gmm) technique. 3.1. the model specification the study is focused to examine the roles of lagged values of the following: market capitalization, index of stock prices, volume traded, turn-over ratios, foreign portfolio investment, real gross domestic product, money supply and openness of the economy on market capitalization. it is also aimed at establishing the impacts of capital market developmental indices on the economic growth. structurally, the equations are given as: mcap = f( mcapt-i ,indxt-i , vtrt-i , tvrt-i, fpit-i, rgdpt-i. m2t-i,, opnt-i )…………….…3.1.1 where: mcap= stock market capitalization. indx = index of stock prices. vtr = volume traded tvr = turn over ratios. fpi = foreign portfolio investment. rgdp = real gross domestic product. m2 = money supply opn = openness of the economy the explicit form of equation 3.1.1 is represented as: mcap = ᵦ0 + ᵦ1mcapt-i + ᵦ2indxt-i,+ ᵦ3 vtrt-i + ᵦ4tvrt-i + ᵦ5fpit-i + ᵦ6rgdpt-i + ᵦ7m2t-i + ᵦ8opnt-i + μt…………………………………………………………………………………………………3.1.2 on the other hand the impact of capital market development on economic growth is stated as: rgdp = f( rgdpt-i , mcapt-i ,vtrt-i , tvrt-i, opnt-i )………………………………………3.1.3 where: rgdp = real gross domestic product. mcap= stock market capitalization. vtr = volume traded tvr = turn over ratios. opn = openness of the economy. explicitly, the equation 3.1.3 becomes: rgdp = λ0 + λ1 rgdpt-i + λ2 mcapt-i + λ3vtrt-i + λ4 tvrt-i + λ6 opnt-i + εt ……...…3.1.4 economy, 2016, 3(1): 31-39 36 3.2. validity of the method the use of gmm is informed by the fact that the two relationships to be studied are characterized by joint endogeneity of some variables involved in the study. besides in a system of simultaneous equation, the issue of identification is upheld. in the case of over-identification, the method of indirect least square is not appropriate. other methods such as two stage least squares (tsls), three stage least squares (3sls), seemingly unrelated regression (sur), general least squares (gls) and generalized method of moments (gmm) are favoured. however, if the rank condition is satisfied, the most appropriate of these techniques to apply is the gmm according to gujarati (2005) and yartey (2008). from our simultaneous equation system, some of the explanatory variables in the model are either simultaneously determined with the dependent variables or have a two way causal relationship with it. in the presence of correlation between the right hand side variable and that of the left hand side, estimation method such as ols will not be consistent because assumption of strict exogeneity of the explanatory variables would be violated. again the orthogonalised condition between error term and regressors are not likely to meet for either gls or sur estimator to produce consistent estimation. it is still possible to achieve the orthogonal condition between the error term and the regressors through appropriate differencing of data. however because equations contains endogenous regressors as well as effects of lagged endogenous variables, the error term in the differenced equation is correlated with the lagged dependent variable through contemporaneous error term. therefore, neither application of gls or sur estimator will produce consistent estimates under this condition except the use of gmm. gmm estimator is an instrumental variable estimator that uses lagged values of all endogenous regressors as well as lagged and current values of all strictly exogenous regressors as instruments. the equations can be estimated using the levels or the first differences of the variables. the gmm is chosen because of the optimal properties that its parameters estimates possess. its computational procedure is fairly simple, and it has limited data requirement. it is intuitively appealing. above all, the gmm technique has over time produced fairly satisfactory results in a range of economic relationship it has been applied, yartey (2008). 3.3. the technique of evaluation the equations 3.1.2 and 3.1.4 will be subjected further to dynamic estimation using the lag structure of the variables. there will also be determination of the existence of substantial co-movement among the time series variables. furthermore the data would be tested for unit root by applying the augmented dickey fuller (adf) tool. also the wald coefficient test will equally be applied to the estimated equation to perform hypothesis tests on the coefficients of the model after using gmm. the wald test examines whether the positive and negative coefficients in the gmm estimate are significantly different from zero (that is, whether they are symmetric or asymmetric). the coefficient of determination and its adjusted values with durbin watson statistics shall equally be applied in the evaluation. 3.4. sources of data the data for this study covering the period of 1984-2014 is a secondary data secured from central bank of nigeria statistical bulletin, various issues; nigerian bureau of statistics (nbs) and the nigerian stock exchange (nse) fact books. 4. empirical analysis in this section, we presented an analysis of the data used and the interpretation of the result generated from the data. the data for the study is presented in the appendix and it covers the period of 1984-2014. starting from the model identification, the two equations in our study were discovered to be over-identified. table-4.0.1. unit root test. 5% los critical values augmented dickey-fuller statistics. variable(s) level 1 st difference 2 nd difference decision mcap 5.662 -3.612 i(0) vtr 5.621 -3.622 i(0) tvr -4.735 3.581 i(1) fpi -9.653 -3.587 i(0) rgdp -6.060 -3.581 i(1) m2 -4.883 -3.574 i(1) opn -3.632 -3.568 i(0) indx -5.661 -3.574 i(1) sources: authors computation we therefore proceeded to apply the gmm techniques as pointed to earlier. meanwhile the augmented dickeyfuller tests of the time series were done to ascertain the time series property of the data. the result of the adf test is presented and analyzed below. the result of the unit root test as presented above indicates that mcap, vtr, fpi and opn were stationary at level. while tvr, rgdp, and indx were integrated at order one, each at 5 percent level of significance. it is judged safe to continue with the time series data estimates of our econometrics specifications. economy, 2016, 3(1): 31-39 37 4.1. presentation of results of gmm table-4.1.1. generalized method of moments (gmm) result. explanatory variables equation 3.1.2 coefficients (mcap is dependent variable) explanatory variables equation 3.1.4 coefficients (rgdp is dependent variable) constant -642.38 (-0.375) constant -8.66 (-0.286) mcap(-1) 1.332 (2.564) * mcap(-1) 0.003 (2.09) * vtr(-1) -26.916 (-2.19) * vtr(-1) 0.188 (3.09) * tvr (-1) 216.94 (1.68) tvr (-1) -3.969 (-2.09) * opn(-1) 691.18 (2.17) * opn(-1) -7.27 (-2.59) * rgdp(-1) -18.274 (-1.58) rgdp(-1) 1.307 (10.01) * fpi(-1) -127.71 (-0.77) r 2 = 0.99 r -2 = 0.98 dw = 2.32 m2(-1) 124.51 (2.23) * indx(-1) -0.043 (-0.88) r 2 = 0.94 r -2 = 0.92 dw = 1.92 note: * (significant @ 5 percent los). table-4.1.2. wald coefficient test: test statistic value df probability f-statistic 123679.9 (8, 21) 0.0000 chi-square 989439.0 8 0.0000 source: authors computation using e-views. 4.2. interpretation of result the table 4.1.1 above conveys the result of gmm procedure applied to equations 3.1.2 and 3.1.4 on the impact of reforms on capital market development and that of the effect of capital market development on economic growth in nigeria over the period of 1984 to 2014. from equation 3.1.2, the constant coefficient which is negatively signed indicates that there will be a decrease of 642.38 in the value of market capitalization if other variables were zero. however, the figure is not significant at 5 percent significance test. on the lagged explanatory variables, the result presented a significant impact of the combined explanatory variables on the dependent variable. this is revealed by the adjusted r-squared of 0.92. on the contributions of the individual explanatory variables to explain the dependent variable; lagged values of market capitalization (mcap), volume of shares traded (vtr), openness of the economy (opn) and money supply (m2) were highly significant at over 5 percent to determine capital market development over the period of our study in nigeria. particularly, the vtr, though it appeared with wrong sign, yet was significant. the same is applicable with real gross domestic product (rgdp), foreign portfolio investment (fpi) and the index of stock prices (indx). their various signs are indication that when these variables increase by 1 percent, the market capitalization decreases by the coefficient assigned to each of these explanatory variables. the turn over ratio (tvr) in particular, though insignificant at 5 percent level, it contributed positively and has a large coefficient of 216.94. the result supports the finding that the market liquidity rates have positive impact on stock market capitalization. according to levine and zervos (1996) liquidity helps investors to facilitate investment projects and make them less risky. again the result has re-emphasized the importance of openness of the economy. the coefficient of opn was positive, significant and large. it is clear that openness engenders positive development in the stock market. but the foreign portfolio investment (fpi), though it has large coefficient, it appeared with negative insignificant sign. this indicates that foreign portfolio investment in nigeria is not yet adequate to contribute positively and significantly to capital market development. it implies that what is taken out of the capital market in terms of capital flight is more than what comes into the market in form of portfolio investment. also on the result of money supply, it is indicative that increase in money supply make for positive and significant development of the stock market. the coefficient of money supply (m2) is very high at 124.51. the rgdp contributed negatively and insignificantly to capital market development in nigeria over the period of our study. on the whole, the r 2 and r -2 of 0.94 and 0.92 respectively, indicates that capital market development is adequately explained by the model. by implication, 94 percent variations in capital market development are explained by the explanatory variables. the durbin-watson (dw) statistics of 1.92 which is approximately „2‟ indicates absence of autocorrelation and tends to support the model estimated with the gmm procedures. the result and findings shows that there is significant relationship between capital market reforms and capital market development. this result is consistent with the findings from the studies by yartey (2008); idowu and babatunde (2012) and audu (2015). on the other hand, column 3 and 4 of table 4.1.1 shows the result of equation 3.1.4 where rgdp appeared as the dependent variable. it is noteworthy that the three indicators of capital market development (mcap, tvr and economy, 2016, 3(1): 31-39 38 vtr) yielded significant results to influence economic growth. the mcap and vtr had positive signs, while tvr appeared negative. the openness of the economy (opn) was significant but had negative sign. the lagged value of rgdp was highly significant and positive, to explain changes in current rdgp. the result from r-squared and its adjusted value of 0.99 and 0.98 respectively, indicated that economic growth in nigeria is adequately explained by the model over the period of 1984 to 2014. durbin -watson (dw) of 2.32 which is approximately „2‟ indicates absence of autocorrelation. this implies that the analysis is free from the problem of serial correlation, and tends to support the model estimated with the gmm procedure. from the evaluation made we can therefore reject the null hypotheses and accept the alternative hypotheses that there is significant relationship between capital market reforms and economic growth in nigeria. the result are consistent with studies by levine and zervos (1996); anyanwu (1998); ohiomu and godfrey (2011); kolapo and daramola (2012) and audu (2015). also the result of wald coefficient test on table 4.1.2 shows a chi-square value of 989439 and probability value of 0.0000. the low probability value is indicative that the null hypothesis is strongly rejected. therefore, the coefficient are asymmetric (i.e. significantly different from zero) as evidenced by the low probability values. 5. summary and conclusion the analysis done in this study has shown that the 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n., 1989. the economics of development, a survey. economics journal, 99(397): 597685. sule, o. and o. momoh, 2009. the impact of stock market earnings on nigerian per capita income. african joiurnal of accounting, economics, finance and banking research, 5(5): 77-89. yartey, c., 2008. the determinants of stock market development in emerging economies: is south africa different. imf working paper, african department. wp/08/32. table-4.1. stock market and other economic development indicators ( 1984 – 2014) year mcap vtr tvr fpi gdp m2 opn indx 1984 3.000000 0.140000 2.140000 0.030000 183.5600 33.72000 0.090000 118.5000 1985 3.280000 0.160000 2.080000 0.930000 201.0400 32.84000 0.090000 127.3000 1986 3.300000 0.240000 1.370000 0.050000 205.9700 34.43000 0.070000 163.8000 1987 4.000000 0.190000 2.140000 0.050000 204.8100 26.20000 0.240000 190.9000 1988 4.550000 0.390000 1.180000 0.050000 219.8800 27.58000 0.240000 233.6000 1989 5.410000 0.260000 2.100000 0.050000 236.7300 21.17000 0.380000 325.3000 1990 6.090000 0.080000 7.230000 0.040000 267.5500 19.76000 0.580000 513.8000 1991 8.700000 0.090000 9.540000 0.050000 265.3800 24.16000 0.790000 783.0000 1992 11.50000 0.180000 6.350000 0.080000 271.3800 20.86000 1.290000 1107.600 1993 17.28000 0.290000 5.910000 0.240000 274.8300 24.18000 1.400000 1543.800 1994 24.07000 0.360000 6.720000 0.260000 275.4500 25.59000 1.340000 2205.000 1995 64.11000 0.650000 9.810000 0.420000 281.4100 14.95000 6.060000 5092.200 1996 97.30000 2.380000 4.090000 0.420000 293.7500 12.80000 6.370000 6992.100 1997 93.34000 3.420000 2.730000 0.420000 302.0200 14.75000 6.910000 6440.500 1998 84.47000 4.370000 1.930000 0.490000 310.8900 18.02000 5.110000 5672.700 1999 96.10000 4.510000 2.130000 0.490000 312.1800 19.69000 6.570000 5266.400 2000 143.4800 8.550000 1.680000 0.480000 329.1800 19.17000 8.900000 8111.000 2001 185.5800 16.16000 1.150000 0.450000 356.9900 26.86000 9.040000 10953.10 2002 176.5700 13.71000 1.290000 0.380000 433.2000 21.79000 7.520000 12137.70 2003 284.6500 25.21000 1.130000 0.370000 477.5300 23.01000 10.82000 20128.90 2004 400.4200 42.80000 0.940000 0.470000 527.5800 18.68000 12.49000 23844.50 2005 516.1000 46.79000 1.100000 0.580000 561.9300 18.10000 17.88000 24085.80 2006 859.4900 78.93000 1.090000 0.810000 595.8200 20.46000 18.02000 33189.30 2007 2096.110 169.6500 1.240000 0.870000 634.2500 24.82000 20.01000 57990.20 2008 1422.640 249.8000 0.570000 0.590000 672.2000 32.96000 23.93000 31450.80 2009 977.9000 95.37000 1.030000 0.610000 718.9800 37.96000 18.72000 20827.20 2010 1277.570 14.27000 1.240000 21.25000 776.3300 32.47000 24.53000 24770.50 2011 1159.560 25.20000 1.510000 26.01000 834.1600 32.42000 39.41000 20730.60 2012 14800.90 21.02000 9.710000 41.64000 717.1400 21.17000 20.40000 28078.80 2013 19077.40 34.40000 7.330000 56.33000 800.9300 13.89000 19.70000 41329.20 2014 16127.82 76.12000 0.820000 16.26000 890.4400 15.16000 19.20000 34557.20 sources: cbn, sec, nbs and nse year book various issues. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. economy issn: 2313-8181 vol. 2, no. 4, 64-70, 2015 www.asianonlinejournals.com/index.php/economy * corresponding author 64 on the j-curve theory: the literature and further proposed improvements dhakir abbas ali mail 1* --fuadah johari mail 2 --mohammad haji alias mail 3 1 universiti sains islam malaysia (usim) malaysia bio statement faculty of economics and muamalat, malaysia 2 universiti sains islam malaysia (usim) malaysia competing interests ci policy; faculty of economics and muamalat, malaysia 3 universiti sains islam malaysia (usim) competing interests ci policy; bio statement faculty of economics and muamalat, malaysia abstract this work is licensed under a creative commons attribution 3.0 license asian online journal publishing group contents 1. introduction ............................................................................................................................................................................... 65 2. research method ....................................................................................................................................................................... 65 3. tracking the improvement of the j-curve: a literature review analysis ........................................................................ 65 references ...................................................................................................................................................................................... 70 as one of the most debated topics in international trade, the j-curve theory has undergone several stages of improvement. this paper tracks those stages consecutively by evaluating the state of the literature. previous literature and studies on the exchange rate movements on the j-curve theory to achieved understanding of the effects of exchange rate movements on trade balance substantially which undergone several stages of improvement was gathered within period of 1973 – 2013. the study highlights the need for comprehensive studies assessing the overall effect of exchange rate depreciation on trade balance for one country and all of its major trade partners discretely on disaggregated level, i.e. the sector or commodity-level of trade. although time-consuming and vast, this could be the only way for a country to draw a full picture for the impacts of its monetary policy on trade balance. keywords: exchange rate, trade balance, devaluation, j-curve theory, monetary policy and trade. jel classification: f10, f31, f41. http://creativecommons.org/licenses/by/3.0/ economy, 2015, 2(4): 64-70 65 1. introduction among all the theories discussing the effect of currency exchange rate movements on trade balance, there was one theory that got most of the attention, the j-curve. the theory which relates prior approaches into a more complicated theory claims that the effect of exchange rate depreciation on trade balance is inconsistent and changes in direction over the course of time. as first observed by magee (1973) the phenomena suggests that trade balance is expected to deteriorate in the short-run as an instant reaction to currency devaluation. however, in the long-run, the trade balance recovers to higher level compared to its initial level when depreciation took place. this sequence of changes in trade balance over time can be likened to the capital letter j. the reason why this theory has occupied most of the recent empirical literature concerning the relation between exchange rate movements and trade balance is its ability in testing other old approaches indirectly, while providing a novel approach to the issue by itself. for the case of marshall-lerner condition, which claims that in order for a currency depreciation to have a favorable effect on trade balance, the elasticities of demand for imports and exports should exceed unity in absolute terms (marshall and groenewegen, 1923) a long-run improvement of the trade balance under the analysis of the j-curve could indicate the condition is met (bahmani-oskooee and wang, 2008). another approach for the issue, known as the elasticities approach, was introduced by bickerdike-robinsonmetzler in the first half of the twentieth century (hooy and chan, 2008). the approach simply states that in order for the exchange rate depreciation to improve trade balance, the ultimate effect is determined by the interaction of the volume and value effects on trade flows. however, the j-curve can also be understood in the same context. in the short-run, the value effect hits fast by changing the prices of traded goods. the value of imports increase due to currency depreciation as paid in domestic currency, thus, the net exports decrease, causing trade balance to worsen. nevertheless, the value effect itself leads the trade balance to improve in the long-run by changing the volumes of trade. it is caused simultaneously by a combination of two effects. first, domestic market starts to compensate the relatively high price of imports by consuming domestic production, and second, the exports start to increase given its newly high price-competitiveness in international markets. however, although the j-curve phenomena has improved the general understanding of the effects of exchange rate movements on trade balance substantially, the theory itself has undergone several stages of improvement. this study tracks the progress in the j-curve analysis as summarized in section [2]. while section [3] concludes the study by proposing further improvements for the analysis to tackle with the challenges the j-curve analysis is still experiencing until today. 2. research method this paper is theoretical in nature and empirical method is being used to give account of the six distinct approaches of exchange rate movements on trade balance. previous literature and studies on the exchange rate movements on trade balance was gathered within period of 1973 – 2013. data and information are collected through the libraries, recognized journals both local and international. this simply suggests that secondary sources are predominantly used in the methodology of this study. the next section systemizes these studies into six different approaches of exchange rate movements on trade balance to ease the understanding of the historical improvement of the topic. 3. tracking the improvement of the j-curve: a literature review analysis since the idea of the j-curve was introduced, numerous studies have attempted to test it. bahmani-oskooee and hegerty (2010) divide these studies into three groups based on the data they employ: aggregate trade data, bilateral trade data, and a vastly growing number of studies on sector-level trade data. an examination of each of these three groups of studies is important because it helps to illustrate the evolution and the rationale behind the theory. 3.1. stage one: aggregate trade data earlier studies of the j-curve employed aggregate trade data, which is the trade data of a country with all its trading partners, in order to examine the overall relationship between a country's trade balance and currency devaluation. the studies of magee (1973); himarios (1985) and meade (1988) are examples investigated in the following. magee (1973) tested the effect of depreciation on trade balance in a study that introduced the j-curve as a novel approach. this study analyzes three periods following depreciation or an appreciation; the currency-contract, the pass-through, and the quantity-adjustment periods. first period, the currency-contract, refers to the short period following a depreciation in which contracts are signed before the changes take place. next period, the pass-through period, is when the depreciation has taken place and the contracts are signed based on the prices after the devaluation (the new prices). the behavior of trade balance in these two periods is the key to illustrate the short-run effects of currency devaluation on trade balance. the last period, quantity-adjustment period, is the period of price adjustment where the effect of currency depreciation on the quantities is taking place. referring to this analysis, this study discusses the possibility of different effects of devaluation in short-run and long-run. in fact, in a successful currency depreciation, the trade balance worsening short-run will be improved in the long-run. the study also argues that “there mayor may not be a j-curve because the trade balance can change in either direction in each period”. in another attempt, himarios (1985) estimated the following linear trade balance model: [1] where the dependent variable (b) is the trade balance in foreign currency, y (y*) represents the domestic (foreign) income, m (m*) represents the domestic (foreign) money, g (g*) represents the domestic (foreign) economy, 2015, 2(4): 64-70 66 government expenditure (which is replaced by the government consumption if the government expenditure is not available).q represents the real exchange rate, and finally r represents the opportunity cost of money. this study uses annual data for 10 countries over the period of 1956-1972, while the entire variables are in real terms. the dataset of this work is very close to the dataset used by miles (1979) where he has studied costa rica, finland, ecuador, france, iceland, israel, philippines, spain, sri lanka, and uk. miles (1979) has concluded that there is not any evidence that currency devaluation will improve the trade balance although it would improve the balance of payments. but himarios (1985) found a completely different results from the findings of miles (1979). based on his study, in nine cases out of ten, depreciation improves the trade balance in the long-run. meade (1988) in an investigation that used sectorial trade data, examines the relationship between the trade balance and exchange rates. this study applies quarterly data from 1968q1 to 1984q4 for the us, and its findings suggest no support for the j-curve phenomena. the author believes that due to different structure and behavior of each sector, the response in a particular market may differ from the aggregate response. this study has focused on three sectors: non-oil industrial supplies, capital goods excluding automobiles, and consumer goods. the results support the objective of research, as when trade data at sector level is used, it is shown that each sector's responses to depreciation are quite different. meade (1988) recognized that the changes in exchange rate will affect the nominal trade balance both directly and indirectly. the direct channel is through export and import prices, and indirect channel is through the response of export and import volume to an alteration in relative prices. she emphasizes; “that the more quickly import prices respond to the changes in exchange rate and the more slowly import and export volumes adjust, the larger will be the initial worsening of the nominal trade balance and the longer will be the delay before a net improvement" (p. 635). there are more studies in literature that used aggregate trade data to explain the relationship between a country's trade balance and currency depreciation (bahmani-oskooee and alse, 1994; david et al., 1994; brada et al., 1997). generally, the findings based on aggregate trade data are old, mixed, and ambiguous where the significance of the jcurve phenomena can poorly be defined. 3.2. stage two: bilateral aggregate trade data the second group of studies that employs bilateral trade data tries to reduce the possible impact of "aggregation bias" and the measurement problems by choosing specific pairs of countries. the existence of the aggregating bias problem, which is one of the drawbacks of the first group of studies, may be the result of different nature of trade in each pair of countries. there is a possibility that the j-curve phenomena exists between a country and one of its trading partners, while there is not any significant relationship between the exchange rate depreciation and the trade balance with the other trading partners. hence, considering this possibility, an insignificant relationship with one partner can offset a significant relationship of the exchange rate and the trade balance with another trading partner. furthermore, using the aggregate data to examine the j-curve theory may need to proxy the trade data for the rest of the world if it is not available. therefore, another advantage of using bilateral level trade data could be the reduction of some measurement problems in comparison with applying aggregate data. for the second group of studies we refer to rose and yellen (1989); marwah and klein (1996); bahmanioskooee and brooks (1999) and dhasmana (2012). rose and yellen (1989) investigate the bilateral j-curve between the us and their trade partners. they specify the equations for the demand and supply of import. they followed the well-known marshallian demand analysis in which the demand for imports by the home (foreign) country is determined by the domestic (foreign) income and the relative price of imported goods. obviously, an increase in domestic (foreign) real income leads to an increase in the volume of import demand by the home (foreign) country, and also, an increase in the relative price decreases the volume of import demand. the demand for imports is expressed as: where dm(d*m) represents the quantity of goods imported by the home (foreign) country; y (y*)represents the level of real income that is measured in domestic (foreign) output; pm represents the relative price of imported goods to domestically produced goods in home currency; and pm*represents the analogous relative price of imports aboard. assuming perfect competition, the equations for the supply of exportablesis specified as follows: [3] where sx, (s*x) represents the supply of domestic (foreign) exportables.px represents the home country relative price of exportable defined as the ratio of the domestic currency price to exportables (px) to the domestic price level (p); and px* represents the foreign country relative price that is defined as the ratio of foreign currency price of exportables(px*) to the foreign price level (p'). in the following, the domestic relative price of import is written as: ( ) ( ) [4] where e represents the nominal exchange rate that is defined as the domestic currency price of foreign exchange; and rex represents the real exchange rate that is defined as e (p*/p). correspondingly, the relative price of imports abroad is written as: economy, 2015, 2(4): 64-70 67 [5] two equilibrium conditions determine the quantities of trade and the relative prices of exported goods in home and foreign countries in equilibrium: [6] b which represents the value of the home country's balance of trade in real terms is shown by the value of net exports in home currency divided by p: [7] thus, the trade balance b that is written as a 'partial reduced form', is a function of real exchange rate, the domestic and foreign income: [8] rose and yellen estimate a log-linear approximation of the above trade balance model, which is determined as follows: [9] where represents the us trade balance with country j, represents the us real gnp, represents trade partner j's real gnp (or gdp) and represents the real exchange rate between the us dollar and j's currency. this study has applied the quarterly bilateral trade data for the period of 1960to 1985 for the us and its six g-6 trading partners (canada, france, germany, italy, japan and uk).they have found no significant effect of the exchange rate on the trade balance for any lag length, but for the case of italy and germany. the negative findings of this study are interpreted as a result of the potential simultaneity of the trade balance, exchange rates and outputs in one hand, and presence of unit-roots in the variables on the other hand. also, they come up with a suggestion about taking each individual assumption such as; a short-run inelastic response of the import quantity to import prices, a short-run elastic response of the import prices to the exchange rate, and a slow response of the export quantity to the exchange rate, into account that collectively will give rise to the j-curve. another study which took bilateral trade data is done by marwah and klein (1996). the study uses quarterly data of canada and the us with their five largest trading partners (us/canada, france, germany, japan and uk) for the duration of 1977-1992. they estimate the trade balance (us/canada exports over us/canada imports) which is a function of the real exchange rate and the quantity of world trade in the constant ratio of 1985 as us dollar over us/canada gnp. this study has found the evidences of the j-curve for both us and canada. bahmani-oskooee and brooks (1999) in another study based on bilateral trade data, investigated the drawbacks in the analysis of rose and yellen (1989) and marwah and klein (1996). they point three deficiencies in the study of rose and yellen (1989) first, the sensitivity of findings to the units of measurement as in this study the trade balance is described as the difference between merchandise exports and imports, secondly, it is claimed that their cointegration technique (engle-granger) has low power as it requires the dickey-fuller (df) or the augmented dickey-fuller (adf) tests. then, the short-run results are from a simple autoregressive analysis, rather than errorcorrection modeling; and third, they do not attempt to use any objective criterion to select the lag length in estimating their var model. the major deficiency for marwah and klein (1996) is using non-stationary data. bahmanioskooee and brooks (1999) avoid the shortcomings of these studies and examine bilateral j-curve between the us and her six major trading partners (canada, france, germany, italy, japan, and uk). they adopt a model similar to the model used by rose and yellen (1989) which is specified as follows: [10] where trade balance is denoted as . contrasting rose and yellen (1989) tb is the ratio of the imports from trading partner j over the exports to j. is the index of the us real gdp, is the index of j's gdp, while is the real exchange rate defined as number of us’s currency per trade partner j’s currency. under this definition, the expected sign of d is positive if real depreciation is to improve trade balance. moreover, they employed the new cointegration technique of autoregressive distributed lag (ardl). in order to capture the short and long-run effects, the model is put then in error correction model format. the specification of bahmani-oskooee and brooks (1999) takes the following form: ∑ ∑ ∑ ∑ [11] by employing quarterly bilateral trade data from 1973ql to 1996q2, they find no specific short-run patterns supporting the j-curve, that is short-run negative sign for the coefficient of rex (d) followed by a positive sign. but they show that a real us dollar depreciation has positive long-run impact on trade balance of the us. the uniqueness of the work done by dhasmana (2012) is the use of panel data analysis in bilateral trade data. the study covers the period of (1975-2011) using aggregate quarterly data of india’s bilateral trade with her major 15 trade partners. economy, 2015, 2(4): 64-70 68 although hard to justify, dhasmana (2012) believes that although the direction of the relationship between real exchange rate and trade balance in the short-run might differ from a country to another or a commodity to another, the relationship is still homogenous in the long-run (depreciation should improve trade balance). thus, the coefficient estimates of this approach are more accurate. by using real effective exchange rate instead of bilateral real exchange rate, dhasmana (2012) concludes that there is a strong positive relationship between real exchange rate depreciation and trade balance. like the first group, the findings of the second group are still highly inconsistent and still expected to suffer from aggregation bias since they used aggregate trade data instead of sectorial or commodity trade data. 3.3. stage three: bilateral disaggregated trade data the third and most recent group of studies focus the analysis on commodity and sectoral trade data, with the intention of further reducing the aggregation bias. there can be no reason why each bilateral sector of tradeshould respond in the same way to depreciation. doroodian sr et al. (1999) for example call attention to the fact that the payments for agricultural goods are mainly madeupon delivery, thus, the delivery lags are longer than those for manufactured goods. they argue that "it is thus plausible to test hypothesis that the j-curve effect is more pronounced for agricultural goods than for manufactured commodities". there has beenmany studies that can be categorized in this group i.e. carter and pick (1989); doroodian sr et al. (1999); baek (2007); bahmani-oskooee and wang (2008) and bahmani-oskooee and zhang (2013). as pointed out by bahmani-oskooee and hegerty (2010) “aggregate or bilateral studies often arrive at ambiguous or conflicting results, or sometimes even no results at all”. therefore, some researchers have disapproved the use of this data since it mighthide significant information. for instance, one bilateral flow, say imports, might show a positive response to depreciation, while exports might show a negative one. when the two results are combined, as done in aggregate level, these responses might “cancel each other out, causinga single unimportant effect. disaggregating trade data into industries has been recommended as a way to reveal significant results that are unnoticed at higher levels of aggregation.here is a quick summary of this growing trend in the literature. however, it should be noted that the term “commodity-level” seems to hold a blurry meaning. in many studies, it is used while it refers to a group of commodities instead of a single commodity i.e. soap, cleansing and polishing paper is described as a single commodity by bahmani-oskooee and wang (2008). in some other studies, the term is more appropriately seen as “industry level” (ardalani and bahmani-oskooee, 2007). however, both terms are used interchangeably (bahmani–oskooee and hosny, 2013). nevertheless, in other cases, the investigated commodity is a single commodity i.e. tomatoes as done by alias et al. (2012). the reason of this mingling might be attributed to the source of data. there are mainly two widely-used sources of commodity trade data, the harmonized commodity description and coding system (hs), and the standard international trade classification (sitc). each nomenclature follows a distinct definition of sectors and commodities while both are recognized as commodity classification systems. in this study, we conform the term of “sector-level” of trade. carter and pick (1989) study the short-run adjustment path for the effect of currency devaluation by testing the pass-through effect. the paper concentrates on export as well as import unit values and net impacts of this adjustment. they use quarterly data from 1973 to 1985 and estimate the following model of trade balance : [12] where ( ) is the agricultural exports (imports) value, ( ) denotes the assessed effect of a depreciation on the export (import) unit value. it should be noted that in their above trade balance model in the shortrun, they assume that changes in exchange rate are independent from the volume of trade. thus, the effect of devaluation on the agriculture trade balance is measured through its impact on the agricultural merchandise unit values. they concludes that agricultural import unit value adjust much faster than agricultural export to a depreciation. they also suggest that "the first segment of j-curve does exist for the us agricultural trade balance; and with a 10% depreciation, the trade balance will initially decline for about nine months" (p. 719). in a further development, doroodian sr et al. (1999) examined the j-curve phenomena for agricultural and manufactured goods in the us by employing quarterly data from 1977ql to 1991q4. the trade balance is modeledas in the following equation: [13] where y is the us real output, g is the us budget surplus/deficit, mb is the us money base, and e* is the real effective exchange rate. all, y*, mb*, and g*are weighted averages calculated on the basis of the bilateral trade share in each group of commodities (agricultural and manufactured goods). the included countries are the most important 9 trade partners of the us. the paper also suggests the presence of j-curve phenomena for agricultural goods, but fails to support it for manufactured goods. the contradictory results for the different groups of commodities, according to them, are indicative for the need for further data disaggregation in the j-curve analysis. baek (2007) investigates a single sector of industries, the us-canada bilateral trade of five forest products. using quarterly data from 1989q1 to 2005q1 and trade data obtained from the foreign agricultural service (fas online), the study finds no support for the j-curve applying the ardl cointegration approach. in a broader study, ardalani and bahmani-oskooee (2007) examined the us bilateral trade with the rest of the world as a single trade partner of 66 sectors (sitc three-digit codes). they also apply the ardl to monthly data (jan1991-aug2002). although 22 sectorsseem to have favorable long-run results, only six have the short-run succession of coefficients that support thej-curve. economy, 2015, 2(4): 64-70 69 therecent trend of disaggregating trade data has enabled an extended series of inclusive studies at the industry levelof bilateral trade. bahmani-oskooee and bolhasani (2008) for instance, find that for a set of 152 sitc threedigit trade flows between the us and canada, 50% only have long-run effect. howeve, most sectors have some short-run effects. similarly, bahmani‐oskooee and wang (2007) study 108 sitc industries from 1962 to 2003 between the us and australia. the study findings that 68 have significant short-run effects, whilemerely 35 have positive long-run effects. for the us and china, bahmani-oskooee and wang (2008) prove the presence of the j-curve in 22 of 88 bilateral trade flows. the data is of two and three-digit sitc and extends over the period 1978-2002 annually. likewise, bahmani-oskooee and hajilee (2009) studied trade between the us and sweden for 87 sectors from 1962 to 2004. employing annual data,while 50 presentof the industries have short-run significant effects, seven have a short-run pattern of coefficients suggesting the j-curve, while 23 sectors have significantly positive long-run relations. in an even more inclusive study, bahmani-oskooee and kovyryalova (2008) examine the us-uk trade using 177 sitc sectors from 1962 to 2003.most industries, 107 industries,show short-run effects, and 66 register long-run effects. similar effects are uncovered for us-japanese trade, as bahmani-oskooee and hegerty (2009) find positive long-run coefficients for 41 of 117 industries but very little evidence of any “j-curve”. furthermore, bahmani-oskooee and mitra (2009) investigate the case of india. the paper usesannual trade data between india and the us for 38 sectors and show that real depreciation of the rupee has short-run effects in most industries (22 sectors), only eight sectors show a j-curve pattern. in one of the most resent studies, bahmani-oskooee and zhang (2013) investigated the existence of the j-curve between china and the uk. using out of the 47 sectors consideredfrom 1978 to 2010, they show that the currency devaluation has favourable short-run effects in 38 industries. nevertheless, the short-run impacts last into the long run in seven cases only. however, it should be noted that for almost all the studies investigated in the third group, the sectorlevel, the employed methodology for cointegration was autoregressive distributed lag (ardl). while many previous analyses of the j-curve phenomena employed other cointegration techniques, the methods peior to ardlsuffered from certain problems. first, the order of integration might not be alike among all variables, which means that some variables might be stationary at level while some other variables become stationary after taking the first difference (bahmani-oskooee and hegerty, 2010). secondly, the j-curve process of shortand long-run dynamics might not be correctly captured if several procedures are needed to form an error-correction model (ecm). one procedure has become a norm-like for the jcurve analysis because it successfully addresses these two problems (pesaran et al., 2001) suppose x,y, and z are the domestic country’s gdp, partner country’s gdp, and the real bilateral exchange rate respectively: ∑ ∑ ∑ [14] this specificationpresents a standard ecm, with the addition of a linear combination of lagged level variables as a direct substitute for the first lagged error term (ecm t-1) in the engle and granger (1987) formula. cointegration can be tested by following these simple steps. first, the specification is tested without the lagged level variables. then, the lagged level variables are added again and tested for joint significance with a special version of the f-test which new tabulated critical values are calculated by pesaran et al. (2001) or narayan (2005) for small samples. significance indicates that there is a long-run association between variables, and thus cointegration. since equation [14] integrates the coefficients of the shortand long-run, it is perfectly appropriate to investigate the j-curve phenomena. this can be captured by comparing the sign and the significance of the short-run coefficients at early lags with those at later lags. contrary signswould indicate that the j-curve or the inverted jcurve (depending on the definitions). another way to trace the j-curve is to compare the short-run coefficient with that of the long-run (in this case, the maximum number of imposed lags on first differenced variables should be one). to summarize, the third stage of improvement has successfully tackled with two key points of the j-curve analysis. first, it showed that it is implausible to test the j-curve on the aggregate level of trade since some trade sectors or commodities might be affected negatively by exchange rate depreciation while other sectors positively, hence, when studying the effect on aggregate level, the two contradictory relations might cancel each other out resulting in a no effect final estimation. thus, to obtain more meaningful results, its better to employ bilateral commodity trade data. second, the econometric techniques used in the j-curve analysis in many studies employed some models that require pretesting for the unit root and were not able of detecting the short and long-run effects independently. as widely agreed by most of the recent studies, it is the best not to test for stationarity using any of the popular tests, but to establish cointegration by applying the autoregressive distributed lag technique. to capture the time-dependent effects, it is applicable to use the error correction mechanism. 4. concluding remarks and further proposed improvements as summarized in this study, the plausible theory of the j-curve has undergone several stages of improvement. where early studies used aggregate trade data between one country and all of its trade partners at a time, the bias of aggregation and exogeneity led a group of other researchers to utilize the trade data bilaterally. to further reduce the bias, anenormous body of literature investigated the j-curve bilaterally on disaggregatedlevel of trade, i.e. sector and commodity-level. economy, 2015, 2(4): 64-70 70 however, even with these improvements, the j-curve theory is still one of the most debated topics in this field. the most significant question the j-curve is still facing could be stated as follows;what is the overall effect of exchange rate movements on trade balance for a certain country? since the effects of exchange rate movements on trade balance are not expected to be homogenous in different bilateral relations, i.e. different levels of development and economy structure,and on the other hand, the same effects are not expected to be homogenous indifferent commodities either,more comprehensive sector-level studies on the jcurve for a country and its major trade partners separately should be conducted to function as a frame of reference for monetary policymakers. to tackle with this new perspective, a novel phase of improvement for the j-curve analysis could be triggered.by doing so, we can indeed capture the effect of exchange rate movements on trade balance in majorbilateral relations of a country and specific commodities, which permits new bidirectional comparisons over sector and trade partner. references alias, e.f., a. baharom, i. ismail and a. radam, 2012. the impact of exchange rate on tomato trade: evidence from malaysia. asian social science, 8(6): 20-25. ardalani, z. and m. bahmani-oskooee, 2007. is there a j-curve at the industry level. economics bulletin, 6(26): 1-12. baek, j., 2007. the j-curve effect and the us–canada forest products trade. journal of forest economics, 13(4): 245-258. bahmani-oskooee, m. and j. alse, 1994. short-run 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economics, 37(17): 1979-1990. pesaran, m.h., y. shin and r.j. smith, 2001. bounds testing approaches to the analysis of level relationships. journal of applied econometrics, 16(3): 289-326. rose, a.k. and j.l. yellen, 1989. is there a j-curve? journal of monetary economics, 24(1): 53-68. views and opinions expressed in this article are the views and opinions of the authors, economy shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. economy issn: 2313-8181 vol. 3, no. 1, 1-18, 2016 www.asianonlinejournals.com/index.php/economy 1 the impact of physical and human capital development on economic growth in developing and developed countries: a comparative panel data approach olusola olalekan joshua1 1 international economics and finance, bournemouth university, uk abstract this research used panel data of 74 developing and 47 developed countries over the period of seven years (2005 -2011) to investigate and compare the impacts of physical and human capital development on economic growth in these two regions. the results from fixed effects method employed revealed that physical capital such as investment proxy by gross fixed capital formation is not positively and significantly contributing to economic growth in developing regions until investment from other sources such as fdi and other growth determinants were taken into account. the reverse is the case for developed countries with this had positive and significant effect on gdp in almost all the model specifications. infrastructure and innovation technology prove positive and significant in developing countries while they were not significant in developed countries which may be due to catching up effect through technology externalities and knowledge spillover. human capital contributes to gdp in developed region through investment flow in primary and tertiary education. however, the result further showed that developing countries have neglected basic primary and secondary education with focus on tertiary education which may lack quality to contribute to gdp due to poor foundation as a result of poor attention to primary and secondary education. keywords: panel data, fixed effect, physical capital, human capital, economic growth, knowledge spillover. contents 1. introduction ........................................................................................................................................................................... 2 2. literature review .................................................................................................................................................................. 2 3. data sources and research methods .................................................................................................................................... 6 4. analysis and interpretation of research findings ............................................................................................................... 8 5. conclusion and recommendations ..................................................................................................................................... 14 references ................................................................................................................................................................................ 15 bibliography ............................................................................................................................................................................ 17 citation | olusola olalekan joshua (2016). the impact of physical and human capital development on economic growth in developing and developed countries: a comparative panel data approach. economy, 3(1): 1-18. doi: 10.20448/journal.502/2016.3.1/502.1.1.18 issn(e) : 2313-8181 issn(p) : 2518-0118 licensed: this work is licensed under a creative commons attribution 3.0 license funding: this study received no specific financial support. competing interests: the author declares that there are no conflicts of interests regarding the publication of this paper. transparency: the author confirms that the manuscript is an honest, accurate and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: history: this study follows all ethical practices during writing. received: 26 november 2015/ revised: 23 january 2016/ accepted: 27 january 2016/ published: 2 february 2016 publisher: asian online journal publishing group http://creativecommons.org/licenses/by/3.0/ http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.1/502.1.1.18 http://search.crossref.org/?q=10.20448/journal.502/2016.3.1/502.1.1.18 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.1/502.1.1.18 http://search.crossref.org/?q=10.20448/journal.502/2016.3.1/502.1.1.18 economy, 2016, 3(1):1-18 2 1. introduction 1.1. background of the study the growth of any economy has been found in a great number of literatures to be influenced by its level of physical and human capital. there is no country that can achieve sustained economic development without substantial investment in human capital (ogujiuba, 2013). harbison (as cited in adelakun (2011)) refers to human capital as the abilities and skills of human resources while human capital development refers to the process of acquiring and increasing the number of persons who have the skills, education and experience which are critical for the economic growth of any country. hence, education and health are closely related components of human capital that work together and make individuals more vigorous and productive (javed et al., 2013). the developing countries are arguably more endowed with human resources in the world compare to developed countries in term of population. however, these are not amounted the kind of human capital for economic growth because human resources required for economic growth need to possess some level of skills that will enhance their productivity. this has largely been attributed to poor schooling system, and poor health system resulting to low life expectancy and high mortality rate which are all antidotes to human capital development. moreover, the importance of physical capital in terms of capital formation to create enabling environment for growth cannot be overemphasized. rostow (1960) argued that necessary investment needs to be made in three key economic sectors such as technology, infrastructure and transportation system for rapid economic growth to take place. however, the level of infrastructure in many developing countries does not encourage economic activities to thrive. the small scale business and enterprises which form the real sector of many of these countries may find it difficult to grow and contribute meaningful impacts to economic growth. meanwhile, the essence of comparing the cross-country results of both developing and developed economies to empirically examine what the countries in both regions do differently in exploiting their physical and human capital for economic growth. this will provide guidelines for policy makers in both regions, the areas of the economy sectors that need more attention for sustainable economic growth. however, in a more specific terms, the findings from this study provide answers to the following research questions: 1) to what extent has education and health system in developing and developed countries influence their economic growth? 2) to what degree has physical capital in terms of investment and infrastructure influence economic growth in developing and developed countries? 3) what level of influence does technological advancement and innovation has brought to economic growth in developing and developed countries? 2. literature review 2.1. economic growth and determinants in developed and developing regionsfacts and figures economic growth is not the same across the globe. it is believed that countries in europe, america and other developed continents tend to have higher gdp compare to their counterparts in developing and emerging economies. this can be depicted figure 2.1 below as countries in european union have higher gdp put together over the periods of 14 years than their counterparts in east asia, latin america and sub-saharan africa regions. figure-2.1. gdp trends in european union and developing regions 2000-2013 source: plotted by author using data from world bank development indicator (2015) however, looking at the relationship between gdp and human capital index in 2013 from figure 2.2 below, it is evident that higher gdp in developed countries as shown in figure 2.1 above could be attributed to the commitment of these countries to human capital development (comprising education, health and wellness) compare to their developing counterparts. economy, 2016, 3(1):1-18 3 figure-2.2. relationship between gdp per capita and human capital index source: world economic forum (2013) in the above figure for instance, japan, united states, finland, switzerland, singapore and qatar have higher human capital index score between 0.9 and 1.5 in 2013 compare to their counterparts in developing countries which their hci score were even negative except countries like indonesia, russia, and china which could be seen as emerging economies. it can also be observed that corresponding gdp per capita for the aforementioned high-income countries are hovering around usd$20,000 and above while developing countries were all below that figure. moreover, physical capital in terms of gross fixed capital formation and foreign direct investment could be seen as avenue in which technology and other major infrastructure could be promoted and subsequently lead to economic growth through productivity as a result of enabling environment created by the factors mentioned above. figure-2.3. trends in gdp, gross fixed capital formation and fdi from euro area, latin america, south asia and sub-saharan africa, 2010-2013 source: plotted by author using data from wbdi (2015) in figure 2.3 above, gdp and gross fixed capital formation in euro area initially increased in 2011 before started declining from 2012. this is contrary to other 3 developing regions as the level of gdp starts increases in 2010 so also the gross fixed capital formation. the same goes with fdi relationship between gdp and fdi. meanwhile, despite the decline, the level of gdp and the two form of capital formation are higher in euro area compare to other regions. however, the situation described for developing countries above could be attributed to the fact that even though there is investment in physical capital but there is insufficient one in human capital that will utilise the technology and infrastructure for economic growth. that is why appleton and teal (1999) argue that human capital and investment in physical capital such as machine that will match the skills acquired through human capital development are necessary as both can complementarily contribute to economic growth. 2.2. theoretical literatures investigating the impact of economic growth especially from physical and human capital perspectives cannot be completed without reviewing the general ideas, thoughts and contributions of early economics scholars as well as empirical findings. for this reason, the theoretical frameworks of this research are discussed under three categories which are classical, neoclassical and endogenous growth models. the empirical findings from related studies in order to confirm the validity or otherwise of the postulations in theories were also reviewed. economy, 2016, 3(1):1-18 4 2.2.1. classical theories of economic growth the emphasis of classical school for economic growth to occur is basically investment and capital accumulation. prominent economic models associated to this school include harrod-domar growth model of early 1940s with emphasis on savings and investment as main determinants of economic growth; walt rostows‟ linear-stage growth model of 1959 emphasized that economic growth need to pass through five standard stages. in addition, structural change growth model by arthur lewis in 1960 established the need for economy to move from subsistence agricultural-based to industrialised one. in the same period, chenery et al. came up with the pattern of development which include a shift from agricultural to industrial production; the steady accumulation of physical and human capital; change in consumer demands with emphasis shifting from the production of food and basic necessities to desires for diverse manufactured goods and services. however, itagaki (1963) described the sequential process of rostow‟s theory as inevitable for all the countries as not all of them actually follow these sequential stages in growth attainment. okwuosa (2015) describes united states, canada, new zealand and australia as countries that did not pass through traditional society stage and even derived their preconditions from already advanced country like united kingdom. gallo (2002) also agreed with harrod-domar‟s theoretical strand that the amount of savings and investment play a significant role in the process of economic growth. he therefore describes economic growth as a rise in per capita income and national product as a result of rise in investment greater than the amount necessary to replace depreciated capital. meanwhile, ray (as cited in gallo (2002)) argued that emphasis on savings and investment by harrod-domar holding other factors of production constant is not sufficient enough to increase growth, as there is always the possibility of increasing the output by using additional labour with improved and more intensified techniques. todaro and smith (2011) argue that savings and investment are necessary conditions for accelerated rates of economic growth but not sufficient conditions. according to them necessary conditions are well-integrated financial and capital markets, highly developed transport facilities, a well-trained and educated workforce, good and efficient governance capable of converting new capital effectively into higher level of output. one of the criticisms levelled against lewis‟ model was that it neglects traditional agricultural sector by transferring labour to modern sector until there is no labour in the former which could lead to shortage of food (wang and piesse, 2010). prados (2005) argued that in development pattern, there is no implication that single unique paths, through which all economies have to pass must exist. another argument against chenery‟s pattern of development is that the approach may run the risk of leading the practitioners to draw the wrong conclusions about the causalityin effect, to pursue wrong economic development policy (todaro and smith, 2011). 2.2.2. solow’s neoclassical growth model the model was developed in 1940s and 1950s by robert solow and trevor swan respectively. the model introduced labour into already established model by classical school theorists like harrod-domar by augmenting cobb douglas production function: . however, while this is a welcome development as labour is also one of the critical factors contributing to gdp in any economy, but productivity factor of labour (al) were determined outside the model. this made solow to argue that an economy will reach a steady state (i.e a diminishing return to capital in the long run) where per capita output, capital stock and consumption will grow at a common constant rate equalling the exogenously given rate of technological progress. this argument led to the emergence of endogenous growth theories by romer (1989) and mankiw et al. (1992). 2.2.3. endogenous growth theories there are two major proponents of these theories as mentioned in the above subsection. their models directly responded to the weaknesses of harrod-domar and solow models which both explained savings and technological knowledge in their models exogenously. romer argued that diminishing returns to capital can be eliminated by the link between state of knowledge and the amount of investment (as cited in rafael and de la (2000)). basically, romer explained in his model how investment in technological progress or knowledge (a) in solow‟s model will enhance labour productivity and in turn increase output. however, mankiw et al. (1992) eventually came up with their influential contribution, and present a simple extension to the solow model by allowing human capital as a separate input into an otherwise standard cobbdouglas production function with harrod-neutral (i.e., labour augmenting) technological progress schütt (2003). mankiw et al. (1992) argue that there will be constant increasing return to scale of reproducible factor such as human capital through technology advancement augmented by innovation as a result of deliberate development of human capital via research and development. 2.3. empirical literatures 2.3.1. impact of education and health education and health had been described as two main components of human capital stressing that while education enhances the quality of human capital, health on the other hand improves the efficiency and effectiveness of human capital (ada and acaroğlu, 2014). the idea here is that labour productivity will affect economic growth positively through skilful and healthy labour. barro (1992) found that countries with a higher level of educational attainments grow faster for a given level of initial per capital gdp and for values of policy –related variables. similarly, average schooling years were found to yield a rise in gdp growth of about 0.5% points in a panel data investigation of human capital and economic growth in oecd countries by middendorf (2005). tiruneh and radvansky (2007) carry out a panel data investigation of human capital contribution on european economic growth between the period of 1995-2009 and they found that secondary school enrolment, and labour force with primary, secondary, and tertiary education are all significantly and positively influence gdp per capital growth rates. idrees and siddiqi (2013) compare the impacts of public education expenditure on economic growth in developed (g-7) nations and developing countries using panel data cointegration method. they found that „‟the economy, 2016, 3(1):1-18 5 impact of public education expenditures on economic growth is greater in the case of developing countries as compare to the developed countries, which they conclude as sign of the “catching-up effect” in developing countries‟‟. son et al. (2013) panel data investigation of education impact on economic growth for five groups of eu member states(both developing and developed) revealed that both quantitative (measured by average schooling year) and qualitative (scores on skill tests) features of human capital have positive and significant influence on economic growth in these countries. bloom et al. (2004) found in a panel study of countries for the period between 1960 and 1990 that health has a positive and statistically significant effect on economic growth. it suggests that a one-year improvement in a population‟s life expectancy contributes to an increase of 4% in output. eggoh et al. (2015) examine the relationship between education, health and economic growth among 49 african countries between 1996 and 2010. they found that public expenditures on education and health have a negative impact on economic growth, whereas human capital stock indicators proxies by primary and secondary enrolment have a slight positive effect. they also found that education and health expenditure could complementarily influence economic growth positively. somayeh et al. (2013) investigate effect of health on economic growth in 16 developed and 14 developing countries using panel unit root and panel data approach. they found that found that capital stock and life expectancy have a statistically significant positive effect on economic growth in both groups of countries. 2.2.2. impact of physical capital (a) investment this study examined other physical capital variables apart from traditional gross capital formation. these include foreign direct investment, infrastructure, and natural resources. three of chenery‟s pattern of development characteristic features such as international trade, urbanisation and resource use (as cited in todaro and smith (2011)) serve as one of the justifications for including the above mentioned physical capital. these forms of capital vary from one country to another. kubík (2010) found that physical capital contribute significantly 50% to output on the average in 73 countries between 1960 and 1990 using panel data from six different sources. a linkage analysis in bangladesh between 1986 and 2008 also reveals that level of capital formation caused significant positive effects on changes in real gdp (adhikary, 2011). similar results were found in pakistan using data for the period of 1972-73 to 2010-11 (ali et al., 2012). meanwhile lucas (as cited in benhabib and spiegel (1994)) suggests that one reason why physical capital does not flow to poor countries may be linked to the fact that these countries are poorly endowed with factors complementary to physical capital. this justification was eventually linked to the negative and significant relationship found between income-to-capital ratio and income level (benhabib and spiegel, 1994). (roy and mandal, 2012) was another empirical study which has panel observation of 27 asia countries for the period of 1974 to 2010. they found negative and statistically significant relationship between gross fixed capital formation and economic growth. it was however, argued that „‟domestic investment proxy by gross domestic capital formation is not conducive to economic growth for asian economies due to the mismatch between capital requirement and saving capacity‟‟ (roy and mandal, 2012). similarly, azat (2014) found that gdp per capital income had insignificant negative relationship with gross fixed capital formation in 8 central european economies (cee) between 2005 and 2010 but ignore on insignificant ground. however, cu et al. (2013) found in their panel data investigation of 5 countries in asean region that gross fixed capital formation has a positive and significant effect on gross domestic product. ndambiri et al. (2012) examine the determinants of economic growth in 19 sub-saharan africa countries using generalised method of momentum panel technique between 1982 and 2000. physical capital proxy by gross capital formation alongside human capital significantly contributes to the economic growth among these countries. similarly, fayissa and nsiah (2010) found positive and significant relationship between gdp per capita and gross fixed capital formation in 18 latin american countries between 1980 and 2005. harrod-domar growth model assume closed economy where investment require for economic growth is determined by the amount of savings. one of the model‟s weaknesses is that developing countries could borrow where domestic investment is insufficient to achieve economic growth. however, literature has criticised this assumption claiming that this has resulted to huge debt profile for many developing countries with repayment problems (nyandat, 2014). (b) foreign direct investment meanwhile, several empirical literatures have found that encouraging fdi could complement domestic investment and then lead to economic growth. there are mixed empirical results on the above as some findings revealed inverse relationship between fdi and growth especially in developing countries. also the simultaneity problem causing bidirectional relationship used to produce ambiguous results. cu et al. (2013) found that fdi had a negative and significant effect on gdp in panel study of asean-5 countries. they argue that the negative effect may be due to indirect effect such that fdi does not generate employment good enough to boost the economy. behname (2012) found that capital formation and foreign direct investment had positive and significant effect on gross domestic product (gdp) in south asia countries. the study uses panel data between 1977 and 2009. similarly, fayissa and nsiah (2010) found positive and significant relationship between gdp per capita and fdi in 18 latin american countries between 1980 and 2005. in another study of developing countries, mallick and moore (2006) found in a panel study of 60 developing countries that „‟fdi flows exert beneficial complementarity effects on the domestic capital formation across all income-group countries, thus suggesting that external finance does positively contribute to economic growth‟‟. similarly, borensztein et al. (1998) found fdi from industrial countries to 69 developing countries in their crosscountry study as vehicle for the transfer of technology, contributing relatively to growth than domestic investment. economy, 2016, 3(1):1-18 6 their findings further revealed that fdi would contribute to economic growth only when the host countries have a minimum threshold of human capital and sufficient absorptive advanced technology capability. meanwhile, a panel data investigation of oecd and non-oecd countries carried out by luiz and mello (1999) reveals that fdi would only contribute to economic growth of the recipient‟s economy with upgraded technology and knowledge spillovers. similarly, an increase in annual gdp growth between 0.3 and 0.71 percentage points had been attributed to an increase in fdi share of gdp in 43 sub-saharan africa between 1980 and 2009 (juma, 2012). (c) infrastructure there is no infrastructural development whether in energy, transportation, aviation & port and/or power sector that can really thrive without the support of telecommunication facilities and its allied products. this accounts for the importance of telecommunication infrastructure as life wire upon which other infrastructural facilities contribute to economic growth. the effect of this category of infrastructure on economic growth had been established by a number of literatures. telecommunication developments were found statistically and positively correlated with the real gdp per capita of 24 countries from low income, middle income and income groups between the period of 1985 and 2003. these results were based on the empirical panel data investigation by zahra et al. (2009). similarly, sahin et al. (2014) examine in their panel data investigation, the infrastructure effects on economic growth of three groups of european union countries (eu 12, eu 15 and eu 27) between the period of 1980 and 2010 using generalised momentum method (gmm). they found „‟that telecommunications investments have positive effects on growth in all groups, energy investments have positive effects in eu 15-eu 27 groups and investments on railway and road have positive effects only in eu 27group.‟‟ mahyideen et al. (2012) in their 5 asean‟s panel data investigation for the period between 1980 and 2010 also revealed that all the 4 infrastructural development proxies including number of subscriptions for both fixed line and mobile phone, number of telephone lines, the number of mobile cellular subscription are statistically and significantly correlated with economic growth proxy by gdp per capita. evidence from developing countries in a study carried out by sridhar and sridhar (2007) shows that there are positive impacts of mobile and landline phones on national output, even when they control for the effects of capital and labour. economic development had been linked with a critical mass telecommunication infrastructure. röller and waverman (2001) found that mass presence of telecommunication infrastructure using penetration rate of line per capita had significant effect on gdp in 21 oecd countries over 20 year periods. similarly, in a dynamic fixed panel data investigation of 22 oecd countries for the period of 1980 to 1992 by datta and agarwal (2004) found that „telecommunication infrastructure is both statistically significant and positively correlated with growth in real gdp per capita growth for these countries even after controlling for the effects of investment, government consumption, population growth, openness, past levels of gdp, and lagged growth‟‟. however, it has been argued further that telecommunications investment is subject to diminishing returns, suggesting thereby that countries at an earlier stage of development are likely to gain the most from investing in telecom infrastructure (datta and agarwal, 2004). 1 (d) innovation and technological advancement innovation as a result of research and development had been theoretically linked to technological advancement which in turn enhances productivity of labour (mankiw et al., 1992). in view of this, high-technology exports percentage of manufacturing has been described as products with high r&d intensity, such as in aerospace, computers, pharmaceuticals, scientific instruments, and electrical machinery (wbdi, 2015). however, a number of empirical studies have also established this endogenous technology progress position of growth model. benhabib and spiegel (1994) found that human capital can positively influence economic growth through two mechanisms. first, through the rate of domestically produced technological innovation; second, through the speed of adoption of technology from abroad, this can be through fdi in case of developing countries especially. kilavuz and altay (2012) also found that high-tech manufacturing industry export contribute positively and significantly to economic growth in 22 developing countries investigated. hence, it is expected that this factor should have positive and significant effect on growth in developed countries being industry-oriented. (e) other factors affecting economic growth trade openness, natural resources endowment, population and tax policy cannot be overemphasized in economic growth literature. according to chenery‟s patterns of development empirical exposition (as cited in todaro and smith (2011)) „‟in addition to accumulation of capital, both physical and human, a set of interrelated changes in the economic structure of a country are required for transition from a traditional economic system to a modern one‟‟ the structural changes being referred to simply involve factors responsible for economic function such as production transformation, composition of consumer demand, international trade, natural resources, urbanisation and population density. these are all macro and socio economic factors determining economic growth in every country and their impacts vary from country to country. 3. data sources and research methods 3.1. data collection and sample size description the study uses secondary sources mainly from wdi to collect data. the explanatory variables of interest are broadly classified into four categories and these are: human capital development, physical capital including infrastructure, innovation & technology advancement and other control variables (including trade openness, fdi, population, tax policy, e.t.c). table-3.1. data description 1 see also china case in ding and haynes (2006). economy, 2016, 3(1):1-18 7 s/n procxy description microeconomic indicators sour ce 1 lngdp gdp constant 2005 u$$/ wdi economic growth wdi 2 edi ndx hei ndx mean years of schooling for adult aged 25 years+based on educational attainment & expected years of schooling based on enrolment by age at all levels of education (min. 15 and max. 18 years life expectancy at birth, ( min. 35 and max. 85 years) human capital development (education) human capital development (health) hdi pryse sww tse lexp school enrollment, primary ( % gross) school enrollment, secondary ( % gross) school enrollment, tertiary ( % gross) life expectancy at birth human capital development (education) human capital development (health) wdi hex health expenditure, total (% of gdp) human capital (health facilities) wdi 3 gfc infr hetech gross fixed capital formation (% of gdp) fixed telephone subscriptions ( per 100 people) high-technology exports (% of mfg. exports) domestic investment infrastructural development innovation & technology advancement wdi 4 fdi lpop trop ntr tax foreign direct investment, net inflows (% of gdp) population ages 15-64 ( % of total) trade (% of gdp) total natural resource rents (% of gdp) total tax rate (% of commercial profits) foreign investment inflow availability of labour trade openness resource endowment tax policy wdi notes: 1 natural log dependent variable wdiworld development indicator 2 human capital components hdihuman development index 3 physical capital components 4 control variables-other factors that can influence economic growth source: author‟s compilation from wbdi (2015) there had been mixed results using these proxies in a number of studies both in developed and developing countries (barro, 1992; benhabib and spiegel, 1994; appleton and teal, 1999; ranis et al., 2000; tatoğlu, 2011; son et al., 2013; ada and acaroğlu, 2014; eggoh et al., 2015). this study therefore used both index and school enrolment and reconciles the differences as shown in the above table ****. another human capital health proxy used is health expenditure (% of gdp). the sample size contain 74 developing countries made up of 49% sub-saharan africa (ssa), 11% middle east & north africa (mena), 18% latin america & caribbean (lac), 5% east asia & pacific (eap), 11% europe & central asia (eca) and 7% south asia (sa). however, 47 developed countries were majorly sampled from high income countries. the nature of observed data is panel because it comprises many countries as explained above for the period of seven years 2005 to 2011. this is sometimes called cross-section time-series data because it combines both cross-sectional data and time series data in the observation. 3.2. research methods this study employed quantitative research method which involves the generation of data in quantitative form and subjected to rigorous quantitative analysis in a formal rigid fashion (kothari, 2004). the quantitative analysis techniques used are panel (fixed-effects & random-effects) and cross-sectional regression techniques. however, this study basically used fixed-effects and random-effects model in order to eliminate endogeneity problem in the panel observation which may have been caused by unobserved variable which might have correlated with regressor and residual i.e error term. for instance education quality which could enhance skills and performance for productivity and economic growth were not observed in this study‟s model. however, the use of pooled ols model estimation may be inconsistent and bias as it assumes that the intercepts are the same for all the countries. thus, deny the heterogeneity or individuality effect that may exist among the countries in the panel observation. meanwhile, fixed-effects model allows for heterogeneity or individuality effects among countries in the panel observation and hence each has its own intercept value. it accounts for the fact that though intercept may differ across countries but does not vary over time. random-effects model also identify time-invariant effects but with common intercept value which resulted to a very important assumption upon which random-effect approach could be consisted and free from bias estimation. 3.3. models specifications this study empirically employed mankiw, romer and weil human capital model as human capital was included in the aggregate neo-classical cobb-douglas production functions stated below (as cited in l‟angevin and laïb (2005)): y = where y, k, h, l respectively total output, physical capital, human capital and labour, and the partial elasticity of production with respect to the two forms of capital, a harrod-augmenting technical progress and t time and . the above model can be re-written as simple production function with technical progress a treated as endogenous variable (dewan and hussein, 2001): hence, two separate econometric functions could be derived from equation 3.8 by substituting human capital variables of interest. the first econometric function by substituting first set of human capital proxy is as follows: the second econometric function after incorporating second set of human capital proxy (i.e school enrolment at all education level and life expectancy at birth): panel a panel b economy, 2016, 3(1):1-18 8 where gfc is gross fixed capital formation, (pryse, sse, and tse) are primary to tertiary school enrolments, infrinfrastructure, htechhigh-tech innovation, lexplife expectancy, hex-health expenditure, edindx education index and heindx– health index. equation *** and *** can be represented in econometric models form respectively as follows: panel a specification: panel b specification: where represent natural log of gross domestic products for i individual country at specific t time period and is error term. all other variables remain as described in previous page. however, the above two separate panel models (using fixed-effects and random-effects regression techniques) for both developing and developed countries were subjected to econometric analysis. the hausman test then applied in order to compare and choose appropriate and efficient estimate between fixed-effects and random-effects in each of the model category (dewan and hussein, 2001; tvartani, 2007). a cross section analysis was also carried out for both developing and developed countries for the last four years of the sample years (i.e 2008-2011) in order to examine the efficacy of cross section regression technique and panel regression technique. these two methods had been used in a number of literatures earlier cited in this study. 4. analysis and interpretation of research findings 4.1. descriptive statistics results the descriptive statistics of both developing and developing countries are shown in table 4.1 below. the number of panel observations (n) for both developing and developed countries are 239 and 243 respectively. the average gdp for both regions within the period observed (2005-2011) were usd$102.25 billion and usd$973.82 billion respectively. the standard deviation represents the variability of each data within the sample. it is a measure that is used to quantify the amount of variation or dispersion of a set of data values (wikipedia, 2015). it explains how widely the values in a data set are spread around the mean. hence, the larger the standard deviation, the more spread out the observation as shown in table 4.1 below. in 2011 and 2005 ukraine and niger recorded maximum and minimum education index scores of 0.79 and 0.15 respectively in developing region. these are lower than those recorded in developed region as australia and saudi arabia recorded 0.92 and 0.62 in 2009 and 2005 respectively. table-4.1. descriptive statistics developing countries developed countries variables mean std. dev. max. min. n mean std. dev. max. min. n gdp (usd$bn) 102.25 238.61 1326.24 0.82 239 973.92 2358.33 13816.14 6.81 243 edindx 0.53 0.15 0.79 0.15 239 0.82 0.06 0.92 0.62 243 heindx 0.71 0.13 0.91 0.40 239 0.90 0.05 0.97 0.79 243 pryse 103.88 16.23 149.95 50.04 239 102.28 4.75 118.43 91.02 243 sse 64.37 26.90 101.32 10.10 239 104.05 10.34 147.62 84.71 243 tse 24.72 19.30 79.25 0.49 239 66.98 16.23 113.98 10.33 243 lexp 66.38 8.15 79.56 45.86 239 78.62 2.94 82.93 70.87 243 hex 6.22 1.95 12.49 2.79 239 8.67 2.17 17.10 2.22 243 gfc 23.13 5.69 46.73 12.81 239 22.87 4.26 36.75 10.47 243 infr 11.04 10.13 37.00 0.16 239 41.44 13.02 69.51 15.28 243 htech 6.71 10.44 70.79 0.00 239 14.56 9.36 60.66 0.26 243 fdi 5.00 4.53 27.52 -1.77 239 7.17 28.55 430.64 -16.15 243 trop 80.46 32.84 203.83 33.11 239 92.98 46.75 349.85 24.77 243 tax 43.74 14.17 112.90 8.10 239 43.69 16.95 107.40 14.50 243 ntr 10.44 12.63 68.36 0.00 239 3.84 9.92 64.77 0.00 243 lpop 61.02 7.01 72.28 47.49 239 67.37 2.17 72.83 62.12 243 source: author‟s research outputs via e-views 7 using world bank (wdi) and undp (hdi) data (2015) in developing region, the maximum gdp of usd$1.326.24 trillion was recorded by india in 2011 while the minimum of usd$0.820 billion was recorded by burkina faso in 2007. however, in developed countries, the maximum gdp value of usd$13.816.14 trillion was recorded by united states in 2011 while the minimum gdp of usd$6.8 billion was recorded by argentina in 2005. 4.2. correlation results the correlation matrix in table 4.2 a shows the level of correlation among the variables of interest for developing countries. it also helps to detect multicollinearity. economy, 2016, 3(1):1-18 9 table-4.2a. correlation matrixdeveloping countries source: author‟s research outputs via e-views 7 using world bank (wdi) and undp (hdi) data (2015) however, secondary school enrolment and life expectancy are highly correlated with education index and health index with score index of 0.910 and 0.928 respectively. this is expected and does not constitute any multicollinearity problem as these variables were used in different models. table-4.2b. correlation matrixdeveloped countries source: author‟s research outputs via e-views 7 using world bank (wdi) and undp (hdi) data (2015) as mentioned above, the same applicable to developed countries as life expectancy and health index are highly correlated with 0.991. apart from these, there is no incident of other independent variables being highly correlated with another which to some extents, indicate no multicollinearity problem. 4.3. analysis of panel regression results table 4.3 shows the panel a results where education index and health index (as described in table 3.1) were used human capital proxy for both developing and developed regions. the pooled ols regression results in column 1 for both regions indicate that the model is not fit enough as a result of r square of 0.2299 and 0.3991 respectively. this means that only 23% and 40% variations in gdp can be explained by independent variables of both regions respectively. however, the f statistic test of 18.71 and 31.999 shows that all the predictors in the models jointly influenced gdp by 19% and 32% in both developing and developed regions respectively. also, the linear relationship between gdp and all the predictors in the model are entirely significant (at p-value<0.01). although, durbin watson test result was very low but this may be due to small sample years. table-4.3. panel a: summary of panel regression (using human capital index) dependent variable: lngdp without control variables with control variables model 1 model 2 model 3 pooled ols fixed-effects fixed-effects developing developed developing developed developing developed constant 22.1311** 8.9954** 19.6848** 19.9087** 17.5823** 18.1505** (0.6751) (2.2314) (0.1655) (0.5043) (0.3505) (0.5616) regressors: gfc -0.0239 0.0217 -0.0007 0.0090** 0.0027* 0.0079** (0.0136) (0.0188) (0.0012) (0.0010) (0.0012) (0.0009) infr -0.0106 -0.0163 0.0125** 0.0002 0.0083** 0.0002 (0.0137) (0.0091) (0.0023) (0.0009) (0.0022) (0.0008) htech 0.0356** -0.0267** 0.0015 -0.0001 0.0013 -0.0005 (0.0072) (0.0075) (0.0008) (0.0008) (0.0008) (0.0008) edindx 1.9020* 0.3015 1.9222** 1.6554** 1.3324** 1.1816** (0.8396) (1.3447) (0.269) (0.2855) (0.2533) (0.2756) heindx 3.2586** 16.6002** 4.2933** 5.4299** 3.6198** 4.9530** (0.8745) (2.3825) (0.3353) (0.6944) (0.3068) (0.6727) hex -0.2088** 0.3037** -0.0156** -0.0268** -0.0198** -0.0209** (0.0434) (0.0451) (0.0062) (0.0065) (0.0057) (0.0064) continue economy, 2016, 3(1):1-18 10 fdi -0.0018 -0.0001 (0.0013) (0.0001) tax -0.0004 -0.0014 (0.0007) (0.0009) trop -0.0008 0.0002 (0.0005) (0.0003) ntr -0.0002 0.0016 (0.0011) (0.0014) lpop 0.0500** 0.0400** (0.0063) (0.0047) r-squared 0.2299 0.3991 0.9988 0.9995 0.9990 0.9996 durbin-watson test 0.0279 0.0207 0.5298 0.6848 0.6056 0.8529 observation 383 296 383 296 377 282 f-statistic 18.7132 31.9925 3808.402 9784.497 4311.123 10650.420 prob. 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 hausman test 14.2620 21.1045 67.3743 40.1130 prob. 0.0268 0.0018 0.0000 0.0000 notes: the standard errors are in parenthesis,**and* indicate significant at p<0.05 respectively; see appendix i for the results of random-effects as compared with fixed-effects using hausman test above. source: author‟s research outputs via e-views 7 using world bank (wdi) and undp (hdi) data (2015 meanwhile, there is positive relationship between human capital proxy by education and health index in both developing and developed regions as shown in figure 4.1. however, the causal effects relationship results and level of significance are shown in table 4.3. in developing region, the results shows that for every 1% point increase in education and health performance index, gdp correspondingly increases by 19.0% and 32.6% points at (pvalue<0.05) and (p-value<0.01) respectively. moreover, education index had positive effect on gdp in developed region but not significant. however, coefficient of health index in developed region is far higher than that of developing region with every 1% point increase in health performance index, the gdp increases by 16.60 point (at pvalue<0.01). figure-4.1. relationship between gdp and education index source: author‟s research outputs from pooled cross-country regression via e-views (2015) however, there is negative relationship between gdp and health expenditure in developing region within 7 years panel observation while this relationship was positive in developed region as shown in figure 4.2 below. the same relationship exists when school enrolments and life expectancy were used as human capital proxy (see appendix iii and iv). figure-4.2. relationship between gdp and health expenditure (% of gdp) source: author‟s research outputs from pooled cross-country regression via e-views (2015) however, table 4.3 shows causal effect results and level of significance of the relationship depicted in figure 4.2 above. for developing region, gdp decreases by 20.8% point for every 1% point increase in health expenditure economy, 2016, 3(1):1-18 11 (at p-value<0.01) while for developed region, gdp increases by 30.37% point for every 1% point increase in health expenditure (at p-value<0.01). the physical capital proxy by gross fixed capital formation and other allied physical capital such as telecommunication infrastructure had negative effects on gdp in developing region while only infrastructure exerts negative effects on gdp in developed region as shown in table 4.3 above. however, these effects are not significant in both regions. meanwhile, innovation and high technology advancement proxy by hightech manufacturing exports had effect on gdp but the effect was positive in developing region while it was negative in developed region. meanwhile, these pooled ols regression results may not be consistent as it fails to recognise country specific effects by treating countries in the panel observation as same. hence, having applied hausman test, fixed efects results were found appropriate as shown in column 2 and 3 of table 4.3 with r square of 0.99 indicating that 99% variations in gdp can be explained by predictors and confirm the fitness of the model. fstatistic also indicates that all predictors in the model are jointly influence gdp at 1% significance level. contrary to pooled ols results, both education and health performance index positively and significantly influence gdp in developing region with every 1% point increase in both human capital index gdp correspondingly increases by 19.2% point and 42.9% point (at p-value<0.05). the explanatory power of education performance index for developed region increase contrary to pooled ols results, with every 1% point increase, gdp also increases by 16.6% point (at p-value<0.01). health performance index still retained its positive and significant effects on gdp for both regions while health expenditure still having negative and significant effects on gdp in both regions.gross fixed capital formation became significant (at p-value<0.01) in developed region from fixed effects model results and the effect is positive indicating that gdp increases by 0.9% point for every 1% point increase in gross fixed capital formation. however, in developing region, the relationship was not significant and the effect is negative. however, after controlling for fdi, tax, trade openness, natural resources and population with working age (1565 years), the effects of education index, health index, gross fixed capital formation on gdp remain positive and significant in both regions. health expenditure‟s negative and significant effects remain the same in both regions. as expected tax exerts negative effect on gdp in both regions but not significant. population of age 15-65 years also have positive and significant effects on gdp in both regions. table 4.4 below shows results of panel b where human capital is proxy by primary, secondary and tertiary school enrolment and life expectancy. it comprises of pooled ols, random effects, and fixed effects models for both developing and developed regions. table-4.4. panel b: summary of panel regression (using school enrollment & life expectancy) dependent variable: lngdp without control variables with control variables model 1 model 2 model 3 pooled-ols random-effects fixed-effects fixed-effects developing developed developing developed developing developed constant 19.7950** -0.3244 18.0603** 21.701** 16.471** 19.986** (1.1361) (3.3637) (0.3913) (0.5014) (0.5163) (0.6361) regressors: gfc 0.0034 0.0500 0.0020 0.0137** 0.0047** 0.0114** (0.0154) (0.0210) (0.0014) (0.0013) (0.0015) (0.0012) infr -0.0003 -0.0129 0.0107** 0.0009 0.0061* -0.0002 (0.0154) (0.0101) (0.0030) (0.0009) (0.0029) (0.0009) htech 0.0332** -0.0335** 0.0026** -0.0024** 0.0018* -0.0011 (0.0082) (0.0091) (0.0009) (0.0008) (0.0009) (0.0008) hex -0.3525** 0.3568** -0.0094 -0.0055 -0.0096 0.0085 (0.0481) (0.0507) (0.0075) (0.0066) (0.0070) (0.0067) pryse 0.00451** 0.0646** -0.0001 0.0081** 0.0008 0.0057** (0.0054) (0.0181) (0.0013) (0.0017) (0.0014) (0.0016) sse -0.0162** -0.0147 0.0011 -0.0002 0.0009 -0.0006 (0.0064) (0.0091) (0.0013) (0.0010) (0.0013) (0.0010) tse 0.0274** 0.0074 0.0070** 0.0054** 0.0025 0.0044** (0.0076) (0.0053) (0.0014) (0.0007) (0.0014) (0.0007) lexp 0.0867** 0.2256** 0.0796** 0.0384** 0.0658** 0.0249** (0.0182) (0.0411) (0.0062) (0.0064) (0.0063) (0.0068) fdi 0.00006 -0.00003 (0.0016) (0.0001) tax -0.0011 -0.0029* (0.0010) (0.0012) trop -0.0011 0.0013** (0.0006) (0.0004) ntr 0.0008 0.0017 (0.0014) (0.0018) lpop 0.0452** 0.0475** (0.0079) (0.0065) r-squared 0.4115 0.4314 0.6598 0.9995 0.9992 0.9996 durbin-watson test 0.0579 0.0340 0.5537 0.9988 0.7915 1.0016 observation 244 253 244 253 239 243 f-statistic 20.5359 23.1447 56.9601 9132.276 3329.835 9676.342 prob. 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 hausman test 14.7941 26.5473 41.8944 50.2677 prob. 0.0633 0.0008 0.0001 0.0000 notes: the standard errors are in parenthesis; ** and * indicate significant at p≤0.01 and p≤0.05 respectively; see appendix ii for the results of random-effects as compared with fixed-effects using hausman test above. source: author‟s research outputs via e-views 7 using world bank (wdi) and undp (hdi) data (2015) economy, 2016, 3(1):1-18 12 the pooled ols regression in column 1 revealed that physical capital proxy by gross fixed capital formation and telecommunication infrastructure does not have significant effect on gdp in both developing and developed regions. meanwhile, life expectancy exerts significant and positive effect on gdp in both developing and developed regions. innovation and technological advancement proxy by high-tech manufacturing exports have significant effects on gdp in both regions but the effect is negative for developed world while it proves positive in developing region. only primary school enrolment was significant and had positive effect on gdp in developed region while enrolment from primary to tertiary school turn significant in developing region but secondary school enrolment influences gdp negatively. however, the panel regression results in column 2 and 3 having applied hausman test revealed that random effect estimate is appropriate for developing region meaning that country specific effects associated with unobserved variables are not correlated with error terms. meanwhile, fixed effect estimate proves appropriate in the case of developed region. exactly like result in panel a, gross fixed capital formation had positive and significant effect on gdp in developed region while it is not significant in developing region but infrastructure exerts positive effect in both regions. however, this effect was significant in developing region but not significant in developed region. moreover, contrary to ols results, primary and tertiary school enrolments in developed region were significant (at p<0.01) and influence gdp positively while only primary enrolment had positive and significant relationship with gdp in developing region. meanwhile, having controlled for tax, fdi, trade openness, natural resources and population, none of the human capital development proxies had significant effects on gdp in developing region except life expectancy. however, primary and tertiary school enrolments as well as life expectancy still exert positive and significant effect on gdp (at p<0.01) in developed region. the explanatory power of physical capital in developing region also increased as it influences gdp significantly and positively. as expected, tax exerts negative effects on gdp in both regions but significant (at p<0.05) in developed region. 4.4. analysis of cross-section regression results table 4.5 below presents the results of single cross section regression of developing region from 2008 to 2011. only health expenditure proves significant with negative effects in all the four years of analysis even when school enrolments and life expectancy were used as proxy for human capital development. table-4.5. single cross-section regression results: developing countries (2008 2011) notes: the standard errors are in parenthesis; ** and * indicate significant at p≤0.01 and p≤0.05 respectively source: author‟s research outputs via e-views 7 using world bank (wdi) and undp (hdi) data (2015) economy, 2016, 3(1):1-18 13 table-4.6. single cross-section regression results: developed countries (2008 2011) notes: the standard errors are in parenthesis; ** and * indicate significant at p≤0.01 and p≤0.05 respectively; source: author‟s research outputs via e-views 7 using world bank (wdi) and undp (hdi) data (2015) however, table 4.6 below presents cross section regression results of developed region where health performance index and primary school enrolment were found to be significant (at p<0.05) and exert positive effects on gdp in 2011. there is also positive and significant relationship between health expenditure and gdp in 2011. meanwhile, different statistical tests were carried out in order to ensure that the above cross section regressions are free from error and bias. hence breusch godfrey serial correlation lm test shows that no serial correlation exist (at p-value>0.05). jarque-bera normality test also confirmed that errors are normally distributed with (p-value>0.05). heteroskedasticity test also informed that there is no standard errors bias which could render t-statistics or f-statistics useless. it is a situation whereby the variability of a variable is unequal across the range of values of a second variable that predicts it taylor (2013). however, based on the above analysis, it can be concluded that human capital development in form of quality health status measured by life expectancy index and basic primary education had been the catalyst behind economic growth in developed region throughout the four years. meanwhile, only health expenditure had significant effect on gdp in developing region and this effect was negative while it was positive in developed region but this could be due to corruption in health sector of developing region. 4.5. discussion, comparison and implication 4.5.1. physical capital the discussion and comparison are based on panel results. it could be observed from table 4.3 that the results of fixed effects estimates having acknowledged endogeneity problem shows that gdp increases by 0.91% point for every 1% point increase in gross fixed capital formation (at p-value<0.01) in developed region 2 . the cross-section regression result in table 4.6 showed that gross fixed capital formation had positive and significant effects on gdp of developed countries in 2010 and 2011 (at p-value<0.05) when hdi was used as human capital proxy. however, it was negative effect in developing region with gdp declined by 0.07% point but not significant. this could be attributed to mismatch between capital requirement and saving capacity as well as low rates of investment in terms of physical capital in developing regions (appleton and teal, 1999; roy and mandal, 2012). meanwhile, after controlling for fdi and other growth determinants as shown in table 4.3 gross fixed capital formation in developing region turns positive (at p-value<0.05) while this remains positive and significant (at p-value<0.01) in developed region. however, when school enrolments were used as proxy for human capital in table 4.4 gross fixed capital formation in developed region remains positive and significant even after controlling for other growth determinants variables while it was not significant in the case of developing region until when fdi and other determinants were introduced into the model. the implication is that domestic investment is not sufficient enough for economic growth 2 see the findings from eu and oecd countries in son, noja, ritivoiu and tolteanu (2013). and queirós and teixeira (2014). respectively. murthy and chien (1997). also found that physical capital measured by real investment ratio to real gdp plays a significant role in economic growth of oecd countries if complements with technology know-how. economy, 2016, 3(1):1-18 14 in developing region compare to developed region due to poor savings unless other growth factors are taken into account. this means there is need to mobilise capital from other source such as fdi as mallick and moore (2006) found positive complementary effects of fdi and domestic capital formation on gdp per capita in 18 latin american countries regardless of income group. 4.5.2. telecommunication infrastructure and high-tech exports the results in column 2 and 3 from table 4.3 and 4.4 revealed that infrastructure development in terms of ict facilities and innovative technology advancement proxy by high technology manufacturing exports were positively and significantly influence gdp in developing region. this could be attributed to the speed of adopting technology from abroad through fdi (benhabib and spiegel, 1994). technology externalities and knowledge spillover through fdi had made infrastructure and innovation technology development contribute immensely to economic growth in developing region (luiz and mello, 1999). however, in developed region, results in column 2 and 3 from table 4.3 and 4.4 revealed that telecommunication infrastructure and high technology manufacturing had negative effects on gdp in developed region but not significant. the implication is infrastructure and technology advancement are not driving force behind economic growth in this region within the period observed even after controlling for other growth determinants. this could be attributed to the concept of diminishing return to capital going by most neo-classical theories indicating that developed countries tends to benefit at earlier stage of infrastructure development in terms of contribution to economic growth. datta and agarwal (2004) argued that this benefit becomes less significant as telecommunications infrastructure is more developed. 4.5.3. human capital development (education and health capital) the results in column 2 and 3 from table 4.3 shows that education and health index as proxy for human capital development exhibit positive and significant effects on gdp in both regions though the beta value of health index for developed region is higher than developing region by average 1.2 points. this implies that there is more commitment to health and wellness of human capital in developed region compare to developing region. this consistent with the findings of number of growth literatures in developed countries (gyimah-brempong and wilson, 2004; ecevit, 2013; şen et al., 2015). meanwhile, health expenditure exhibits significant inverse relationship with gdp in both regions and from the entire panel results (both table 4.3 and 4.4). this could be attributed to corruption in health sector in developing region especially africa (agbenorku, 2012). however, the situation is different in developed countries as several literatures have attributed this adverse effect to higher proportion of national income as health expenditure on ageing labour force who might not be productive as the younger ones (isabe and poças, 2012; churchill et al., 2015) moreover, the results in column 2 and 3 from table 4.4 confirm that human capital development through education contribute to economic growth in developed countries than developing countries. for instance, the results of model 2 from table 4.4 show that commitments to primary and tertiary education in developed countries contribute about 0.8% and 0.5% points to gdp respectively for every 1% point increase in the enrolment rate at these two levels of education. meanwhile, only tertiary school enrolment had positive and significant effect on gdp in developing countries with 0.7% point increase in gdp for every 1% point increase in number of potential human capital in tertiary institution. similar results were again found in model 3 from table 4.4 for both regions. this study also identified concern about the choice of proxy for human capital in terms of education like other growth studies. for instance, barro (1992) used school enrolment as flow of investment in human capital while student-teacher ratio was used as quality of education. zaman (2012) criticised the use of school attainment and school enrolments as perfect proxy while he supports education quality measured by mathematics and science test score. meanwhile, wo ßmann (2003) supports the use of education attainment and average year of schooling while describing school enrolment as imperfect. the above shows that there is no consensus yet on human capital measurement in economic growth literature and that is why this study uses different proxies. however, education index measured by mean years of schooling for adult aged 25 years plus (education attainment) and expected years of schooling showed positive and significant effects on gdp in both regions (see model 2 and 3 in table 4.3). although, the results of model 2 and 3 in table 4.4 were quite different when school enrolments were used as proxy for human capital in terms of education. only tertiary school enrolment had positive and significant impacts on gdp in developing countries while both primary and tertiary enrolment positively and significantly influence gdp in developed countries. the implication here going by school enrolment proxy‟s results, is that developing countries neglect primary education which is the foundation for any form of human capital development and that is why the qualities of university products in this region are not contributing enough to the economic growth because educational foundation in terms of primary school education is poor. meanwhile, when health index proxy and life expectancy were compared, the effect was positive and level of significant on gdp was same for both regions except the big coefficient exhibits by health index proxy (see table 3.1 for the description of health index and life expectancy). 5. conclusion and recommendations 5.1. conclusion the objective of this paper is to examine how physical and human capital development had impacted the economic growth in developing and developed countries and what policy makers in both regions could do in order to make best use of these two resources (physical and human capital) for the economic growth. however, the overall empirical results of this paper based on fixed effects outcome show that physical capital in terms of investment measured by gross fixed capital formation does not contribute to economic growth in developing countries unless other growth determinants such as fdi, trade openness, e.t.c are taken into account. however, gross economy, 2016, 3(1):1-18 15 fixed capital formation contributes positively and significantly to gdp in developed countries in all the models specified. meanwhile, infrastructure and innovative technology prove positive and significant in developing countries than developed ones which had been attributed technology externalities and knowledge spillover through the speed of adopting technology from abroad via fdi (benhabib and spiegel, 1994; luiz and mello, 1999). this can also be related to catching up effect of convergence hypothesis of neo-classical solow growth model of 1956. it was also discovered that developing countries have only concentrated on developing human capital through tertiary education neglecting primary education which is the foundation for all levels of education. however, investment flow in basic and higher education proxy by primary and tertiary school enrolments were found positively and significantly contributing to gdp in developed countries. meanwhile, health expenditure exerts negative and significant effects on gdp in both regions although a number of growth literatures have attributed these effects to the high proportion of government expenditure on ageing work force which manifest in high life expectancy especially in developed countries. this category of workforce might not be productive or resist innovation and change (isabe and poças, 2012; churchill et al., 2015). 5.2. recommendations in light of the findings of this research, efforts of the policy makers in developing countries should be geared towards improving primary and secondary education as these are foundations for higher education. there is possibility that poor primary education system could affect the products of secondary and later graduates from university making them not relevant or productive in the economy. there is over reliance on investment from abroad in developing countries as this made gross fixed capital formation not significant until other factors like fdi and trade openness were taken into account. this investment from abroad in form of fdi and trade openness does not themselves impact gdp positively as shown in table 4.3 and 4.4 (model 3). however, they does contribute indirectly by serving as conduit pipe through which technology flown into developing region coupled with improved infrastructure. meanwhile, it may look as if everything is well with the developed countries but this is far from the truth as there is need for developed countries to encourage knowledge and skills development among their nationals. more than half of the educated persons in developed countries like uk and usa acquired their doctorate and professional qualification in these countries and remain important part of labour force contributing to the economic growth of these countries (dodani and laporte, 2012). however, the argument above is that this has constituted brain drain as majority of these skilled and professional workers are foreigners from developing countries. this could also lead to brain gain in the long run as these foreign professionals might decide to return to their home country with all skills and technology know-how acquired to develop their countries. this again brings us back to convergence hypothesis through catching up effect of technology externalities and knowledge spillover as demonstrated by endogenous growth literatures (romer, 1989; romer, 1990; benhabib and spiegel, 1994; luiz and mello, 1999). 5.3. limitations of the study for further research this research had faced data availability limitations like any other quantitative studies. the researcher however, still collect the available data that reasonably serve as alternative ones without grossly affected the overall research results.  data on important proxy for infrastructure like electricity (power) in developing countries are not available for huge number of countries. this forced researcher to use alternative one i.e telecommunication line (per 100 people) which has been widely used in growth literature (datta and agarwal, 2004; mahyideen et al., 2012; sahin et al., 2014)  data for research and development expenditure is very problematic to source for developing countries. this forced the researcher to use high-technology exports to measure innovation & technology advancement. this proxy has been described as export with high r&d intensity (wbdi, 2015). it has also been used in empirical literature (kilavuz and altay, 2012).  this research employed cross-section regression to complement the results of within transformation fixed effects and random effects methods as least square dummy variable (lsdv) is practically difficult to use due to large number of countries involve in the panel observation. though the degree of freedom is exhausted in within transformation method due to elimination of intercept but the results had been argued to be same with lsdv (dougherty, 2012). this 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http://arxiv.org/pdf/physics/0601009.pdf http://www.schmidheiny.name/teaching/panel2up.pdf http://www.soderbom.net/metrix2/lec6_7.pdf economy issn: 2313-8181 vol. 1, no. 2, 68-78, 2014 www.asianonlinejournals.com/index.php/economy * corresponding author 68 economic deprivation and terrorism: further empirical evidence from nigeria emmanuel okokondem okon 1* 1 department of economics, kogi state university, anyigba, kogi state, nigeria abstract this work is licensed under a creative commons attribution 3.0 license asian online journal publishing group contents 1. introduction ........................................................................................................................................................... 69 2. nigeria: economy and terrorism overview ....................................................................................................... 69 3. literature review.................................................................................................................................................. 70 4. specification of model for analysis ..................................................................................................................... 71 5. empirical outcome and discussion ..................................................................................................................... 72 6. summary of findings, conclusion and policy implication ................................................................................ 73 appendix .................................................................................................................................................................... 75 references .................................................................................................................................................................. 77 this paper examined the question whether economic deprivation leads to terrorism in nigeria. the study covered the period 1970 to 2012. it employed the econometric methodology of vector error correction model and testing the results using stationarity test and co-integration. the ordinary least square (ols) estimation method was used as an essential component of the estimation techniques. the results show that government expenditure has a significant inverse relationship with terrorism while the degree of openness of the economy, gdp per capita, interest rate and macroeconomic policy index have positive relationships with the occurrence of terrorism both in the long run and short run. some key policy implication of these results are that the rapid economic growth experienced by nigeria should be made to show improvements in social welfare and macroeconomic policy inconsistencies should be minimized. similarly, policy reversalsshould be properly checked for both short and long run effects on the economy. keywords: terrorism economic, deprivation, nigeria. http://creativecommons.org/licenses/by/3.0/ economy, 2014, 1(2): 68-78 69 1. introduction nigeria is a country abundantly blessed with natural resources. for the past fifty years precisely, the country‘s oil subsector has tremendously grown. since commercial production in 1958, oil production and exports have both increased tremendously. for example, crude oil production increased from 395.7 million barrels in 1970 to 776.01 million barrels in 1998 (akinlo, 2012). actually, 919.3 million barrels increase was experienced in the year 2006.according to akinlo (2012) the figure declined in 2009 to 777.5 million barrels. similarly, exports of crude oil rose from 139.5 million barrels in 1966 to 807.7 million barrels in 1979 (akinlo, 2012). there was a quantity drop of 390.5 million barrels of crude oil exports in 1987 thereafter an increase of 675.3 million barrels in 1998 (akinlo, 2012). beyond 2000, this trend persistent. likewise, oil revenue rose from n166.6 million in the year 1970 to n 1,591,675.00 million and n6,530,430.00 million in the year 2000 and 2008 respectively (akinlo, 2012). expenditure and investment increase because of the net wealth provided by huge oil revenues; macroeconomic management complication and oil dependent of the economy as a result of the huge revenue. the economy still grapples with many challenges (for example, high and rising unemployment rate, manufacturing production decline, high and rising level of poverty; insufficient and poor infrastructural development) despite the huge oil rents. the dismal performance of the nigerian economy in the face of increasing domestic terrorism sparks up the question whether economic deprivation leads to terrorism? zumve et al. (2013) summarized in their discourse that economic deprivation, marginalization, frustration, and desperation experienced by the greater population of nigerians is the underlying cause of terrorism in contemporary nigeria. this views lack strong empirical basis even as it plausibly seems. the objective of this paper is to empirically investigate whether economic deprivation over the period 1970-2012 leads to terrorism in nigeria. specifically, the paper examine whether or not cointegrating relationship exists between economic variables such as gdp per capita, inflation rate, trade openness, government total expenditure, interest rate, macroeconomic policy index and terrorism. the rest sections of this article are structured in this manner. first, section 2 of this paper provides the trend and dynamics of terrorism and performance of nigerian economy. a review of related literature is done in section 3. specification of model, data source and technique of analysis are addressed in section 4. section 5shows the outcome of regression estimation. the concluding section contains the summary of major findings and offers some policy prescriptions with a view to mitigating terrorism in nigeria. 2. nigeria: economy and terrorism overview 2.1. trends and dynamics of terrorism in nigeria the historical trends and dynamics of terrorism are older than nigeria itself. terrorism predates nigerian history as one nation. during the pre-colonial nigeria oyeniyi (2007) noted that the secret societies were involved in acts of terrorism like killing, looting, armed robbery, assassination, kidnapping, perversion of justice and so on. most of them were also used by the local chiefs as agents of terror to eliminate opponents and threaten oppositions. in so doing, acts amounting to harassment, intimidation, violence, fear and general insecurity, characteristics of terrorism were established by the local chiefs. consequently, it was easy for the colonial masters to collaborate with the local chiefs in further committing acts of terrorism on the people (chinwokwu, 2012). in the post colonial era, abubakar (1997) contends that during the years of the first republic (1960-1966) the political system was typified by communal conflicts – such as the tiv riots, electoral violence epitomized by western regional crisis of 1965, and the agbakoya uprising. the tensions and terrorist activities that were carried out against the igbo ethnic group during this period eventually led to the fall of the first republic and the rise of the 1966 pogrom. the 1966 pogrom saw the real northern hatred, wickedness and unequivocal display of total acrimonious acts of terrorism perpetrated against the igbo and southern minorities. to completely wipe out the igbo race was the main aim. the actions of the federal government or northern political or military leaders was seen as the worst display of terrorist acts against a nation aside from the hitler‘s jewish six million gas chamber genocide (chinwokwu, 2012). the display of terrorism has been further demonstrated in all the phases of government in nigeria. during the military era, the dynamic nature of terrorism in nigeria assumed a different political dimension, not only in the weaponry, strategy, intensity and scope but also in the choice of targets and mass destructions. from 1986, when the use of a parcel bomb was introduced and used to kill dele giwa during the regime of general ibrahim babangida, till present day the dynamics, dimensions, intensity and pervasiveness of terrorism assumed an unprecedented proportion in the history of nigeria (chinwokwu, 2012). both state and non-state terrorism became rampant and alarming with massive human casualties. the return of civil rule in 1999 opened up new opportunities for nigerians to breathe air of freedom from the old order of tyranny and terrorism. it is important to state that instead terrorism assumed an alarming proportion with the introduction of kidnapping, hostage taking, assassinations, armed robbery, murder and soon (chukwurah, 2007; okoronkwo, 2007; sokumbi, 2007). it was so severe and brutish in the niger delta and the south – east that oil facilities were destroyed, expatriates abandoned their projects and deserted the zones. many nigerians called for state of emergency to be declared in the zones. even the state governors of the five south-east approached the presidency, claiming that they lack the resources to contain criminal activities in their states (adeleye, 2010; chidozie, 2010; fabiyi, 2010). see table 1 (in appendix) for cases of domestic terrorism arising from bomb explosions in nigeria from 1986 to 2012. also, see images of terrorism in nigeria below. economy, 2014, 1(2): 68-78 70 christmas day bombings, including one picture of a boko haram fighterat st. theresa catholic church in captured by the military authoritiesmadalla, nigeria.65 people were reported killed source: goodspeed (2006),ckn nigeria (2013) 2.2. nigeria economy at a glance categorically, nigeria is as an emerging market. it is rapidly reaching middle income status, given its abundant supply of natural and human resources, well-developed legal, financial, communications and transport sectors, as well as stock exchange. the nigerian stock exchange happens to be the second largest in africa. as at 2007, in terms of gdp(ppp), nigeria was ranked 37 th .nigeria is the united states' largest trading partner in sub-saharan africa and supplies a fifth of its oil (11% of oil imports) (wikipedia, 2009). currently, for u.s. goods, nigeria is reported to be the 50 th -largest export market and concerning goods to the u.s., nigeria is said to be the 14 th -largest exporter. than any country worldwide, it has the seventh-largest trade surplus with the u.s. the united states is the country's largest foreign investor (state.gov., n.d). the bulk of economic activity is centered in four main cities: lagos, kaduna, port harcourt, and abuja. beyond these three economic centers, development is marginal (wikipedia, 2009). many years of military rule, corruption and mismanagement had hindered economic development, previously but the restoration of democracy accompanied with economic reforms have successfully put the country back on the path of achieving its full economic potential as one of africa‘s main economies. as the economist intelligence unit and the world bank reported, the country‘s gdp(ppp) has almost doubled from $170.7 billion in the year 2005 to $292.6 billion in the year 2007 (economist.com., n.d). the gdp per head has jumped from $692 per person in 2006 to $1,754 per person in 2007 (economist.com., n.d). nigeria accumulated a huge foreign debt to finance core infrastructural investments during the 1970s oil boom. the country struggled to keep up with its loan payments as a result of the fall of oil prices during the 1980 period oil glut. it finally defaulted on its principal debt repayments; thus limiting repayment to the interest portion of the loans. the size of the debt increased because of arrears and penalty interest accumulated on the unpaid principal. nevertheless, in october 2005, following negotiations the nigeria authorities and its paris club creditors reached an agreement such that nigeria‘s debt was repurchased at a discount of approximately 60%. part of the country‘s oil profits was used to pay the residual 40%, freeing up at least $1.15 billion annually for poverty reduction programs (wikipedia, 2009). in april 2006, history was made when nigeria become the first african country to completely pay off its debt (estimated $30 billion) owed to the paris club. some macroeconomic indicators in nigeria from 2006 to 2010 are show in table 2. table-2. macroeconomic indicators (2006 – 2010) year external reserves ($million) contributions to real gdp (%) oil production level at constant prices (n billion) oil sector growth (%) inflation rate (%) gdp growth (%) 2006 42,298.11 21.85 130,193.52 -4.51 8.50 6.03 2007 51,333.15 19.60 124,285.12 -4.54 6.60 6.45 2008 53,000.36 17.35 116,594.57 -6.19 15.10 5.98 2009 42,470.00 16.29 117,121.37 0.45 13.90 6.96 2010 32,339.25 15.85 122,957.88 4.98 12.70 7.87 source: (national bureau of statistics, 2010) 3. literature review according to lacquer (1987), terrorism is not peculiar to the present era. the terms ‗terrorism‘ and ‗terrorists‘ can be traced to 18 th century. most terrorist events were simply localized, before the 1960 period. it was strictly reduced to certain regions or limited to specific geographical area. however, the rapid advances in transportation and communication technology associated with globalization have brought about a shift in the nature and scale of the terrorist threat (zumve et al., 2013). gurr (1970) developed the term ‗‗relative deprivation,‘‘ which links economic disparity with the propensity of individuals to resort to violent political action. gurr uses relative deprivation to ‗‗denote the tension that develops from a discrepancy between the ‗ought‘ and the ‗is‘ of collective value satisfaction, that disposes men to violence‘‘(piazza, 2006). when a person‘s expectations of economic or political commodities exceed the actual or real distribution of those commodities, political unrest (violence) is more likely to happen. gurr‘s work provides a theoretical base for a large number of scholars studying political violence, including huntington (1968), who borrows from the relative deprivation framework to explain the increase in political violence witnessed in the united states and in southeast asia during the 1960s and 1970s. to briefly note the studies that make use of the deprivation model: muller and seligson (1990) study of eighty-five developing states between 1973 http://en.wikipedia.org/wiki/emerging_markets http://en.wikipedia.org/wiki/nigerian_stock_exchange http://en.wikipedia.org/wiki/gdp economy, 2014, 1(2): 68-78 71 1977 found that income inequality, rather than misdistribution of land, is a (slightly) significant predictor of political violence, even when controlling for regime repression and level of national economic development. through an analysis of fifty-one developing countries between 1968 and 1972, london and robinson (1989) found a significant relationship between income inequality and political violence that was mainly mediated by the degree to which distribution of wealth in domestic economies had been altered due to penetration by multinational corporations. in a study on a related topic—civil war and insurgency— fearon and laitin (2003) also found socioeconomic factors to be significant. from 1945 to 1999, during the study of 127 civil wars, fearon and laitin showed that poverty comfortably positively predicts violent domestic clashes, in line with general unstable political system, rugged terrain, and large size population levels, due to ‗‗bureaucratically and financially poor (weak) states‘‘ and encourages insurgents in recruitment. nevertheless, ethnic or religious diversity within countries was not found to be a significant predictor of civil war, as oppose to the assumptions of most scholars. the general picture that emerges from the above studies is that economic deprivation leading to terrorism is not conclusive. nonetheless, the literature showing link between economic deprivation and terrorism is not much discussed with respect to nigeria, therefore this present paper is devoted for that purpose. it specifically seeks to determine through multiple regression analysis the degree to which economic variables predict terrorism. 4. specification of model for analysis it is assumed that the occurrence of domestic terrorism in nigeria depends on economic conditions such as gdp per capita, inflation rate, trade openness, government total expenditure, interest rate and macroeconomic policy index and takes the following form: terr = ƹ0+ƹ1loggdpc + ƹ2 logopen + ƹ3loginfl + ƹ4loggovx + ƹ5logintr + ƹ6polx + ὡt ……....(1) where: terr = dummy variable which takes the value of 1 if terrorist attack occurs in a year and 0 if otherwise gdpc = grossdomestic product per capita infl = rate of inflation open= an indicator variable for trade openness govx = expenditure of government intr = rateof interest on loan polx= index of economic policy ὡt = white noise (signifying error term) a priori expectation:ƹ1< 0, ƹ2< 0, ƹ3> 0, ƹ4< 0, ƹ5>0 , ƹ6< 0 4.1. data source and technique of analysis to investigate the relationship specified in equation 1,data were sourced from secondary sources much include central bank publication, relevant textbooks and journals. the study covered the period between 1970 and 2012.the choice of the period is due to availability of data. the net effect of the explanatory variables on the dependent variable can be captured. this is because the data from this period gives a reasonable degree of freedom that is required. the ordinary least square regression analysis was the main analytical tool employed. the method of ols is extensively used in regression analysis primarily because it is initiatively appealing and mathematically much simpler than any other econometric technique (gujarati, 2004). the empirical investigation consists of three main steps. the first step in this analysis involves testing the order of integration of each variable. among the many procedures for the test of order of integration developed by researchers, augmented dickey-fuller (adf) test credited to dickey and fuller (1979; 1981), and phillip-perron (pp) credited to phillips (1987) and phillips and perron (1988) are the most popular ones. augmented dickey-fuller test is based on rejecting a null hypothesis of unit root (i.e., series are non-stationary) for the alternative hypotheses of stationarity. the tests are carried with and without a deterministic trend (t) for each of the variables (series). the general form of augmented dickeyfuller(adf) test is given as: ∆ yt = α 0 + α 1 y t-1 + ∑ α∆yt+ e t ..……………...(2) ∆yt= α0 + α1ytμ-1 + ∑ α1∆yt+ δt+ et ………………..(3) where yis a time series, t is a linear time trend, δ is the first difference operator, α0 is a constant, n is the optimumnumber of lags in the dependent variable and e is the random error term. thedifference between equation (2) and(3) is that the first equation includes just drift. however, the second equation includes both drift and linear timetrend pp. ∆yt= α0 + α1yμ-1 + et ………………..(4) step two of this analysis is testing of the presence or otherwise of cointegration between the variables of the same order of integration. this is done by forming a cointegration equation. the notion behind cointegration is that if in the long-run, two or more variables move closely together, even though the variables themselves are trended, the difference between them is constant. it is wise to see these variables as defining a long-run equilibrium relationship, invariably, the difference between them is stationary (hall and henry, 1989). a lack of cointegrationimplies that such variables do not exhibit long-run relationship (dickey et al., 1991).the maximum-likelihood test procedure established by juselins and johansen (1990) and johansen (1991) is employed. specifically, if yt is a vector of n stochastic variables, then there exists a p-lag vector auto regression with gaussian errors of the following form: johansen‘s methodology takes its starting point in the vector autoregression (var) of order p given by: yt= μ + ∆1yt-1 + …+∆p yt-p + εt………………..(5) economy, 2014, 1(2): 68-78 72 where ytis an n x1 vector of variables (which are integrated of common denoted (1)order) and the n x1 vector of innovations is εt. in another form, the var is expressed as follows: ∆yt= μ + ɳyt-1 +∑ r1∆yt-1 + εt………………..(6) whereπ = ∑ and ∑ to determine the number of co-integration vectors, johansen (1991) and juselins and johansen (1990) suggested two statistic test, the first one is the trace test (λ trace). it function is to tests the null hypothesis in order to ensure that the number of distinct cointegrating vector is less than or equal to q as opposed to a general unrestricted alternatives q = r. the test calculated is as follows: λtrace ( r) = ∑ ( ) wheret is refers to the number of observations (usable), and the estimated eigenvalue( from the matrix) are the λ1,s . the dynamics of output relation is then specified in an error correction model (ecm), incorporating the one period lagged residual from the static regression. the error correction model is designed to capture the short-run deviations that might have occurred in estimating the long-run co-integrating equation (engle and granger, 1987). thus, equation 1 is re-specified as follows to include an error correction term (ecm) terr = ƹ0+ ƹ1loggdpc + ƹ2 logopen + ƹ3loginfl + ƹ4loggovx + ƹ5logintr + ƹ6polx + ecmt-1 +ὡt ………………………………(7) 5. empirical outcome and discussion from the pairswise correlation matrix in table 3 in appendix, terrorism (terr) and interest rate showed a highly positive correlation of about 0.71. this is followed by a strongly positive movement between government expenditure (govx) and quality of institution (qins). other variables exhibited moderately weak correlation in general. table 4 in appendix contains the multivariate regression results of the basic model from equation 1. the results indicate that log(infl)is statistically insignificant. this necessitates the dropping of inflation variable from the model and hence the parsimonious estimation contained in table 5 which will be the focus of the discussion. in table 5, some of the presumptive signs were correct apart from the log of gdp per capita, log of openness of the economy to trade, interest rate (log(intr) and quality of institution (qins), which showed a positive sign instead of a negative sign. the improved results as contained in table 5 show that individually, all the coefficients of the variables are statistically significant. precisely, the coefficient of log(gdpc) is found to be statistically significant at 5 percent level as indicated by its probability value 0.0244butwrongly signed (positive). this, therefore, implies that 1 percent increase in gdp per capita increases terrorism by 24.4 percent. this is not in line with the apriori expectation. the implication is that economic development in nigeria spurs terrorism. the result also indicates that as gdp per capita increases terrorism rises, as implied in the positively weak correlation between gdp and terr in table 8 (see appendix).a plausible explanation for this result is that nigeria‘s economy is struggling to leverage the country‘s vast wealth in fossil fuels in order to displace the crushing poverty that affects about 57% of its population (doublegist.com., 2013). ‗resource curse‘ is a phrase which economist used to refer to the coexistence of vast wealth in natural resources and extreme personal poverty in developing nations such as nigeria. although ‗resource curse‘ is more widely understood to mean an abundance of natural resource this fuels official corruption resulting in a violent competition for the resource by the citizens of the nation, hence terrorism. in nigeria, government expenditure has been on the rise owing to the huge receipts from production and sales of crude oil, and the increased demand for public (utilities) goods. with a negative and statistically significant coefficient, the result suggests that the increase in government expenditure reduces terrorism. unfortunately, the rise in government expenditure has not translated into meaningful growth and development, as nigeria ranks among the poorest countries in the world (sevitenyi, 2012). in addition, many nigerians have continued to wallow in abject poverty, while more than 50 percent live on less than us$2 per day (sevitenyi, 2012). in addition to this, are deteriorated infrastructure (roads and power supply precisely) which have resulted to the close down of many industries, accompanied by high level of unemployment and abandoned gigantic projects. as such the result should be taken with caution. there is a strong believe that trade openness stimulates economic growth through its effect on global economies integration and better markets generation. the positive relationship of log(open) suggests that as nigeria‘s economy opens to the world, terrorism is attracted. openness attracts inflow of foreign direct investment. some foreign nationals having investments in nigeria have been arrested in connection with terrorist activities. recently, a terror cell and lebanon-based hezbollah armory was uncovered in bompai, kano state, according to a report by niajagist.com. (2013). also, illegal aliens from chad and other neighboring countries armed with weapons have been arrested. they come into nigeria through the porous borders. regarding savings and investment behavior of households as well as enterprises, real interest rate is a vital determinant and also a factor in terms of cyclical development as well as long-term economic growth. the positive relationship of interest rate coefficient suggests that it encourages terrorism. this is because of high lending rate of loans by commercial banks, which small and medium scale industries could not afford because of their limited capital and production base. thus, the need for the introduction of non-interest banking in nigeria as stated by the central bank of nigeria (cbn) (chima, 2011). but this plan has generated a lot of controversies as some religious groups have argued that the move violates the country's secular constitution and that it may cause division in the country. finally, the results in table 5 indicate statistically significant coefficient on policy index variable(polx) suggesting a positive relationship with terrorism. from 1960, when the nation gained independence, to 2013, nigeria economy, 2014, 1(2): 68-78 73 experienced about twenty-five years of civilian, as opposed to military rule. the government‘s policy stance in the macro-economy has been considerable fluctuating and some bad habits e.g., deficit budgeting have been persistent. the implication of the result is that government policy stance ultimately affects the poverty level over the years. invariably, terrorism in nigeria is a direct consequence of the people‘s deep dissatisfaction with their government‘s macroeconomic policy. the 0.805794r 2 value implies that 80.58 percent of total variation in terrorism is explained by the regression equation. coincidentally, the goodness of fit of the regression remained high after adjusting for the degrees of freedom as indicated by the adjusted r 2 (0.779550 or 77.96%). the 30.70f-statistic value which is a measure of the joint significance of the explanatory variables, is found to be statistically significant at 1 percent as indicated by the corresponding probability value (0.000000).as a result of the observed 1.41 d.w statistic is low to rule out autocorrelation, decision was taken to analyze it further by conducting lm test for autocorrelation up to the firstorder. as depicted in table 6, the statistic labeled ―obs*r-squared‖ is the lm test statistic for the null hypothesis of no serial correlation. the 0.040551 probability value indicates the presence of some level of serial correlation in the residuals. furthermore, there is evidence of autoregressive conditional heteroskedasticity (arch) in the residuals as shown by the probability value of 0.072136 on the statistic labeled ―obs*r-squared‖ in table 7.white‘s heteroskedasticity test was also carried out as shown in table 8.white‘s test statistic is asymptotically distributed as a χ 2 with degrees of freedom equal to the number of slope coefficients, excluding the constant, in the test regression (five in this case). thus the critical χ 2 value is calculated as 11.0704976935. since ―obs*r-squared‖ value of28.62386isgreater than the 5% criticalχ 2 value of 11.0704976935, the null hypothesis of no heteroskedasticity can be rejected. the presence of serial correlation, heteroskedasticity and arch indicate the need for further analysis. thus, the unit root test was carried out as shown in table 9 (see appendix). the results reported indicate that all the variables are non-stationary in their respective levels. by taking first differences, all the variables become stationary as the adf statistic for each time series shows at the 1% significance level with the exception of gdp per capita at 5 % significance level. in other words, the time series data of all the variables are integrated of order one i(1). given the unit root properties of the variables, the study proceeded to establish whether or not there is a long-run cointegrating relationship among the variables by using the johansen cointegrating test. the trace and maximum eigenvalue figures reported are displayed in table 10 of the apppendix. the trace test indicates 6cointegrating equation(s) at the 5% level while the maximum eigenvalue statistic indicates no cointegration at both 5% and 1% levels. according to juselins and johansen (1990) as cited in owoye and onafowora (2007), the use of trace statistics is recommended when the two statistics exhibit conflict. this is because the trace statistics takes into consideration all eigenvalues of the smallest figure; it shows addition power than the max eigenvalue statistic. since the trace statistic was accepted that there is cointegration then there is need to further subject the variables to error correction test. the error correction term (ecm) is stationary at level and statistically significant at 1% level (see table 10 in appendix).in addition, the ecm shows a long run relationship between regressors and regressand in the model. the absolute value of the coefficient of the error-correction term indicates that about 33 per cent of the disequilibrium in the terrorism (terr)is offset by short-run adjustment in each year. the error correction term is correctly signed (negative) (see table 11 in appendix).furthermore; the goodness-of-fit of the estimated model indicates that the model is reasonably accurate in prediction. 5.1. robustness test of the estimation to determine whether the results of the primary variables are robust to the inclusion of other control variables, unemployment was introduced. the significance of parameter estimates of the primary variables tend not to fluctuate over the sample period but the coefficient of the unemployment variable was statistically insignificant (see table 12 in appendix) at conventional test levels. in order words, the magnitude of the coefficients did not change considerably compared with the results in table i1 and the signs remained the same even after the unemployment variable was introduced in the regression. the test of equation stability and of estimated values was done using the most used tests of stability: cusum tests; cusum of squares tests; recursive coefficients. the cumulative sum of the equation errors in regression is what cusum test is premised on. figure 1 shows the cumulative sum of errors together with critical lines of 5%.the equation parameters are not considered stable if the whole sum of recursive errors gets outside the two critical lines. from the graph cusum stays within the 5 per cent critical line, indicating parameter constancy throughout the sample period. cusum of squares test is similarly calculated and interpreted as cusum test, with the difference that instead of recursive errors, the recursive doubled errors is used. for the analyzed equation, according to this test, the values of the equation are stable for the study period as shown by the cusum test staying within the 5% critical line (figure 2, see appendix).recursive coefficients shows the equations figures computed regressively. the figures are said to be stable if, together with the improvement of the pattern, their figure is not changed. for calculating recursive coefficients we start with the first observation k + 1 where k represents the number of coefficient of the regression equation. we proceed similarly until we estimate coefficients for the whole pattern of available data. then recursive coefficients are graphically represented. for the analyzed equation, recursive coefficients are represented in figure 3 (see appendix).after having analyzed the multiple linear regression model the general conclusion is that it is valid. 6. summary of findings, conclusion and policy implication the paper examined whether economic deprivation leads to terrorism in nigeria. the study spanned a period of 1970 through 2012. it employed the econometric methodology of vector error correction model and testing the results using stationarity test and co-integration. the ordinary least square (ols) estimation method was used as an economy, 2014, 1(2): 68-78 74 essential component of the estimation techniques. the findings reveal that government expenditure has a significant inverse relationship with terrorism, whereas per capita gdp, the degree of openness of the economy to international trade, interest rate and macroeconomic policy index have positive relationships with terrorism both in the long run and short run. table-1. cases of domestic terrorism arising from bomb explosions in nigeria 1986-2012 source: chinwokwu (2012), ajayi (2012) budget surplus in relation to gdp, rate of inflation and trade openness are some of the major indicators of macroeconomic policy. the three policy variables are used to construct policy index instead in this paper dummy was constructed to reflect government‘s policy stance in the macro economy during the 32 years of rule in the country. it takes the value 1 for civilian and 0 for military. also, due to data limitation on the number of terrorist attacks per year or the number of victims per incident through the study period a binary was developed for the dependent variable. it was done from a chronology of terrorist attacks over the years. all this factors could have affected the results of the study. as such further studies based on alternative approaches are necessary to shed more light on the connection between economic deprivation and terrorism in nigeria. nonetheless, the results in this paper suggest that economic deprivation encourages the occurrence of terrorism confirming the need for policy efforts in mitigating the associated risk. therefore, the paper suggests that border trade should be monitored. this calls for serious and sustained surveillance and supervisory efforts of law enforcement agencies to curb activities of illegal aliens and unpatriotic nigerians who assist them.since the analysis showed that government total expenditure has negative effect on terrorism, more favorable attention in the allocation of government expenditures should be done to ensure that capital expenditure and recurrent expenditure are properly managed in a manner that it will raise the nation‘s production capacity and accelerate economic growth. as a prerequisite for generating economic growth, government must embark on growth-enhancing reforms and be sensitive to the behavior of interest rates in the country. thus the monetary authority must formulate and implement financial policies that enhance investmentfriendly rate of interest and take into consideration those other factors which negatively affect investment in the country. this will definitely enhance policy formulation for development of private sector as a catalyst for general economic growth of the country.the rapid economic growth experienced by nigeria should be made to show date place state terrorist group casualty 19/10/1986 parcel bomb, lagos lagos nil 1 31/5/1995 venue of launching of family support ilorin kwara nil no record 18/01/96 durbar hotel kaduna kaduna nil 1 19/1/1996 aminu kano airport, kano kano nil no record 11/4/1996 ikeja cantonment lagos nil no record 25/4/1996 airforce base lagos nil no record 14/11/1996 mmia lagos nil 2 16/12/1996 col. marwa convey lagos nil no record 18/12/96 task force(lagos state) onenvironment (bus) operating inlagos lagos nil no record 7/1/1997 military bus at ojuelegba, lagos lagos nil no record 12/2/1997 military vehicle fakka d608 on ikorodurd, lagos lagos nil no record 7/5/1997 nigerian army 25 seater bus at yaba, lagos lagos nil no record 12/5/1997 eleiyele, ibadan oyo nil no record 16/5/1997 onitsha anambra nil 5 6/8/1997 port harcourt rivers nil 1 2/9/1997 col. inuabawa convey, akure ekiti nil no record 18/12/1997 gen. o. diya in abuja airport abuja nil 1 22/4/1998 evan square lagos nil 3 23/4/1998 ile-ife osun nil 5 6/1/ 2012 attack on some southerners in mubi adamawa boko haram 13 21/1/ 2012 multiple bomb blasts rocked kano city kano boko haram over 185 people killed 29/1/ 2012 bombing of a police station at naibawa area of yakatabo kano boko haram no record 8/2/ 2012 bomb blast rocked army headquarters kaduna boko haram no record 15/2/ 2012 attack on kotonkarfe prison which 119 prisoners were freed kogi boko haram 1 warder killed 19/2/ 2012 bomb blast near christ embassy church, in suleija niger boko haram 5 people injured 26/2/ 2012 bombing of church of christ in nigeria, jos plateau boko haram 2 people killed and 38 injured 11/2/ 2012 bombing of st. finbarr‘s catholic church rayfield, jos plateau boko haram 11 people killed and many injured 29/2/ 2012 attack on bayero university kano boko haram 16 people killed and many injured 30/2/ 2012 bomb explosion in jalingo taraba boko haram 11 people killed and several others wounded economy, 2014, 1(2): 68-78 75 improvements in social welfare. as such poverty reduction and job creation must be made to keep pace with population growth of the country. this can be made possible when public funds are judiciously utilized. in other words, every public fund should be spent to maximize social welfare. a large portion of government income should be used for development projects and in import sectors of the economy (i.e., agricultural and manufacturing sectors). finally, the government should ensure that macroeconomic policy inconsistencies are minimized and policy reversals are properly checked for both short and long run effects on the economy. appendix table-3. correlation matrix (pairwise) infl gdpc govx open intr terr polx infl 1.00 gdpc -0.24 1.00 govx -0.22 0.49 1.00 open 0.03 -0.02 0.43 1.00 intr 0.34 -0.09 0.19 0.35 1.00 terr 0.20 0.15 0.35 0.36 0.71 1.00 polx -0.21 0.47 0.64 0.17 0.29 0.49 1.00 source: researchers‘ computation, 2013, adapted from regression result using e-view 4.1 table-4. estimates of regression variable coefficient std. error t-statistic prob. c -0.616363 0.598483 -1.029875 0.3099 log(infl) -0.014902 0.041387 -0.360071 0.7209 log(gdpc) 0.172628 0.073634 2.344397 0.0247 log(govx) -0.113963 0.043641 -2.611361 0.0131 log(open) 0.071738 0.034837 2.059220 0.0468 log(intr) 0.657786 0.101564 6.476560 0.0000 polx 0.227890 0.094308 2.416438 0.0209 r-squared 0.806491 mean dependent var 0.767442 adjusted r-squared 0.774240 s.d. dependent var 0.427463 s.e. of regression 0.203106 akaike info criterion -0.202282 sum squared resid 1.485067 schwarz criterion 0.084425 log likelihood 11.34906 f-statistic 25.00635 durbin-watson stat 1.445299 prob(f-statistic) 0.000000 source: computational results using eviews 4.1 table-5. parsimonious estimates variable coefficient std. error t-statistic prob. c -0.665862 0.575589 -1.156834 0.2548 log(gdpc) 0.167195 0.071219 2.347612 0.0244 log(govx) -0.108547 0.040482 -2.681342 0.0109 log(open) 0.067505 0.032406 2.083096 0.0442 log(intr) 0.651310 0.098776 6.593788 0.0000 polx 0.229565 0.093079 2.466343 0.0184 r-squared 0.805794 mean dependent var 0.767442 adjusted r-squared 0.779550 s.d. dependent var 0.427463 s.e. of regression 0.200703 akaike info criterion -0.245198 sum squared resid 1.490416 schwarz criterion 0.000551 log likelihood 11.27176 f-statistic 30.70394 durbin-watson stat 1.408547 prob(f-statistic) 0.000000 source: researchers‘ computation, 2013, adapted from regression result using e-view 4.1 table-6. serial correlation lm test: breusch-godfrey f-statistic 3.891456 probability 0.056250 obs*r-squared 4.194698 probability 0.040551 source: computational results using eviews 4.1 table-7.arch test f-statistic 1.384540 probability 0.246284 obs*r-squared 1.405131 probability 0.235866 source: computational results using eviews 4.1 table-8.white heteroskedasticity test f-statistic 2.410239 probability 0.023128 obs*r-squared 28.62386 probability 0.072136 source: computational results using eviews 4.1 economy, 2014, 1(2): 68-78 76 table-9.unit root test source: authors‘ computation from computer output. note: * significant at 1%; ** significant at 5%; and ***significant at 10% table-10. unrestricted cointegration rank test hypothesized trace 5 percent 1 percent no. of ce(s) eigenvalue statistic critical value critical value none * 0.537180 102.5062 94.15 103.18 at most 1 * 0.399611 70.91915 68.52 76.07 at most 2 * 0.371117 50.00190 47.21 54.46 at most 3 * 0.301093 30.98568 29.68 35.65 at most 4 * 0.251351 16.29797 15.41 20.04 at most 5 * 0.102396 4.429068 3.76 6.65 *(**) denotes rejection of the hypothesis at the 5%(1%) level trace test indicates 6 cointegrating equation(s) at the 5% level trace test indicates no cointegration at the 1% level hypothesized max-eigen 5 percent 1 percent no. of ce(s) eigenvalue statistic critical value critical value none 0.537180 31.58708 39.37 45.10 at most 1 0.399611 20.91725 33.46 38.77 at most 2 0.371117 19.01622 27.07 32.24 at most 3 0.301093 14.68771 20.97 25.52 at most 4 0.251351 11.86890 14.07 18.63 at most 5 * 0.102396 4.429068 3.76 6.65 *(**) denotes rejection of the hypothesis at the 5%(1%) level max-eigenvalue test indicates no cointegration at both 5% and 1% levels source: researchers‘ computation, 2013, adapted from regression result using e-view 4.1 table-11.error correction model estimates variable coefficient std. error t-statistic prob. c -0.472115 0.570480 -0.827576 0.4135 log(gdpc) 0.147372 0.072297 2.038430 0.0491 log(govx) -0.102344 0.041005 -2.495909 0.0174 log(open) 0.070241 0.033035 2.126235 0.0406 log(intr) 0.585034 0.102283 5.719735 0.0000 polx 0.240609 0.091067 2.642103 0.0122 ecm(-1) -0.334137 -0.170726 -1.957157 0.0583 r-squared 0.810114 mean dependent var 0.785714 adjusted r-squared 0.777562 s.d. dependent var 0.415300 s.e. of regression 0.195869 akaike info criterion -0.271726 sum squared resid 1.342768 schwarz criterion 0.017886 log likelihood 12.70625 f-statistic 24.88679 durbin-watson stat 2.066517 prob(f-statistic) 0.000000 source: researchers‘ computation, 2013, adapted from regression resultusing e-view 4.1 table-12. test of robustness of estimates variable coefficient std. error t-statistic prob. c -0.476808 0.600756 -0.793680 0.4329 log(gdpc) 0.148157 0.078129 1.896312 0.0664 log(govx) -0.102874 0.045392 -2.266368 0.0299 log(open) 0.070518 0.034835 2.024338 0.0508 log(intr) 0.586184 0.111019 5.280054 0.0000 log(unem) 0.002022 0.069331 0.029162 0.9769 polx 0.239577 0.098932 2.421626 0.0209 ecm(-1) -0.332837 0.178862 -1.860858 0.0714 r-squared 0.810118 mean dependent var 0.785714 adjusted r-squared 0.771025 s.d. dependent var 0.415300 s.e. of regression 0.198726 akaike info criterion -0.224132 sum squared resid 1.342734 schwarz criterion 0.106853 log likelihood 12.70677 f-statistic 20.72270 durbin-watson stat 2.065951 prob(f-statistic) 0.000000 source: researchers‘ computation, 2013, adapted from regression resultusing e-view 4.1 augmented dickey-fuller variables levels 1st difference 2nd difference lag length order of integration infl -3.502597 -6.330409* 9 i(1) gdpc -2.502918 -3.542123** 9 i(1) govx 0.954130 6.061500 9 i(1) open -2.232916 -7.139956* 9 i(1) intr -1.747155 -10.31167* 9 i(1) terr -1.840175 -6.403124* 9 i(1) polx -2.282445 -7.695598* 9 i(1) ecm -4.757667* 9 i(0) economy, 2014, 1(2): 68-78 77 figure-1. cusum test figure-2. cusum of squares test source: researchers‘ computation, 2013, adapted from regression resultusing e-view 4.1 figure-3. recursive coefficients test source: researchers‘ computation, 2013, adapted from regression resultusing e-view 4.1 references abubakar, d., 1997. the rise and fall of the first and second republics of nigeria. in f. u. okafor (ed.). new strategies for curbing ethnic and religious conflicts in nigeria. enugu: fourth dimension publishers. pp: 6970. adeleye, j., 2010. kidnapping: ending the celebration of failure. the punch: 64. 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[accessed 2007, august 15]. state.gov., n.d. nigeria (07/08). available from http://www.state.gov/r/pa/ei/bgn/2836.htm. wikipedia, 2009. nigeria. available from http://www.africa.com/nigeria. zumve, s., m. ingyoroko and i.i. akuva, 2013. terrorism in contemporary nigeria: a latent function of official corruption and state neglect. european scientific journal, 9(8): 122 140. views and opinions expressed in this article are the views and opinions of the authors, economy shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. http://fullcomment.nationalpost.com/2012/01/06/al-qaeda-linked-terrorists-targetting-christians-turning-nigeria-into-cauldron-of-religious-strife/ http://fullcomment.nationalpost.com/2012/01/06/al-qaeda-linked-terrorists-targetting-christians-turning-nigeria-into-cauldron-of-religious-strife/ http://naijagists.com/hezbollah-terrorists-camp-found-in-kano-state-nigeria-rocket-propelled-guns-dangerous-ammunition-recovered/ http://naijagists.com/hezbollah-terrorists-camp-found-in-kano-state-nigeria-rocket-propelled-guns-dangerous-ammunition-recovered/ http://www.scientificjournals.org/journals2007/articles/1229.pdf http://www.state.gov/r/pa/ei/bgn/2836.htm http://www.africa.com/nigeria economy issn: 2313-8181 vol. 1, no. 3, 79-88, 2014 www.asianonlinejournals.com/index.php/economy * corresponding author 79 evaluation of third national fadama development programme (fadama 111) on poverty reduction in rural communities of buruku local government area of benue state, nigeria apesughur dominic achiv 1 --idoma kim 2* --ashiki godwin masin 3 --ibrahim umaru abdullahi 4 1,2,4 department of geography, faculty of science, ahmadu bello university, zaria nigeria 3 department of geography, nassarawa college of education, akwanga, nigeria abstract abstract this work is licensed under a creative commons attribution 3.0 license asian online journal publishing group contents 1. introduction ............................................................................................................................................................................... 80 2. methodology .............................................................................................................................................................................. 81 3. findings ...................................................................................................................................................................................... 82 4. conclusion .................................................................................................................................................................................. 87 5. recommendations ..................................................................................................................................................................... 87 references ...................................................................................................................................................................................... 88 fadama111 is a world bank assisted programme designed to reduce poverty in the rural areas of nigeria. the objective of the programme is to sustainably increase the incomes of fadama users. by increasing their incomes the programme would help reduce rural poverty, increase food security and contribute to the achievement of the millennium development goal (mdg). the objectives of this study are to; examine status of the benefiting rural communities in the study area, assess the impact of the fadama111 programme on the beneficiary community members’ livelihood activities and socioeconomic development in the study area, identify constraints to effective intervention of fadama111 programme in the study area. the method of data collection was the use of questionnaire, personal observation and structural interview. all the five funded fcas and thirty three fadama user groups (fugs) in the study area were selected as sample frame. 380 respondents were purposively chosen as sample size for this study. the questionnaire was administered to ten respondents in each fca and fug. performance index and satisfactory level were the measurement variables. descriptive techniques were used for data analysis. the conclusion was that fadama111 programme did not improve the condition of members of the benefiting communities especially in the area of food production. corrupt practices such as embezzlements and mismanagement of funds by both rural and state management officials of fadama111 programme, untimely and inadequate supply of inputs and difficulties of member communities to pay counterpart funds were major constraints to effective implementation of fadama111 programme in the study area. keywords: rural, poverty, participation, sustainability, empowerment, evaluation, fadama, nigeria. http://creativecommons.org/licenses/by/3.0/ economy, 2014, 1(3): 79-88 80 1. introduction the reduction of poverty is universally accepted as a primary development objective. poverty is a vicious circle which keeps the poor in a state of destitution. the concept of poverty is multi-dimensional in nature. poverty according to kankwenda et al. (2000),robb (2002),undp (1994) and kwaghe (2006) is multi-dimensional, because it affects many aspects of the human condition, including physical, moral and psychological. for many societies, poverty is a concrete phenomenon and can easily be identified. it is also relative because the population that may be classified as poor in developed countries could be regarded as materially well off in least developed countries. each society as pointed out by agumagu (2000) defined poverty in its own terms. conventional measures of poverty count the number of people below the poverty line and define the poverty rate as the proportion of total population below the poverty line. poverty, according to him, is therefore, a normative concept and setting the poverty level requires a judgment about social norms. therefore, irrespective of how poverty is defined, the poor have been described as those who could not obtain adequate income, find stable job, own property or maintain healthy condition (obadan, 1997), they also lack adequate level of education and cannot satisfy their basic needs (ebenehi et al., 2012). thus, the poor are often illiterate, live in poor condition of health and have short life spans (world bank, 1996).moreover, they have no access to basic necessities of life; lack skills and gainful employment, possess fewer economic assets and sometimes lack self esteem (ajayi, 2009).concurringly, (joseph, 2005) submitted that the poor are those with income below the poverty line, who lack access to basic services, practical contacts and other forms of support. they can also be seen as people isolated in rural areas and the marginal urban zones where essential infrastructure are lacking. admittedly, the rural areas of the world particularly those of the developing countries have their unique identity. the rural areas are at disadvantageous positions when comparison is made between the urban and the rural areas. for instance, the rural communities generally have low population size and low density, poor infrastructural facilities, poor education, poor housing qualities and they produce more primary products (ehisuoria, 2012). it is important to note that nigeria is gripped by both income and food poverty, and poor access to the means of supporting rural development (fgn/who, 2004).outstandingly, poverty in nigeria has been described as widespread and severe (world bank, 1996). the federal office of statistics/world bank in their analysis of the poverty trend in nigeria noted that poor families are in higher proportion in farming household and are mainly in the rural areas (adeolu and taiwo, 2004). accordingly, nigeria is faced with the challenge of providing adequate food supply for its teaming population of about 140 million. similarly, food and agricultural organization has consistently listed nigeria among countries that are technically unable to meet their food needs from rain-feed agriculture at low level inputs. lamentably, the devastating effect of desertification and drought in the last three decades on the dry sub-humid and semi-arid agro-ecological zones of nigeria have made the nigerian government to embark on massive investment in small-holder irrigation (adeolu and taiwo, 2004).hence, the goal of increasing food production and reducing food import has elicited many programmes and policies at the various level of government. for example, in 1993, the federal government of nigeria in collaboration with the world bank and state government started a new programme referred to as the national fadama development programme. the first national fadama development programme (fadama i) is a world bank assisted programme designed to promote simple and low cost improved irrigation technology. the widespread adoption of the technologies enabled farmers to increase production. federal government impressed by the achievements, approached the african development fund (adf) of the african development bank (adb) for support in expanding the achievement of fadama in scope and size. this led to the formation of fadama ii programme (agbarevo and okwoche, 2014). fadama ii programme was implemented in 17 states and federal capital territory between 2004 to february 2009. the programme adopted community driven development approach with extensive participation of the stakeholders at early stage of the programme cycle. this approach was in line with african development bank policies and development strategies for nigeria which emphasizes poverty reduction to beneficiary participation (ker, 2008). however, fadama iii programme is a follow-up of fadama ii programme, which covers the remaining nineteen states of the country with 380 local government areas that did not participate in fadama ii programme (agbarevo and okwoche, 2014). 1.2 statement of the research problem the objective of the fadama iii programme is to sustainably increase the incomes of fadama users. by increasing their incomes, the programme would reduce rural poverty, increase food security and contribute to the achievement of the millennium development goal (mdgs). its target beneficiaries are the private economic sector or those who indirectly benefits from the exploitation of the natural resources in a given fadama area. in each benefiting community, people form groups known as fadama users groups (fugs) with membership of between 10-20 people to participate in fadama111 activities. in each community, all the fugs have to formally come together, democratically elect members among them to form a body to be known as fadama community association (fca).this serves as apex body overseeing the activities of all fadama user groups in that rural community (agbarevo and okwoche, 2014).the programme would empower the fadama community associations (fcas) with resources, the needed training and technical assistance or support to properly manage and control these resources for their own development. the fcas would take charge of their own destiny through real empowerment. it would also adopt a socially inclusive and participatory process whereby all fadama users would collectively identify their development priorities and agree on their investment activities which would be outlined in a community development plan. initiallyin benue state the fadama iii programme started disbursement of money to beneficiaries on 23 rd march 2009 with twenty participating local government areas, these were; agatu, buruku, gboko, gwer, gwer-west, katsina-ala, konshisha, kwande, logo, makurdi, ogbadibo, oju, okpokwo, otukpo, tarka, ukum, ushongo and vandeiky primarily, the major thrust of fadama iii programme is to practically demonstrate the concept of community driven development in line with the emerging paradigm of bottom-to-top approach in rural development. thus,fadama111 programme is to serve as facilitator to the benefiting communities economy, 2014, 1(3): 79-88 81 in achieving the programme objective such as infrastructural investment ( feeder roads rehabilitation, culverts, drifts, stock routes, grazing reserves etc, market infrastructure (toilets, boreholes, warehouses, stores etc), pilot assets acquisition ( water pumps, watering cans, tube well and sprinklers for irrigation, fishing traps, canoes, agro processing equipment, oil processors, rice threshers and processors, garri processing equipment, groundnut dehiscing, honey collection and processing equipment, soap production etc).thus, with a special arrangement, the beneficiary would pay 10% of the total cost (known as counterpart funds) while the balance of 90% would be paid by the programme. for input support like seeds and seedlings, veterinary drugs for livestock, feeds and fingerlings, herbicides etc. the beneficiary would pay 30% of the total cost while the programme would pay the balance of 70%. notably, in buruku l.g.a., fadama iii programme started disbursement of funds to beneficiaries in 2011.in view of the foregoing, the researchers intend to assess the impact of fadama iii programme in improving benefiting rural community members in buruku local government area, benue state( 2011-2013 intervention period). 1.3 aim the aim of this study is to assess the performance of fadama iii programme interms of improvement of the beneficiary member communities’ livelihood activities and socio-economic development of the study area. 1.4 objectives the objectives of this study are to; i. examine the socio -economic status of the benefiting rural communities in the study area. ii. assess the impact of fadama iii programme on the livelihood activities and socio-economic development of the benefiting communities in the study area. iii. identify constraints to effective intervention of fadama iii programme in the study area. 1.5 study area 1.5.1 location buruku local government area (l.g.a.) is located between latitude 7 o 500 north and longitude 8 o 5600 and 9 o 2000 east. it shares boundaries with logo l.g.a to the north, katsina-ala lga to the east, ushongo l.g.a to the south, gboko l.g.a. to the west and tarka l.g.a. to the north-west. 1.5.2 climate and drainage mean annual rainfall in the area ranges between 150-180mm. the l.g.a. experience two main seasons; dry and wet season. the wet season starts from april and last till october while the dry season lasts from november to march. buruku l.g.a. falls within the koppen’s aw (wet and dry) climate type. the rains are usually intense and torrential sometimes accompanied by storms. temperature is mostly high throughout the year ranging between 23 o c28 o c with a peak of about 35 o c. the coolest part of the season is around the harmattan period between december and february. the major river in the l.g.a. is river katsina-ala and other smaller rivers. the l.g.a. lies in the guinea savannah vegetation of typical grassland. 1.5.3 people and socio-economic activities the l.g.a. is inhabited by the tiv people who are farmers. there are other ethnic groups like etulo and abakwa who engage in both cropping and fishing activities. 2. methodology a reconnaissance survey was carried out in order to have in depth knowledge of the activities of fadama iii programme in the study area. 2.1. data needed for the study the data needed for this study were: data on socio-economic status of the respondents, data on projects of fadama iii programme,impact of fadama111programme on the benefiting communities and data on constraints to effective implementation of fadama iii programme. 2.2. data collection the methods of data collection for this study are questionnaire, personal observation and structural interview. the questionnaire is divided into three sections namely; status of the respondents, impact of the programme on the livelihood activities and socio-economic development of the benefiting communities, constraints to fadama iii programme activities and recommendations for improvement of fadama iii programme in the study area. 2.3. source of data for this research work, both primary and secondary sources were used. 2.4. sample frame and sampling technique fadama iii programme have been implemented in five fadama community associations (fcas) and thirty three fadama user groups (fugs) in buruku l.g.a. all the funded fcas and fugs have been chosen as sample frame for this study. however, 380 respondents were selected as sample size. this constitutes 50% of the total population of the benefiting member communities in the study area. structurally, fadama iii programme, is expected to have a membership of twenty people per fca and fug. purposive methods have been used for sample size selection. ten questionnaires were administered in each fadama community association and fadama user group. economy, 2014, 1(3): 79-88 82 2.5. measurement of variables performance index was determined by asking the respondents to indicate the actual quantity of hectares of land cultivated and crop yields in kilogrammes. the beneficiaries are to rate in qualitative terms, their level of satisfaction, using a three point likert type scale ranging from highly satisfactory 1: moderate satisfactory 2; and not satisfied 3. 3. findings 3.1. socio-economic and demographic characteristics of respondents the age distribution of the samples respondents shows that, those between 21-25 were 6%(21), those between 26-30 were 23%(87), those between 31-35 were 24% (91), those between 36-40 were 29% (111), those between 4145 were 15% (60) and those between 46-50 were 3%(10) (table 1).this implies that majority(68%) of the respondents were youths(31-45 years). table-1. age of sampled respondents in the study area age group respondents percentages 21 – 25 21 6 26 – 30 87 23 31 – 35 91 24 36 – 40 111 29 41 – 45 60 15 46 – 50 10 3 total 380 100 source: authors’ field work, 2014. 3.2. sex distribution of respondents on the pattern of sex distribution, 53 %( 200) were male while 47 %( 180) were female (table 2).table 2 has also revealed that the gender disparity in the study area is moderately low. table-2. sex distribution of sampled respondent in the study area sex respondents percentages male 200 53 female 180 47 total 380 100 source: authors’ field work, 2014 3.3. education of the sampled respondents concerning education of the sampled respondents, non-formal education 54%(208), those with primary education were 29%(111), those with post-primary education were 13%(50), those with nce, ond qualification were 1%(3), those with vocational education were 2%(6) and those with university degree were 1%(2) (table 3). this indicates that illiteracy level of the respondents is relatively high and this could impede reception to positive changes. table-3. educational attainment of sampled respondents in the study area educational attainment respondents percentages non-formal education 208 54 primary education 111 29 post primary education 50 13 n.c.e., ond 3 1 vocational education 6 2 university degree 2 1 total 380 100 source: authors’ field work, 2014 3.4. occupation of the sampled respondents out of 380 sampled respondents, 92%(351) were farmers, 1%(4) were civil servants, 1%(5) were traders, 3%(10) were artisans and 3%(10) were other categories of occupations,( table 4). this has shown clearly that the benefiting communities in buruku lga is an agrarian community. hence, fadama programme if properly implemented would benefit them immensely. table-4. occupation of sampled respondents in the study area occupation respondents percentages farmer 351 92 civil servant 4 1 trader 5 1 artisan 10 3 others 10 3 total 380 100 source: authors’ field work, 2014 economy, 2014, 1(3): 79-88 83 impact of fadama111on the livelihood activities of the benefiting community members and socio-economic development of the study area. 3.5. rice processing projects concerning the rice processing projects, mbaapen fadama community association and etulo fadama community association (fca) chose rice processing as their priority project, table 5. table-5. rice processing machine in the study area s/n community no. of machine execution 1. mbaapen 1 completed 2. etulo 1 completed source: authors’ field work, 2014 a sampled of twenty respondents was carried out to determine the level of satisfaction of rice processing machines in the study area. the breakdown of the respondents was: 40 %( 8) of respondents were highly satisfactory, 35 %( 7) were moderately satisfactory and 25 %( 5) were not satisfied, table 6. this implies that the benefiting communities in buruku lga were greatly impacted by the programme, for the reason that 75% indicated they were satisfied. table-6. level of satisfaction of processing machine satisfaction level respondents percentage highly satisfactory 8 40 moderately satisfactory 7 35 not satisfied 5 25 total 20 100 source: author’s field work, 2014. 3.6. market stall project mbaya fadama community association (fca) was the only fadama iii programme benefiting community that selected market stall as their development project in the study area; table 7. table-7.construction of market stall in the study area s/no. community no. of block no. of rooms execution 1. mbaya 1 6 completed source: authors’ field work, 2014 on assessment of satisfactory level on market store in the study area 70 %( 7) of the sampled respondents were highly satisfactory, 20% (2) said moderately satisfactory and 10 %( 1) said not satisfied (table 8). table 8 has further shown that fadama programme had great impact on the benefiting communities in buruku lga through the construction of market store. only 10% of the respondents signified they were satisfied. table-8. satisfactory level on market store in the study area satisfactory level respondents percentages highly satisfactory 7 70 moderately satisfactory 2 20 not satisfied 1 10 total 10 100 source: authors’ field work, 2014 3.7. warehouse projects it is not always possible to produce good as at when required. production is usually done ahead of consumption for various reasons. thus, there is need for warehousing and storage facilities. atiikyaa fadama community association and bineu fadama community association chose warehouse as their intervention project. (table 9). table-9. warehouse project in the study area s/no. community no. of block execution 1. atiikyau 1 completed 2. bineu 1 completed source: authors’ field work, 2014 on the whole twenty respondents were sampled on assessment of warehouse in the study area. the breakdown of the responses was 80 %( 16) of the sampled respondents said moderately satisfactory while 20 %( 4) were not satisfied (table 10).table 10 portrays that the impact of fadama 111 programme on the benefiting communities in buruku lga regarding warehouse project was relatively high for the fact that only 20% of the respondents were not satisfied. table-10. assessment of satisfactory level on warehouse project in the study area satisfactory level respondents percentages moderately satisfactory 16 80 not satisfied 4 20 total 20 100 source: authors’ field work, 2014 economy, 2014, 1(3): 79-88 84 3.8. rice production on the rice production atsozi fadama user group (fug), etulobrande fug and ogilazi fug in etulo fadama community association (fca); mbagbagh fug, angbo/bar in mbaya fca; mbatsaese fug in mbaapen fca; anyol fug, and dajo fug in atiikyaa and wuav rice fug in binev fadama community association chose rice cultivation as their priority project, table 11. table-11. rice production 2011-2013 in the study area s/n fca fug hectares of land cultivated and year quantity harvested in kilogrammes and year 2011 2012 2013 2011 2012 2013 1. etudo atsozi 20 2000 2. etulobranda 20 2100 3. ogilazi 20 1800 4. mbaya mbagbagh 17 18 19 400 700 1200 5. mngbo/bar 17 18 19 500 600 800 6. mbaapen mbatsaese 15 14 13 400 500 200 7. atiikyaa anyol 20 20 1200 1400 8. dajo 18 18 1000 1200 9. binev wuav rice 16 14 12 400 300 300 source: authors’ field work, 2014. out of the 90 sampled respondents, 7 %( 6) said the quantity of the harvested rice is moderately satisfactory while 93 %( 84) of the sampled respondents were not satisfied, table 12. in addition, table 12 has revealed that fadama 111 benefited the communities in the study area immensely through rice production; only 7% of the entire population indicated not satisfied. table-12. assessment of satisfactory level on rice production in the study area satisfactory level respondents percentages moderately satisfactory 6 7 not satisfied 84 93 total 90 100 source: authors’ field work, 2014 3.9. groundnut production mbanor fadama user group (fug) in mbaya fadama community association; mbatsaase fadama user group (fug), mbaagir fug and mbaagir ii fug in mbaapen fadama community association (fca) and wuav g/nut fug in biev fca chose groundnut production as their intervention project, table 13. table-13. groundnut production 2011-2013 in the study area s/n fca fug hectares of land cultivated and year quantity harvested in kilogrammes and year 2011 2012 2013 2011 2012 2013 1. mbaya mbanor 6 5 5 700 700 500 2. mbaapen mbatsaase 5 3 3 400 200 400 3. mbaagir i 4 4 3 500 300 200 4. mbaagir ii 4 4 4 300 200 400 5 binev wuav g/nut 5 4 4 200 300 400 source: authors’ field work, 2014 assessment of the satisfactory level of groundnut production in the study area show that, 6% (3) of the sampled respondents were moderately satisfactory and 94 %( 47) were not satisfied, (table 14). also, table 14 portrays that fadama 111 had low impact on the beneficiary communities with regards to groundnut production as 94% of the respondents indicated not satisfied. table-14. assessment of groundnut production in the study area satisfactory level respondents percentages moderately satisfactory 3 6 not satisfied 47 94 total 50 100 source: authors’ field work, 2014 3.10. soybeans production concerning soybean production in the study area, mbaghagh fadama user group (fug) in mbaya fadama community association (fca); mbaadatso fug in atiikyaa fca and wuavsoyb fug in binev fca chose soybeans production, (table 15). table-15. soybeans production 2011-2013 in the study area s/n fca fug hectares of land cultivated and year quantity harvested in kilogrammes and year 2011 2012 2013 2011 2012 2013 1. mbaya mbaghagh 15 14 15 600 550 500 2. atiikyaa mbaadatso 14 14 14 500 400 450 3. binev wuavsoyb 12 12½ 12 250 200 200 source: authors’ field work, 2014 economy, 2014, 1(3): 79-88 85 on the satisfactory level of soybeans production in the study area, 100 % ( 30) of the sample respondents were not satisfied with improvement of soyabeans by fadama iii programme in the study area( table 16).moreover, table 16 reveals that fadama 111 could not improve on soya bean production in the beneficiary communities. table-16. assessment of soybeans production in the study area satisfactory level respondents percentages not satisfied 30 100 total 30 100 source: authors’ field work, 2014 3.11. yam production on yam production, angi fadama user group (fug) in atiikyaa fadama community association (fca); mbanorabera fug in mbaya fca and otsitzi fug in etulo fca chose yam production as their intervention project in the study area, table 17. table-17. yam production 2011-2013 in the study area s/n fca fug hectares of land cultivated and year quantity harvested in kilogrammes and year 2011 2012 2013 2011 2012 2013 1. atiikyaa angi 12 13 13 400 600 650 2. mbaya mbanor-abera 12 12½ 13 500 500 700 3. etulo otsitzi 14 1500 source: authors’ field work, 2014 out of 30 sampled respondents 13 % ( 4) were moderately satisfactory with the production of yam in the study area, while 87% (26) were not satisfied, table 18. table 18 has reveals poor performance of fadama111on yam production in the study area. table-18. assessment of yam production in the study area satisfactory level respondents percentages moderately satisfactory 4 13 not satisfied 26 87 total 30 100 source: authors’ field work, 2014 3.12. production of mellon ortese fadama user group (fug) in mbaya fadama community association (fca) and mbatsaase fug in mbaapen fca selected production of mellon as their intervention project in the study area, table 19. table-19. production of mellon 2011-2013 in the study area s/n fca fug hectares of land cultivated and year quantity harvested in kilogrammes and year 2011 2012 2013 2011 2012 2013 1. mbaya ortese 12 ½ 13 13 300 350 350 2. mbaapen mbatsaase 12 12 12 200 150 100 source: authors’ field work, 2014 out of the total sampled respondents 100% (20) were not satisfied with the intervention in the study area, table 20. table 20 portrays poor performance of fadama111 on the production of mellon. table-20. assessment of mellon production in the study area satisfactory level respondents percentages not satisfied 20 100 total 20 100 source: authors’ field work, 2014 3.13. millet production ugye fadama user group in etulo fadama community association is the only user group in the study area that chose millet production as their intervention project, table 21. table-21. millet production 2013 in the study area s/n fca fug hectares of land cultivated and year quantity harvested in kilogrammes and year 2011 2012 2013 2011 2012 2013 1. etulo ugye 14 600 source: authors’ field work, 2014 sampled of 10 respondents was carried out to assessed millet yield. the results show that 20% (2) were moderately satisfactory, while 80 % (8) respondents were not satisfied table 21. table 21 again revealed poor performance of fadama 111 regarding millet production as 80% of the respondents indicated not satisfied. economy, 2014, 1(3): 79-88 86 table-22. assessment of millet production in the study area satisfactory level respondents percentage moderately satisfactory 2 20 not satisfied 8 80 total 10 100 source: authors’ field work, 2014 3.14. cassava production on cassava production, etulo widows fadama user, otsefadama user group (fug) in etulo fadama community association (fca); mbaju fuc in mbaya fca and akongu fug, dooshima fug in atiikyaa fadama community association chose production of cassava, table 22. table-23. cassava production 2011-2013 in the study area s/n fca fug hectares of land cultivated and year quantity harvested in kilogrammes and year 2011 2012 2013 2011 2012 2013 1. etulo etulo widows 14 ½ 1500 2. otse 15 1700 3. mbaya mbaju 14 15 15 1000 1400 1500 4. atiikyaa akongu 13 15 15 700 1300 1500 5 dooshina 14 15 15 800 1600 1500 source: authors’ field work, 2014 on the level of satisfaction on cassava production, 100 %( 50) of the sampled respondents were moderately satisfactory, table 23.table 24 shows further that fadama 111 has greatly improved the production of cassava as the entire respondents i.e. 100% indicated moderate satisfaction. table-24. assessment of cassava production in the study area satisfactory level respondents percentages moderately satisfactory 50 100 total 50 100 source: authors’ field work, 2014 3.15. guinea corn production kaaku widows fadama user group (fug) in atiikyaa fadama community association (fca); mbatsaase fug, mbaagir i g/nut fug, mbaagir ii g/nut fug in mbaapen fca and mbanor g/nut fug in mbaya fadama community association chose guinea corn production as their project in the study area. table 24. table-25. guinea corn production in the study area s/n fca fug hectares of land cultivated and year quantity harvested in kilogrammes and year 2011 2012 2013 2011 2012 2013 1. atiikyaa kaaku widows 15 15 15 1000 1100 1300 2. mbaapen mbatsaase 13 14 13 ½ 500 600 500 3. mbaagir i g/nut 14 14 13 400 500 400 4. mbaagir ii g/nut 14 14 14 500 600 500 5 mbaya mabanor g/nut 15 16 16 ½ 1400 1600 1500 source: authors’ field work, 2014 on the whole 50 respondents was assessed on satisfactory level of guinea corn production the result was that, 20%(10) of the sampled respondents rate the production as moderately satisfactory while 80% (40) were not satisfied, table 25.table 26 further portrays that fadama111 did not have significant impact on the production of guinea corn as only 20% of the respondents were moderately satisfied. table-26. assessment of guinea corn production in the study area satisfactory level respondents percentages moderately satisfactory 10 20 not satisfied 40 80 total 50 100 source: authors’ field work, 2014 3.16. constraints to fadama iii programme in the study area. 3.16.1. financial constraints on financial constraints 350 respondents were sampled. the breakdown of the responses were 13.1 % ( 50) said mismanagement of money by community project management committee, 26.3%(100) said inadequate capital to execute the projects, 26.3%(100) said untimely release of money from the state fadama coordination office to rural beneficiary and 34.2%(130) said corrupt practices by the programme managers, table 27.table 27 further depicts that corruption is the bane of poor performance of fadama 111 since 34% of the respondents indicated it. economy, 2014, 1(3): 79-88 87 table-27. financial constraints to effective intervention of fadama iii programme in the study area source: authors’ field work, 2014 3.17. constraints arising from inputs on constraints relating to inputs, 50%(190) sampled respondents said untimely supply of inputs to beneficiaries by the state coordination office. while 50%(190) were of the opinion that inadequate supply of inputs was the main constraints(table 28). table-28. constraints arising from inputs in the study area constraints respondents percentages untimely supply of input 190 50 inadequate supply of inputs 190 50 total 380 100 source: authors’ field work, 2014 3.17.1. constraints from the fadama iii programme benefiting communities on the constraints relating to fadama iii programme benefiting communities in the study area, 100%(380) of the sampled respondents said difficulty to members of fadama communities to pay counterpart funds. (table 29). table-29. constraints from the benefiting communities in the study area constraints respondents percentages difficulty to member of fadama communities to pay counterpart fund 380 100 total 380 100 source: authors’ field work, 2014 3.18. rural community comments for effective implementation of fadama iii programme in the study area on the whole 380 respondents were sampled on community recommendations. the breakdown of the sampled respondents were as follow: 19%(68) said payment of counterpart funds should be encouraged to fadama communities by way of contributing small amount of money by members, 23%(90) said adequate funds should allocate to projects for proper execution by the beneficiary communities, 23%(89) said timely release of money and inputs and 35%(133) said appointment of good leaders should be encouraged to all organizations. table 30. table-30. rural community suggestions for effective implementation of fadama iii programme in the study area suggestions respondents percentages fadama communities should be encouraged to pay counterpart fund through donations 68 19 adequate funds should allocated to projects for proper execution 90 23 timely release of money and input 89 23 appointment of good leaders should be encouraged 133 35 total 380 100 source: authors’ field work, 2014 4. conclusion from the findings, 4%(15) of the total sampled respondents were highly satisfactory with the activities of fadama iii programme on poverty reduction, 26%(100) were moderately satisfactisfied and 70%(265) were not satisfied. generally speaking, fadama iii programme did not improve the condition of members of the benefiting communities especially in the area of food production. in addition, corrupt practices such as embezzlements and mismanagement of funds by both rural and state management officials of fadama iii programme, untimely and inadequate supply of inputs and difficulties of member communities to pay counterpart funds were major constraints to effective implementation of fadama iii programme in the study area. 5. recommendations based on the major findings, the following recommendations are made: i. government is to give zero tolerance to corrupt practices to ensure effective utilization of funds. ii. there should be timely and adequate provisions of fadama inputs and infrastructures like fertilizers, herbicides, insecticides etc since agricultural operations are time –bound. iii. government should ensure improved technologies to for storage, transportation, processing and marketing of fadama produce. iv. project farmers should be encouraged to participate actively in the fuas via trainings and consistent payment of counterpart fund. constraints respondents percentages mismanagement of money by fadama iii programme rural community project management committee 50 13.1 inadequate capital to execute the projects 100 26.3 untimely release of money by the state coordination office to beneficiary 100 26.3 corrupt practices by the programme managers 130 34.2 total 380 100 economy, 2014, 1(3): 79-88 88 references adeolu, b.a. and a. taiwo, 2004. the impact of national fadama facility in alleviating rural poverty and enhancing agricultural development in south-western nigeria. journal of social science, 9(3): 157-161. agbarevo, m.n.b. and a.v. okwoche, 2014. evaluation of effect of the third national fadama development project (fadama 111) on food production among farmers in kwande local government area of benue state, nigeria. european journal of agriculture and forestry research, 2(2): 27-32. agumagu, a.c., 2000. poverty alleviation in nigeria: can agricultural extension help? in: agbamu ,j.u. (ed.) (2009); perspectives in agricultural extension and rural development. lagos: springfield publishersltd. pp: 345. ajayi, a.r., 2009. the role expectation agricultural extension in poverty alleviation in democratic and deregulated economy. in: perspectives in agricultural extension and rural development, j.u.agbamu (ed.). lagos: springfield publishers ltd. ebenehi, o., n.m. saddiq, o. oyinbo, a.a. muhammad and j.o. ichi, 2012. impact of the national poverty eradication programme (napep) on rural livelihood in kogi state,nigeria. sokoto journal of the social sciences, 2(1): 26-36. ehisuoria, s.e., 2012. the role of non-agro based industries in rural development in esan land. edo state, nigeria. ph.d thesis department of geography and regional planning. ambrose alli university, ekpoma. fgn/who, 2004. millennium development goals report. abuja: fgn/who. joseph, i.o., 2005. an assessment of impacts of poverty reduction programme in nigeria as development strategy. phd dissertation,st. clement university of turks caicoos, island. kankwenda, m., l. gregoire, h. legros and h. ouedraogo, 2000. poverty eradication; where stands africa? london: undp. economical limited. ker, j., 2008. general overview of fadama iii programme. state programme coordinator. a publication of communication and information support unit benue state fadama coordination office, makurdi, printed by vital gate ltd. kwaghe, p.v., 2006. poverty profile and its determinants among farming household in bomo state nigeria. in: department of agricultural economics. university of maiduguri, borno states, nigeria. obadan, m.o., 1997. analytical framework for poverty reduction: issues of economic growth versus other strategies. in: proceedings of the nigerian economic society’s annual conference. pp: 1-18. robb, c., 2002. can the poor influence policy? participatory poverty assessment in the developing world. washington,d.c.: the world bank. pp: 1-27. undp, 1994. united nations development programme. sustainable human development and agriculture, undp guidebook series undp new york: 48. world bank, 1996. nigeria: poverty in the most of plant, the challenge of growth with inclusion. a world bank poverty assessment. washington d.c: world bank. views and opinions expressed in this article are the views and opinions of the authors, economy shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. economy issn: 2313-8181 vol. 1, no. 3, 89-94, 2014 www.asianonlinejournals.com/index.php/economy * corresponding author 89 examining the economic impact of the migration of skilled labour from the northern parts of ghana into the ashanti region of ghana williams kwasi boachie 1* 1 department of accounting education, university of education, winneba, kumasi campus, kumasi, ghana abstract this work is licensed under a creative commons attribution 3.0 license asian online journal publishing group contents 1. introduction ......................................................................................................................................................................... 90 2. a brief review of literature ............................................................................................................................................... 90 3. research questions .............................................................................................................................................................. 90 4. purpose of the study ............................................................................................................................................................ 90 5. materials and methods ........................................................................................................................................................ 91 6. data analysis and presentation........................................................................................................................................... 91 7. discussion of the findings from the study.......................................................................................................................... 93 8. conclusion and recommendations ..................................................................................................................................... 94 references ................................................................................................................................................................................ 94 bibliography ............................................................................................................................................................................ 95 in many developing countries like ghana, rural urban migration is a major issue facing governments and other stakeholders. in fulfillment of personal and other interests, people usually move from one place to another in search of satisfactory living conditions. the difference between the wages of rural and urban centers has been seen as one of the main factors affecting the migration. iversen (2006) argued that in india, the wage parameter was influenced by social networks which facilitated the relocation of rural active population into the urban industrial enclaves to work as low paid personnel in the factories. this paper is focused on the socio-economic analysis on skilled labour migration from the northern parts of ghana into the ashanti region of ghana and its impact on the region. in order to achieve this goal, the researcher came up with research design that assisted him to identify the impact as well as the solutions to the migration process. in this study, the analysis was done on the primary data derived from the samples of the skilled personnel who move from the northern parts of the country into the ashanti region of ghana. it was revealed from the study that skilled labour migration have positive impacts in the socio-economic development of the northern part of ghana in terms of remittances, human capital, entrepreneurship, improved welfare, among others. keywords: human capital, migration, geographical locations, skilled labour, jobs acquisition, population. http://creativecommons.org/licenses/by/3.0/ economy, 2014, 1 (3): 89-94 90 1. introduction the movement of people from one geographical location to another is termed as migration. this usually involves either temporal or permanent settlement. the area where the people leave is the „source region‟ and the one into which people migrate is known as the „destination region‟. one remarkable feature of migration is the fact that it usually involves the movement of people from one rural area into an urban centre. of late, this movement of people has become so alarming that the urban areas usually experience high population growth rates whilst the rural areas also experience decreasing population growth rates. in view of this, todaro (1997) pointed out that “the major contributing factor to the ubiquitous phenomenon of urban surplus labour and as a force which continues to exacerbate already serious urban unemployment problems” in the last few decades, population growth in the urban centers has increased and because of this, the united nations has noted that 40% of the total least developed country‟s population lived in urban areas in 2000, compared to 26.1% in 1975. more specifically, 34% of the 2000 sub-saharan african population was urban – a jump of more than 62% over the 15 years. 2. a brief review of literature classical economists, like fei and ranis (1964), claimed the existence of surplus labour, i.e. the presence of hidden unemployment in rural areas, especially at an early stage of a country‟s development. huang (1971), hanson (1971), and ranis (1997), proved empirically that a larger proportion (from 50 to 80 percent) of the labour force in some developing countries is located in the traditional agricultural sector during the first phase of industrialization. it has been shown by, amongst others, ranis (1997) and nayyar (1998) that the process of industrialization and development is associated with the transfer of labour from the agricultural sector to the industrial sector where labour‟s unit productivity is relatively higher, which in turn means higher income. ranis (1997) further argues that when assuming that the reallocation rate exceeds the population growth, and more labour is relocated from the agricultural to the industrial sector, the level of hidden unemployment will shrink and the contribution of labour to economic output will grow. it is therefore not surprising that many development economists, amongst them, todaro (1969) and norton and alwang (1993), regard rural-urban migration as a natural reflection of the economic transformation from agriculture to industry that occurs during the development process. some economists and social scientist also presented (docquier and rapoport, 2004; ratha, 2005; humberto et al., 2007; singh and hari, 2011) the economical benefits, called as remittances, through these migrants. this study is, therefore concerned with an investigation into how the skilled professionals contribute to the development of other parts of ghana. it is the hope of the researcher that knowledge gained from this study would provide policy insights both for source as well as host regions of ghana. 2.1. main determinants of migration in ghana over the years, the greater part of urban population results from the migration of people from the rural areas and this reduces the population of the rural labour force and hence, this reduces the ability of the rural sectors to produce more goods and services to support their economies (twumasi-ankrah, 1995). there are many factors ranging from communities and individual interests that explain the dynamics of the migration problem (anarfi et al., 2003). about 30 years ago, ghana has seen a rapid population growth rate and this has the effect of increasing the labour supply in ghana. in many areas where there is limited availability of agricultural lands for farming usually see a lot of pressure on farmlands. this is normally seen in the northern part of ghana where per capita access to fertile lands is very small, thereby resulting in the movement of the people into the other areas of the country, especially, the southern part of ghana. 2.2. pattern of migration in ghana according to ackah and medvedev (2010), over 80% of the people who migrate usually stay within the country. out of this number, more than 70% of the migrants end up locating in the urban centers of the country such as accra, tema, takoradi, kumasi, obuasi, and other places. many studies have shown that those who migrate usually have come from relatively endowed regions such as the northern region, upper east and upper west regions where many natural resources abound. ackah and medvedev (2010) also indicated that those who are uneducated are the ones who form a greater percentage of those who migrate. 3. research questions a. what are factors that influence migration of people to the urban centers? b. what are the main effects of migration on the migrants and their families? c. what are interventions that can transform the local economy to mitigate rural–urban migration? 4. purpose of the study the aim of this study is to examine the socio-economic impact of migration of skilled workers from the northern parts of the country into the ashanti region of ghana. specifically, the study seeks to 1. determine the reasons that influence people to migrate from the rural areas into the urban centers. 2. analyze the socio-economic impact of such movements on the people who migrate and their communities. 3. to suggest possible recommendations to the government and other stakeholders to formulate policy to address the problem of migrants in ghana. economy, 2014, 1 (3): 89-94 91 5. materials and methods considering the problem under investigation, questionnaires was prepared and distributed through simple and stratified random sampling techniques. the data for this study was collected between may and august 2014 and the population characteristics, resources and time available, as well as the size and types of data analysis played a greater part in determining the size of the sample for the study. in order to reach many of the respondents (who are usually identified by their friends and relatives), the researcher employed simple and stratified random sampling techniques and personally distributes the questionnaire. since a large sample size alone does not guarantee a representative sample, the researcher determined the accuracy of the sample by making an assumption about the population such as the degree of variation and confidence level that is acceptable. sudman (1976) explained that most of the researchers do not use statistical equations for calculating the sample size because of the information required for applying them is not available. the author further stated that a second, more frequently used method is a rule of thumb, a conventional or commonly accepted size. researchers have used it to apply sample sizes close to those of the statistical method. as pointed out by sudman (1976), an increase in sample size from 50 to 100 would reduce errors from 7.1% to 2,1% but an increase from 1000 to 2000 would only decrease errors from 1.6% to 1.1%. keeping in view this theory, in present study a sample of 107 respondents is taken for the analysis. 6. data analysis and presentation in this study, the data which was collected through the questionnaire was analyzed with the application of statistical package for social sciences (spss 14.0 version) to determine simple frequency tables. chi-square tests, gamma tests pearson correlation and multiple linear regression techniques were also employed to process the data. the study consisted of a sample size of 107 who were 20% females and 80% males, and who reside in, kumasi, being the capital city of the ashanti region of ghana. the age of respondents varied from below 30 to 60 years. the average age of respondents was 37.41 years. most respondents were clustered in the range 31-40 years. about 90% of the respondents were married and many had 2 children. most of the respondents exhibited a high level of competence as far as their job level in education was concerned. many of them were also university graduates but there were differences in the level of education attained at the areas where they were obtained. in the education sector, there was about 71% of those sampled were working in the education sector before the migration and also 75.5% of them were working in the education sector after the migration. this shows that most of the migrant workers joined the education sector after the migration and it also indicates that more job opportunities abound for skilled migrant workers in the education sector in kumasi. in this study, skilled labour was the type of labour from the northern part of ghana who migrates to the southern part of ghana where the ashanti region can be found. since there were many educational institutions in kumasi (both public and private), we can see that a greater percentage of skilled workers who migrated to kumasi found jobs in the educational sector. since a stay period of almost 45% of the respondents was between 7 to 10 years, followed by 43% who completed less than 6 years in kumasi, it is an indication that most of the migrants moved to kumasi between 2001 and 2004. the study also revealed that about 5.5% of the migrants spent more than 10 years, with about 6.5% who spent 15 years. again, the reason behind this information is due to the fact that job opportunities in kumasi in educational sector have increased during last decade. the study also showed that after spending more than 10 years, most of the respondents usually came back to their respective towns and villages for several reasons. in terms of remittances, about 98% of the respondents stated that they usually send money back home, however, the size and the amount of money that are usually sent home vary in relation to the income of the respondents. referring to the data on table 1, about 58% of respondents stated that they send 10 to 20% of their income back home to their families. about 32.7% of respondents replied that they send less than 10% of their income. those respondents who sent 20 to 30% or 30 to 40% are only 7.5% and 1% respectively. in the response of the question „are you an entrepreneur‟? almost 96% of the respondents said „no‟ while around 5% respondents said „yes‟. this shows that a greater number of the skilled migrants are working in kumasi but a smaller percentage of them are in entrepreneurship. it also shows a good sign about the impact of migration on the socio-economic circumstances of the respondents and their families since it is very easy and convenient to for respondents to switch the job to their villages and towns as against shifting the complete the business back home in the north. table 1 shows a crosstabulation data between occupation of migrants after migration and change in the financial status of their family back home. table-1. crosstabulation data of respondents changes in families financial position total considerabl y improved improved almost unchanged difficult to say occupation after migration education count 17 37 3 24 81 expected count 23.5 31.8 3.8 22.0 81 % within occupation after migration 21.0% 45.7% 3.7% 29.6% 100% r&d count continue economy, 2014, 1 (3): 89-94 92 expected count 0 1 1 0 2 % within occupation after migration .6 .0% .8 50% .1 50% .5 0% 2 100% academics count 9 4 0 4 17 expected count 4.9 6.7 0.8 4.6 17.0 %within occupation after migration 52.9% 23.5% 0.0% 23.5% 100% trade & business count 5 0 1 1 7 expected count 2.0 2.7 0.3 1.9 7 % within occupation after migration 71.4% 0.0% 14.3% 14.3% 100% total count 31 42 5 29 107 expected count % within occupation after migration 29.0% 39.3% 4.7% 27% 100% value df asymp. sig. (2 sided) pearson chisquare 27.190(a) 9 0.001 likelihood ratio 23.972 9 0.004 linear by linear association 4.193 1 0.041 no of valid cases 107 from table 1, the chi-square test indicates that the pearson chi-square is 0.001 which is less than 0.05 and this shows that there is a strong relation between the chi-square test and the pearson chi-square. in addition to this, the study revealed that the financial status of the migrants who worked in the educational sector had also improved tremendously. table 2 also illustrates data between savings of migrants who moved to kumasi and a change in the financial status of their families. table-2. crosstabulation of savings of respondents in kumasi and change in family‟s financial position changes in families financial position total considerabl y improved improved almost unchanged difficult to say savings in kumasi less than 20% count 0 1 0 0 1 expected count 0.3 0.4 0.0 0.3 1 % within occupation after migration 0.0% 100.0% 0.0% 0.0% 100.0 % 20-30% count 8 15 3 14 40 expected count 11.6 15.7 1.9 10.8 40.0 % within occupation after migration 20.0% 37.5% 7.5% 35.0% 100.0 % 30-40% count 20 21 2 14 57 expected count 16.5 22.4 2.7 15.4 57.0 %within occupation after migration 35.1% 36.8% 3.5% 24.6% 100.0 % above 40% count 3 5 0 1 9 expected count 2.6 3.5 0.4 2.4 9.0 continue economy, 2014, 1 (3): 89-94 93 % within occupation after migration 33.3% 55.6% 0.0% 11.1% 100.0 % total count 31 42 5 29 107 expected count 31.0 42.0 5.0 29.0 107.0 % within occupation after migration 29% 39.3% 4.3% 27.1% 100.0 % model value df asymp. sig. (2-sided) pearson chi-square 7.355(a) 9 0.600 likelihood ratio 8.197 9 0.514 linear-by-linear association 3.470 1 0.062 n of valid cases 107 a 10 cells (62.5%) have expected count less than 5. the minimum expected count is .05. source: output of spss the chi-square test reveals that the pearson chi-square value is 7.355 and corresponding p-value of 0.600 which is greater than 0.05 (p > 0.05), and this reveals that the savings level of migrants in kumasi was not significant as against the change in financial position of their families‟ in back home in the north. the information on table 2 shows that the financial position of the families of the migrants whose savings was between 30% and 40% of their incomes got improved and this also reveals that migrants who are able to save more usually send greater amount of money to their families back home. table 3 presents the regression analysis between age of the respondents and change in their family‟s financial status. we can see from table 3 that the r value is 0.234 and this indicates a strong relationship between age and the financial status of the families of the respondents. analysis of variance indicates a significant regression value of f to be 0.012 which is less than 0.05 and from the coefficient table it is clear that p-value is also less than 0.05. this data goes to support the fact that there is a strong statistical association between age of the respondents and change in their family‟s financial position. table-3. regression analysis between age and change in family‟s‟ financial status model summary model r r square adjusted r square std. error of estimate 1 0.243(a) 0.059 0.050 1.12974 a predictors: (constant), age anova (b) model sum of squares df mean square f sig 1 regression residual total 8.416 134.014 142.430 1 105 106 8.416 1.276 6.594 0.012(a) a predictors: (constant), age b dependent variable: change in families financial position coefficient (a) model unstandardized coefficients b std error standardized coefficients beta t sig 1 constant (age) 3.112 -0.503 0.335 0.196 -0.243 9.293 -2.568 0.000 0.012 a. dependent variable: change in families financial position 7. discussion of the findings from the study the research reveals that over 50% of those who migrated to kumasi were due to professional development. in addition, majority of the respondents presented a high level of educational standards and hence, many of them work in the educational sector in kumasi. also, about 50% of them were working in kumasi between the last 7 to 10 years. after the migration, the study also showed that about 50% of the migrants had 200% more income. in addition to this, half of the migrants also stated that they have planned to go back their towns and villages in the near future and these are those respondents who were in the age groups between 30 to 40 years. the data also indicated that there is a positive statistical relationship between the occupation of the respondents after migration and a change in the financial position of their families in other northern ghana. it also came to light that from the study that the skilled people who migrated to kumasi due to professional development had their families‟ financial status improving considerably. to a very large extent, the jobs of the migrants remained the same before and after the migration and the migrants who were university graduates earned a lot of incomes as against the other migrants. the study also showed that migrants who worked in the education sector had purchased properties, bonds and other household items. the study also showed that migration of skilled labour have got a positive impact on the regions or the districts from which the respondents migrated from; and that, kumasi, being the host destination, also had its direct effect as well. among other things, technology transfer to the areas of origin was also one of the positive effects of the skilled migration. since about 5% of the migrants working in kumasi had planned to go back economy, 2014, 1 (3): 89-94 94 to their areas of origin in future, they would impact transfer of technology to their localities in the northern part of ghana because there is a possibility that these migrants, through research and development, could impact innovations and inventions that can improve the socio-economic development of their source areas. this is one of the main contributions of skilled labour migration on the source areas because when the migrants return to their areas of origin in the northern parts of ghana, many of them could find jobs in factories and other companies where they could impact the experience gained on these areas. apart from the transfer of technology, another important impact of skilled labour migration is on remittance of monies to their families back home. the data indicated that about 50% of the migrants usually remit large amounts of monies to their families back home. hence, this is an indication of a positive effect of skilled labour migration. the research also indicated that skilled labour migration had a significant impact on the economy as a whole because of the fact that more that 95% of the respondents remit money to their relatives through bank transfers, and mobile telecommunications network (mtn) money transfers and this has a significant impact the local economy at the macro level. apart from economic activities that are contributed by the skilled migrants to their source areas, the migrants also contributed immensely to both social and political activities and these also have considerable impact on the ghanaian economy as a whole. other contributions by skilled migrants include social networking and philanthropy because some of the respondents organize charitable businesses that engage in donations, health issues, educational programmes as well as other public work projects in their home towns or villages. many ghanaian who are very wealthy had some private charities and through social networking, these migrants were able to bring such social and economic activities to bear on their source areas. the study also showed that the main reasons behind skilled labour migration to kumasi was for professional development, followed by „earning more money‟, unemployment in the source areas and social networking. apart from these factors, the study also indicated that a lot of other motivational factors such as lack of „social and other economic amenities‟ were factors that are responsible for skilled labour migration to kumasi from the northern areas of ghana. 8. conclusion and recommendations the study revealed that skilled labour migration has a significant effect on the socio-economic development of the source areas. some of these include remittances, philanthropy, technology transfer and social networking. in order to improve upon the significant effect of migration in reducing poverty in the source areas, it is important that the government, district assemblies and other stakeholders  focus more on issues and other affecting migration in ghana by identifying the factors that make people to migrate to the other areas of the country and make provision for these factors accordingly.  to invest more in agriculture by making it more attractive to the people in the northern part of ghana.  provide incentives to entrepreneurs and other industrialists that would be willing to invest and establish businesses in the northern part of ghana.  in view of the fact that skilled labour migration has got a considerable impact on their families in terms of remittances and other social issues, this paper strongly advocates that policy makers should consider reducing the cost of sending monies back home as much as possible to enable the migrants to conveniently remit monies to their families.  provide more social and economic amenities and other job opportunities to the people in the study area to minimize the exodus of the people to the other centers. references 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1, no. 2, 61-67, 2014 www.asianonlinejournals.com/index.php/economy * corresponding author 61 innovations in serbian agribusiness management adzic sofija 1 --stojic dragan 2* 1, 2 faculty of economics subotica, segedinski put, subotica, serbia, europe abstract this work is licensed under a creative commons attribution 3.0 license asian online journal publishing group contents 1. introduction ........................................................................................................................................................... 62 2. characteristics of technological development in the agricultural sector ....................................................... 62 2.1. frameworks and standards for the constitution of the preferred structure of the innovation system for the development of agribusiness in the apv ............................................................................................................... 63 2.2. structural characteristics and the necessary changes in the innovation system ............................................. 65 3. conclusion ............................................................................................................................................................. 66 references .................................................................................................................................................................. 67 bibliography .............................................................................................................................................................. 67 the focus of this paper is to study the desirable structure, the key issues and the preferred method of transformation of scientific innovation system in the revitalization of the agricultural development functions of industry and agribusiness in serbia’s autonomous region of the autonomous province of vojvodina (apv), in accordance with the current european concept of re-industrialization. three operational conclusions are drawn: the concept of operationalization strategy of structural adjustment of the innovation system as a function of agribusiness in the apv is based on the system integration of the learning and cooperative co-operation, induced from the mass, and the majority of informal communication. second: main task of the innovation system is to initiate projects for development of economically self-sustaining farm, encouraging the restructuring of production, technological, organizational and staffing structure of the agro-industrial complex. third, the operationalization of the specific strategy of the structural adjustment of the innovation system as a function of agribusiness in the apv should be reduced to: projects of transformation of the institutes in high-tech enterprises, promotion of new models for innovation development planning at the university, independent institutes and production enterprises, and the promotion of more efficient models of regulating relations keywords: innovation system, reindustrialization, agribusiness, ap vojvodina. http://creativecommons.org/licenses/by/3.0/ economy, 2014, 1(2): 61-67 62 1. introduction the focus of this paper is to study the desirable structure, the key issues and the preferred method of transformation of scientific innovation system 1 in the revitalization of the agricultural development functions of industry and agribusiness in autonomous province of vojvodina (apv), in accordance with the current european concept of re-industrialization. in apv during the 1957-1970, with technical assistance from fao and the united states, a strong and efficient innovation system was built. in the eighth decade of the last century the apv was at the highest technological level and competitiveness in agricultural production and processing industry in relation to the agricultural industry of all other european (now, former) socialist countries. however, around 1980, its development was blocked, and the production of knowledge and the transfer into products and processes in a way that benefits both the innovator and the user came to a halt. at first glance, the current state of the innovation system for the agricultural industry in the apv in terms of resources: the number and structure of the organization for education and research, the number and structure of teachers, scholars and researchers, available space, and experimental farms and to some extent the equipment according to many its dimensions is quite respectable, and almost entirely owned by the state and with the effectiveness in par with other local public and (unfortunately) most commercial organizations. however, the institutional arrangement that supports this system is far from providing a modernization role in the economic preparation of serbia and the apv for the european integration, despite the multitude of (politically) properly designed national and regional educational, scientific, technological, agricultural and industrial policies, including the implementation of the project of privatization and institutional reforms in the past decade [1, 2]. in this context, the innovation system in the agricultural industry of the apv, in the strict scientific sense does not exist, because there is no innovation (in terms of net benefits innovator, a new value to note of the author) system. the prolonged absence of developmental effectiveness of regional innovation system is a key explanation for developmental delay in the apv 2 . in scientific terms, the structure of the innovation system consist of: (1) organizational and functional distribution of innovation potential, (2) the rules of defining the program for the development and valorization of innovation and the allocation of necessary resources, (3) the criteria used to determine the internal organization and conduct of innovation system, and (4) a system of values and base rules for the evaluation of programs, policies and innovation results. in this context, the desirable structure of the regional innovation system can be determined based on the possibilities of achieving the required technological development of the agricultural industry in the apv during the next ten to fifteen years as a function of its real integration into the (european) market environment. in this sense, the projection of the goals and dynamics of transformation of the regional agricultural industry in marketoriented production system can be defined as a standard (norm) for the synthesis of the structure of the innovation system. on the other hand, the boundary conditions, i.e., the most likely state of the basic attributes of the agricultural industry in the apv and its external and internal environment provides the framework to be respected by the structure of the innovation system. in this context, the first part identifies the key trends of technological development in the european agricultural sector and their implications for the structuring of the regional innovation system. the second part deals with the problem of determining the framework and standards for constituting the preferred structure of the innovation system for the agricultural industry in the apv. the third part deals with the structural characteristics and the necessary changes in the innovation system in the apv, in order to obtain a state of well-functioning and the ability to effectively expand reproduction potential of the regional agricultural industry. 2. characteristics of technological development in the agricultural sector the analysis of the development trends of european agricultural industry [3-6] was done in accordance with the following criterion: to what extent and how does the technological development in the european environment modify the probability that the available potential in the agricultural sector in the apv would be transformed into a real development opportunity? the basic assumption is that the development of the european agricultural industry would follow the global technological trajectory. this means that it will prefer technologies that significantly valorize some natural resources and skilled labor, while reducing dependence on natural resources, such that the dominant importance of quantity will gradually be replaced by: quality of work, production, and life. the following key development trends in european agricultural industry are identified [6]; [4, 5] first, technological developments will continue to play a fundamental role in the transformation of the agricultural industry in all member states of the eu. the most important role in next ten to fifteen years will have: sophisticated machinery farm production, biotechnology and information technology. the typical farm will increase in size, intensifying the process of strengthening its ties with the whole agricultural industry while decreasing the role of human labor. the main 1 innovation system is defined as a socio-economic superstructure which deals with the training of personnel for work and during work, as well as with all the activities involved in the gathering and processing of information and on this basis on the production of knowledge and its transformation into products and services in a manner that benefits the innovator and creates a new value to the user (in this case for the purposes of industry agrarian note of the author). in this context, the innovation system encompasses: science technology information education (secondary specialist and vocational, higher education, to develop their knowledge and skills while working) and organization (micro, medium and macro-organization of economic and non-economic activities and actors on the basis of analysis of their behavior in structured networks to the realization of the activities of the public regulation of the economy and economic development, ie, implementation of specific business activities and the provision of public goods and services, public administration). in the innovation system are included and communications (in the broadest sense mail, fixed telephony, mobile telephony, computer networks, data and information, dedicated indoor and outdoor telecommunication systems, informal communication network for the exchange of information between entrepreneurs, managers, professionals, professional teams , open and private networks for the transmission of video and voice, etc.). 2 in assessing the actual production and technological scope of the agricultural industry in the apv, one can compare the next best european achievements (the netherlands, denmark, the northern region of france), or to take the other, more appropriate development framework. thus, in the apv, according to the calculations of the author, in the case of reaching the productivity factor of chinese agriculture, it is expected to produce nearly one million tons of meat and fish, or five times more than current production, which is in contrast to china, where it continuously decreases for more than two decades (meat from the 293,000 t in 1990 to 196,000 t in 2009, while fish production (despite the huge potential opportunities for high-quality and low-cost production) stagnated at the level achieved in 1990 by about 6,500 t). economy, 2014, 1(2): 61-67 63 problem facing the apv is to find solutions for the transition from traditional production based on natural and human resources to an information-based manufacturing process. second, the long-term demand for food in the european market will grow very slowly, except in cases excessive climatic disturbances and their implications for the production and supply of raw materials. there will be a further segmentation of the food market due to attention paid to diet and health. this will have a very clear impact on the role and development of high quality technologies. the trend of dynamic increase in the consumption of fresh food continues, a slight increase in consumption of frozen foods and the reduce in consumption of canned food. in line with these trends the development of new technologies to storing food will intensify. the trend of reducing the use of fertilizers, chemical sprays, synthetic additives, colors and spices, and growth in the use of natural or biotechnological derived fertilizers, plant protection, food additives, colors and spices also continues. the common underlying implication is the need to develop entirely new organizational forms in the reproduction chain and very expensive physical infrastructure. this will have three economic and developmental consequences. increase in production costs due to the implementation of new and expensive technologies will reduce the overall profitability of food production. this will particularly affect producers of raw materials, including the apv. the application of highly sophisticated technology implies a risk of reduced freedom for serbia and the apv to access the european food market due to very poor organization of agricultural industries and low internal investment capabilities. finally, the import of high-quality, clean, diet and healthy food for home consumption will intensify (since the redistribution of social and economic power within serbia and the apv in the last twelve years had elapsed adequate demand). third: in a relatively short period of time to expect complete removal of market barriers for food within europe. at the same time, remains a problem: is there going to be and when and how to eliminate barriers to the outside world? in any case, all european countries, including serbia and the apv are faced with a problem: how to support the technological change (conversion) agro-industrial complex in a manner that will ensure the improvement of the external and internal competitiveness efficient valorization of natural and man-made resources? fourth: global and european trends of reducing employment in the agricultural industry are due to the development and application of new technologies continues. the specificity of this problem for serbia and ap the apv is the fact that in the past two decades there has been a radical deindustrialization, leading to the decrease in number of employed so that in 2012 the number dropped to about 45% of the working population. according to estimates, approximately one-third of the working population in the apv does not have a permanent job. political and social consequences of this condition are partially offset by the fact that part of the population produces food on their small estates, or is seasonally employed (without taxes and social and health insurance at work note authors). in addition to these implications for the technological development of the agricultural industry in the apv, which has its origin in the trends in the european environment, we should note some key external and internal implications for which we must seek an appropriate solution by developing new technologies and business and organizational innovation. fifth: we should find a specific organizational and technological solutions (in the form of business, organizational, and technological innovation note of the author) for: (1) low valuation of basic resources (land, labor, and basic machinery) compared to the former pre-transition peaks, (2) degradation of land, resource depletion and environmental pollution that has occurred over the past twenty years, (3) greater investment in anticontamination of raw materials and (4) increased investment in maintenance materials before delivering to the outside markets [4], [5], [7]. therefore, one of the key tasks of the innovation system is to find a solution to neutralize the effects arising from the fact that poor use of resources in the apv is followed by growth of other elements and costs which threaten, that despite the low price of basic resources, push the production costs of raw materials and primary products up on the domestic and european markets. sixth: the way and time frame in which to conduct the preparation of the apv and serbia for european integration generate specific development problems. involvement in the european integration process creates opportunities for growth in food exports (with higher newly created value per unit of product) from the ap of the apv, meeting the needs in terms of: (1) exclusivity, (2) nature, (3) diet, and (4) health. these segments of the food, the task is almost there, but it is certain that they could be in the apv. these segments occur with implementation of food export policies at a high price, which can be achieved only by using business, organizational, and technological innovation. the key problem is that historical experience suggests that the development of the agricultural industry based on knowledge, which is a necessary prerequisite for this orientation in serbia and the apv, in the past thirty years was at least three times promoted, yet its implementation was never initiated. seventh: current and expected impact of technological development in the agricultural sector is extremely diverse, ranging from the incremental improvement of existing technologies and the development and implementation of a completely new advanced technologies. therefore, the technological development of the european agricultural industry is a mixture of: (1) independent activities of individual producers, (2) the policy of their mutual association on a case basis, (3) the activities of multinational corporations and international companies, and in that respect, foreign direct investment, and (4) organized action of government and regional administrations. the specificity of serbia and the apv is that the role of government in technology and development is dominant, because national and regional governments directly control 96 to 99% of its human and financial resources and in these circumstances there is neither basic mechanism for realistic evaluation of innovation nor for their efficient transformation into processes, products and income. 2.1. frameworks and standards for the constitution of the preferred structure of the innovation system for the development of agribusiness in the apv there are many ways to express the development of innovative systems for agribusiness: desirable, possible, standardized, expected and predicted. we have chosen the first approach, so that the goals, objectives, aspirations and ways of implementation are presented using necessary and feasible structural changes in the agricultural industry in the next ten to fifteen years. obsolescence of the existing structure of agricultural industry in the apv is obvious, economy, 2014, 1(2): 61-67 64 and the changes in this structure should be preceding transformations innovation system. it stems that the target structure of the agricultural industry should be the standard for determining the structure of the innovation system. in this context, it is necessary to determine the boundary conditions, i.e., the most likely state of the basic attributes of the agricultural industry in the apv, as a framework for the new structure of the innovation system. the following boundary conditions can be specified: first, consistently accepting and implementing the view that the apv (despite the large renewable natural resources) has no natural or work accumulated comparative advantages sufficient to compensate for the lack of adequate technology, business and organizational development of the agricultural industry 3 . second, the change of organizational, industrial and business structure of agricultural industry in the apv should be accomplished in two phases. during the first phase, which would coincide with institutionally regulated process of preparing for european integrations, to intensify the use of existing innovative potential and provide their own reservoirs to perform the second phase in which the structural changes should be made, primarily by investing in modern equipment and improving infrastructure for the process of reproduction comparable to the highest european and global standards. third, economic participants in the agricultural industry will receive part of the input signals from the market, on which the economic evaluation of their results would be carried out. the national economy will become the market in modern (european) sense. unfortunately, after twenty-two years since the restoration of capitalism and twelve years of reformed model on the target environment, the republic of serbia and the apv are far from the realization of the project of constitution of an open market economy. a key reason for the slow development of an open market economy is the fact that the restructuring of the economy, after the restoration of capitalism in the first stage of the transition (from 1990 to the end of 2000), took place in the framework of the gray economy. after the radical political changes in late 2000, their key protagonists have legalized its businesses and properties, resulting in the closure of the market to other participants in the market competition. therefore, the spillover effects of the first wave of the global financial and economic crisis in the republic of serbia and the apv, among others, showed that amnesty protagonists of the informal economy are not able to fulfill the primary mission of the entrepreneurial class: that shifting horizons of personal progress shifts the society as a whole. key consequences are the low level of institutional capacity and investment myopia, which are particularly affected manufacturing and primary agricultural production. fourth, national and regional governments will be able to develop activities and responsibilities for the development of the agricultural industry based on knowledge in a way that it benefits the innovator, and creates a new value to the user. fifth, at the beginning of the next decade, the republic of serbia will become a full member of the european union. this means that many of the structural reforms and adjustments in the regional agricultural industry and its internal and external environment will be executed in a relatively short period of time, and will in return receive a reduction in barriers to access markets. sixth, the development of the european agricultural industry in the next ten to fifteen years will continue to follow the well-known global technological trajectory, which is described in detail in the previous section. this means that there is a negligible probability that in the observed period (up to 2020/2025. was) there would come to the abandonment of the dominant techno-economic style. finally, two key findings of the innovation process, which should find its place in the new structure the innovation system for agribusiness, will be presented: first and foremost is that the innovation is a specific and appropriated knowledge and not freely available information. innovation occurs primarily as a result of beliefs and economic development of a motivated businessmen to research, develop and commercialize the products and a new business (manufacturing, purchasing, marketing, sales, service, etc.) of the process to achieve economic benefit administered, which will compensate for the investment in the innovation process and improve its conditions for the development and performance of the market. however, that is not enough: innovations occur when there is a sufficient knowledge base and economic and technological capabilities of the trajectory on which the requested certain innovations exist. this means that the knowledge base includes production experience and various specific internal knowledge and skills, which are difficult to codify and transfer. therefore, for the success of the innovation process is necessary and specific knowledge and skills of a particular manufacturer. the key implication for the development strategy of the new structure for the agricultural industry in the apv is to actively work on developing an environment in which an effective structure for creating innovation infrastructure with the relationship between the public and private factors should not be everything to nothing, as it is today, but at least 1: 1, and more preferably 1: 2 in favor of the market participants. the second is that the restrictions on the provision of innovation from the outside world are massive. transfer costs of innovation, difficulties in communication between donor and recipient of the innovation, misunderstanding technological and economic essence of innovation and the like, represent a great danger, and the transfer of innovation is best done by staff takeover, since the part of the innovation embedded in employees is difficult to codify. but on the other hand, a proper understanding of these issues is a powerful development opportunity. the main implication is that the infrastructure for the diffusion has the same importance as the infrastructure for the creation of innovation and the relationship between the public and private factors in its formation must be a minimum of 3: 1 in favor of the latter. 3 for the analysis of the success of implementation of the strategy of restructuring the innovation system in the revitalization and improvement of competitiveness of the agricultural industry in the apv, one should explicitly define the standards for evaluation of results in light of the aforementioned limitations, on the dynamics of demand and structuring non-commercial and commercial conditions for placement in the european food market. in this context, in the first phase, the main task for the innovation system is to create the conditions for renewal of production (but with a structure adapted to the new market conditions which basically means that in this period one should increase the export of agro-industrial complex in the apv two times to the current level in a very uncertain market conditions) to the pre-transition peak (which is in the apv achieved in 1986). accordingly, it seems to be expedient to propose to achieve that goal by the end of the preparation of the republic of serbia for european integration which can be determined in 2020/21. year. economy, 2014, 1(2): 61-67 65 a short synthesis of the implications of the above analysis for the determination of the framework and standards for the constitution of the preferred structure of the innovation system for agribusiness is a treat of every great innovation system and that is why this system must be carefully studied. in this context, a legitimate public policy action should act towards structuring the innovation system on the principles of self-reproduction, and direct placement into operation of revitalization and improvement of the competitiveness of the agricultural industry in the apv towards the (european) open market economy criteria. it is absolutely certain, without further elaboration, that the revitalization and improvement of the competitiveness of the process, product, and (economic) participants in the regional agricultural industry ultimately comes down to the process of global commercialization through the acquisition and conservation of competitiveness based on the dynamic creation and the development of: (1) economically self-sustaining agricultural farms, cooperatives, manufacturing and transport companies consolidated export macro-clusters are organized by main lines of production (wheat, corn, sugar, oil, bio-diesel, milk, pork, poultry and beef with features health and natural foods) in a manner that provides economic and technologically efficient operation in terms of high rigidity imposed by new models of food consumption, on one hand, and protectionist-oriented agricultural policy in the external environment on the other, and (2) adequate market infrastructure and specialized circles of commercial and financial capital, whose main source of financing the profit is food production for export, followed by a set of projects for rehabilitation, upgrading and new construction of specialized physical, scientific and educational infrastructure and infrastructure for public regulation whose main task of the public and private logistics, r&d, educational, administrative and similar activities provide incentives (and relatively stable) conditions for smooth process of expanded reproduction of the aforementioned production lines with the lowest possible cost [3, 7]. 2.2. structural characteristics and the necessary changes in the innovation system in considering the problem of structural features and the necessary changes in the innovation system and their implications for the dynamics and structure of the regional agricultural industry one should take account of specific national factors that hinder this task. the first are vague objectives of the transition of the real economy in the republic of serbia, which resulted in destruction of all major business in agro-industrial system in the apv. but in historical context, they are the result of another crucial factor. it is a phenomenon of a highly non-economic approach to the formation of a model of development, production, processing, marketing and trade. if we eliminate the events in the period 1945 to 1956 which are the result of different specific factors (major destruction in the wwii, food crisis after the war, industrialization, the socialist concept of hypocrisy development of heavy industry at the expense of agriculture, which was de facto abandoned in 1952, because of the foreign help, first irreversible, and later in the form of favorable commodity and financial credits), this phenomenon became visible at the end of the seventh decade of the last century, when there was a reduction of the national share of world exports of food, in which the apv had a dominant role, since (as stated) in the period from 1957 to 1960, made the revitalization of the radical qualitative and quantitative improvement of the agricultural industry. the initial impulse is to eliminate the national production of meat and meat products from the eu market by introducing the common agricultural policy (which has hit other countries, such as argentina, australia, etc..). the suppression of the principle of economy to the margins and incremental behavior towards structural adjustment have produced sub-optimal use of natural and man-made resources in the regional agricultural industry, major structural technological and production distortions and high costs of its production. therefore, the low efficiency of the innovation system servicing agribusiness in the apv should be treated as a derived macroeconomic phenomenon, which is caused by the mismatch between available natural and human resources, manufacturing base and the way their organizations and national socio-economic conditions of their use (which have in the past twenty-two years produced: transitional stagflation, a radical de-industrialization, the great social and political turbulence and institutional chaos) in a rigid outer environment. therefore, the problem of structural changes in the innovation system and its putting into operation of agribusiness in the apv should be viewed primarily as a project whose main goal is to create a framework for socially organized and institutionally regulated process of cooperative coordination of decisions at the macro level, on the one hand, and medium and micro level, on the other, to development and implementation of in-cite-generated private businesses and technological innovation and the introduction of new forms of social and economic organization and division of labor provided by the global competitiveness of the final product. in this context, if we accept the above framework and the standards (norms) given in chapter 2. it is possible to determine five crucial changes that should create the conditions for the constitution of a desirable structure of the innovation system for agribusiness. first: the reallocation of innovation potential. this is a crucial and the most difficult task. most of the innovation potential should be located within the business entities in the agricultural industry, because only then it can be effective in responding to market signals. the research potential of the university of novi sad should be strengthened, and independent institutes should specialize in the long-term educational technologies. in the context of the complete destruction of the innovation potential in production companies in the past 22 years, the initial impulse can only come from institutes either by shifting from research activities to production, or by their transformation into high-tech enterprises. spontaneous convergence of this model has started more than three decades ago, but was blocked in the middle of the last decade of the last century. there are two problems in the implementation of these ideas,. the first is how to encourage the (existing) institutes to the spontaneous convergence towards this business model within the largely distorted internal institutional and economic systems. the second is to neutralize the distortion that would bring such a spontaneous convergence. this indicates that the focus of intervention should be on measures to supplement the innovation system by creating consulting, transfer, information and other micro-organization, which would actively work to create and develop links between the various participants of the innovation system. these activities should be developed within the university, the institution which will survive the process of spontaneous transformation into a high-tech enterprise. economy, 2014, 1(2): 61-67 66 second: changes in the system of planning innovation. in a market system, production and transport companies make their own decisions about the development and implementation of programs to generate and valorize an innovation. natural short duration of these programs is irreparable, i.e. one can’t expect the adoption and establishment of the program in the long run. it is not a problem, because in this way remarkable results in the generation and implementation of the so-called incremental innovations related to the improvement of existing processes and products are achieved (of course, when there is an appropriate framework for their encouragement and valuation). long-term research programs must be defined by top regional research institutions and associates, regional governments and business associations, based on global trends in scientific, technological and structural developments in the global environments. the main objectives of these programs are creating new knowledge bases and their transfer to new organizational forms, technology, business processes and products aimed at improving the competitiveness and competence in the long run. these programs must be strongly connected with international competitive research. it is sufficient to critically examine the model transformation of agro-complex of the apv in the second half of the sixth decade of the last century to find new creative solutions for its implementation in the current state of the structure. third: a new model of regulation of relationships and behavior in the innovation system. this requirement is adjacent to the planning problem. relations and behavior of the innovation system in terms of business entities need to regulate in-cite established criteria in their business and innovation strategy. market-regulated manufacturers will themselves define criteria for determining its activities related to the generation and implementation of innovations. behavior and relationships in basic and strategic research needs to regulate the criteria that come from the outside from the institutions, bodies and organizations involved in their (co)funding. fourth: the restructuring of the system of financing innovation system. in accordance with the second and third parameter (planning innovation and editing relationships and behavior in the innovation system) resources to finance innovation venture should be structured on the basis of its purpose. innovation that arises in response to market needs should be funded solely by manufacturers. research funding that can’t be recognized by the market information (basic and strategic research, new knowledge and pre-competitive research) should be supported by public funds in accordance with the regional economic opportunities to support intentions carefully defined at european and global level. in both cases there must be a solution that would allow overcoming the risks of quest for innovation and diffusion of other people's results (in the form of new organizational forms, technologies, processes and products). scientific recommendation is the creation of high-risk circles of the (private) capital, followed by specialized regional funds or programs. fifth: increasing the efficiency of the model for the evaluation of innovation. innovations programs that are generated by the market demand are ex-ante evaluated because they are defined by marketing, sales, manufacturing and other commercial and technical criteria. market interactions that exist in generation and implementation of innovation in the enterprise provide evaluation during the process, and the final result (improved or new product or process) validates the market through the promotion of economic efficiency (profits) and increase in market share. for basic research a high quality ex-post automatic evaluation (publication of results in internationally recognized scientific journals, indices citations and co-citations, etc.) is needed. the most difficult problem is the evaluation of strategic research. ex-ante evaluation is performed by exploring the needs and feasibility of strategic projects. in this sense, the common institutions of the european union put together a variety of quality procedures, and provide the possibility of using experts. the objective ex-ante evaluation makes it easier (in terms of cost, time and conflict) to perform evaluations in generating innovation, and its ex-post evaluation. a short synthesis of the implications of the above analysis for the determination of changes in the structure of the innovation system for the agribusiness sector in the apv suggests that a spontaneous and controlled variation of five parameters of the existing structure (reallocation of innovation potential, changes in the planning system innovation, the new model of regulation of relationships and behaviors in innovation system, the restructuring of the system of financing innovation system, increasing the efficiency of the model for the evaluation of innovation) would lead to a state of good functioning over the period of next ten to fifteen years, enabling real integration of regional agricultural industry in the targeted (european) market. of course this does not exhaust all requests for changes in the parameters of the innovation system (at this point we shall state three: overcoming the problems of obsolescence and slow recovery of the innovation of the population, opening up space for engagement innovation population abroad and overcome the problem of the collapse of human capital performance). 3. conclusion necessary conditions for development based on business, technological and organizational innovations in the agricultural sector and the agricultural business in the apv are in poor state. therefore it is necessary to identify all of the major obstacles and shortcomings and eliminate them. in this context, the above taxonomy represents an attempt of scientific interpretation: what should be done in the field of innovation system to create the basic conditions for the opening of the revitalization process development functions of agricultural industry in the apv and its real involvement in the european food market? we came to three operational conclusions: first: the concept of operationalization strategy of structural adjustment of the innovation system as a function of agribusiness in the apv is based on the system integration of the paradigms: learning and cooperative co-operation, induced from the mass, and the majority of informal communication between individuals and businesses that provides for division of labor and specialization based on the flow of information and exchange of experiences necessary for timely and (economically) effective action for the operationalization of individual and group preferences in terms of sharp, open and unequal competition on the european food market. the second main task of the innovation system is to initiate projects for: (1) the development of economically self-sustaining farm, (2) encouraging the restructuring of production, technological, organizational and staffing economy, 2014, 1(2): 61-67 67 structure of the agro-industrial complex, and (3) the elimination of the impact of distribution-oriented coalitions and their replacement with development-oriented coalitions in primary lines of production (wheat, corn, sugar, oil, biodiesel, milk, pork, poultry and beef with the characteristics of healthy and natural foods). third, the operationalization of the specific strategy of the structural adjustment of the innovation system as a function of agribusiness in the apv should be, due to the state of general institutional disorganization, in the initial period reduced to: (1) projects of transformation of the institutes into high-tech enterprises, (2) promotion of new models for innovation development planning at the university, independent institutes and production enterprises, and (3) the promotion of more efficient models of regulating relations, conduct and evaluation of the results of the innovation system based on increasing the competitiveness of products and processes and quality improvement in order to increase exports. in this context, the main activities of the public factors should be limited to: (4) intensification of the process of modernization of the infrastructure for the provision of public goods and public administration services for the agro-industrial complex in accordance with best european models, (5) supporting the development of productive entrepreneurship and human capital through various forms of cooperation between public and private sectors, and (6) the rehabilitation and modernization of transport infrastructure with a complex macrobases and border crossings in service of creating the conditions for economic and technical rational food exports. references [1] v. matejić, "razvoj srbije zasnovan na znanju: pomodna priča ili stvarna mogućnost," in book of conference proceedings xv scientific conference "technology, culture and development", palić subotica, august 8-11, 2008, pp. 32-40. [2] v. matejić, "inovacioni sistem i efektivnost istraživačkog sistema srbije," in book of conference proceedings xvi scientific conference "technology, culture and development", palić subotica, august, 30. –september 2, 2009, pp. 6-13. [3] a. buckwell, featibility of an agricultural strategy to preparate the countries of central and eastern europe for eu assesion. london: phare – study, 1994. [4] x. gellynk, w. verbeke, and j. viaene, "food processing. collection of works: industries in europe: competition," trend and policy issues, pp. 85-110, 2003. [5] a. matthews, agriculture, in johnson, p. ed., industries in europe: competition, trends and policy issues. cheltenham: edward elgar, 2003. [6] v. matejić, istraživački sistem i naučno-tehnološki razvoj u jugoslaviji. zbornik radova: prilozi istraživanju naučnog i tehnološkog razvoja, 2002. [7] s. adžić and j. adžić, "global economic crisis at agro-food industries case study for vojvodina," presented at the vii international pensa conference: economic crisis: food, fiber and bioenergy chains, sao paulo (brazil), 2009. bibliography [1] s. adžić, "revitalizacija stočarstva i makroekonomske politike," agroekonomika, vol. 32, pp. 163-166, 2003. [2] s. adžić, "javna regulacija i unapređenje izvoza u agrokompleksu – kontroverze, ograničenja i rešenja," ekonomski anali, pp. 220233, 2003. [3] s. adžić, "strategy of enhancing of competitiveness of the agro-industrial complex of vojvodina – controversies, limitations, solutions," journal of central european agriculture, vol. 3, pp. 483-493, 2008. [4] s. adžić, "kako završiti tranziciju u agro-industrijskom kompleksu? – studija slučaja za vojvodinu," tranzicija, vol. 19-20, pp. 2148, 2008. [5] s. adžić and j. adžić, "the development strategy of agro-food industry and innovation system – the case study of vojvodina," presented at the international conference of organizational innovation – icoi 2011, bangi (malaysia), 2011. [6] s. adžić and j. birovljev, "the strategic framework for sustainable development of agro-food industry – the case study of vojvodina," ttem (technics, technologies, education, management), vol. 6, pp. 916 – 928, 2011. [7] s. adžić and m. jevtić, "new macroeconomic framework for business: case study of serbia," journal of international business and economics, vol. 10, pp. 41-67, 2010. [8] p. cooke, handbook of research on innovation and clusters: cases and policies. cheltenham: elgar, isbn 978-1-8472-0842-2, 2008. [9] p. cooke, technology clusters, industrial districts and regional innovation systems. in becattini, g.; bellandi, m. & de propis, l. (eds.). a handbook of industrial districts. uk, usa: edward elgar pub. chap. 23, 2009. views and opinions expressed in this article are the views and opinions of the authors, economy shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. economy issn: 2313-8181 vol. 3, no. 1, 24-30, 2016 www.asianonlinejournals.com/index.php/economy 24 poverty and inequality across the nations: how can governments be effective in coping? niraj prasad koirala1  dhiroj prasad koirala2 1 teaching assistant, helen jones devitt fellow, texas tech university, usa 2 tribhuvan university, school of mathematics (* corresponding author) abstract the paper focuses on poverty and income inequality in low income countries with special focus on political economics of poverty and role of fiscal policies in coping those problems. the issue of poverty in low income countries and how different factors are fomenting the problems in those nations are explained. the paper links the relevancy of fiscal policies in combating poverty and income inequality presenting examples of different countries. at some point, the paper explains how multilateral organization assisted fiscal policies are hurting the poverty reduction programs in poor income countries. this paper argues that lower income countries need to focus on increasing tax base, increasing the coverage of formal market for increasing the collection of revenue. for improving the efficacy of government expenditure and to reduce the poverty, the paper suggests to focus on agriculture research and development in low income countries, majority of which are food insecure together with investment on rural electrification and education. keywords: poverty, low income countries, fiscal policy, tax. contents 1. introduction ......................................................................................................................................................................... 25 2. political economic reasons of poverty and inequality ...................................................................................................... 25 3. policies for minimizing poverty and inequality ................................................................................................................. 27 4. fiscal policies ....................................................................................................................................................................... 27 5. revenue mobilization in ldcs ........................................................................................................................................... 29 6. conclusion and recommendations ..................................................................................................................................... 29 references ................................................................................................................................................................................ 30 citation | niraj prasad koirala; dhiroj prasad koirala (2016). poverty and inequality across the nations: how can governments be effective in coping? economy, 3(1): 24-30. doi: 10.20448/journal.502/2016.3.1/502.1.24.30 issn(e) : 2313-8181 issn(p) : 2518-0118 licensed: contribution/acknowledgement: this work is licensed under a creative commons attribution 3.0 license all authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the author declares that there are no conflicts of interests regarding the publication of this paper. transparency: the author confirms that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: history: this study follows all ethical practices during writing. received: 21 january 2016/ revised: 2 february 2016/ accepted: 8 february 2016/ published: 12 february 2016 publisher: asian online journal publishing group http://creativecommons.org/licenses/by/3.0/ http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.1/502.1.24.30 http://search.crossref.org/?q=10.20448/journal.502/2016.3.1/502.1.24.30 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.1/502.1.24.30 http://search.crossref.org/?q=10.20448/journal.502/2016.3.1/502.1.24.30 economy, 2016, 3(1): 24-30 25 1. introduction the world has changed a lot since the world war second in terms of economy and politics. the world was once divided into democracy, the follower of liberal markets and the communists, follower of government controlled market system until the beginnings of 90s. however, after the dissolution of ussr (union of soviet socialist republics), liberal market system has been the only solution for economic growth and development. consequently, world trade organization (wto), world bank group , international monetary funds (imf) and other multinational organizations have been active world wide in advocating the liberal economic policies and globalization. nations accordingly have formulated their policies for uplifting the livelihoods of people in alignment with the global and regional policies of open market system. as results, the population of people living in poverty has significantly decreased and other indicators of human development like access of kids to education, access to health, access to banking services, condition of child and mother death have been significantly improved. despite of those achievements, poverty and income inequality remain major obstacles in our paths toward achieving egalitarian world. still 897 million people live in the poverty line of daily income below 1.9$/day which is almost 13 percentages of the world’s total population and majority of them reside in developing nations of asia and africa (ferreira et al., 2015). poverty and inequalities are multidimensional aspects which are dependent upon social, political, cultural and economic factors of the nations. poverty is a relative term in terms of time and the nations. in case of developed nations, poverty doesn’t mean the absolute inability of the citizens to access the physiological requirements for life which may not be the similar in case of low income nations (ackerman et al., 2010). inequality is another problem which is hindering the uniform economic growth across the nations. poverty and inequalities needs to be dealt as two faces of one problem, as high levels of inequalities which are prevalent more in low income countries, affect the poverty reduction activities even when, the economies are growing (unrisd, 2010). the core challenges for economic growth and development of the nations especially of low income countries are to minimize poverty and inequalities in terms of income, gender, ethnicity and location. in those nations, where the economies haven’t undergone through full structural transformation and household economies are mainly subsistence, major quests remain on increasing the labor productivity, application of appropriate technologies and minimizing the risks of shocks in economy so that their economy become competent in global level minimizing poverty and inequalities. for that governmental spending is needed and tax revenue is a strong resource for them. in relevance to above discussions, the paper reviews the political economics of poverty and inequalities which have kept the economies of low income nations in low level equilibrium trap. the paper emphasizes on reform in political institutions and governance in the low income countries to achieve sustainable development goals and shared growth that would cope with increasing poverty and inequalities in those nations. 2. political economic reasons of poverty and inequality poverty and inequalities are multidimensional issues. major problems in uplifting the living standard of people from poverty and in minimizing poverty arise from hastily designed and implemented state regulations, poor state organs, corruption in developmental activities from bottom to top level of policy formulation and emergence of parallel economies. these factors cause alienation of economically marginal people from society and government organs, increasing the vulnerability of the societies and the nations which is a threat to a peaceful and democratic world. thus, it is good option to explore about political economies of poverty and inequalities in low income nations in order to understand the nature of problems there. a) political culture political culture signifies the relationship between government and citizens and vice-versa. similarly, it also includes the impact of government, civil societies on the national economy (almond and powell, 1966). a good understanding of political culture of any nations will provide information about the formation of government, the extent of involvement of citizens in decision level and the inclusiveness of the governance. there are many issues of politics in low income countries of asia and africa which are hindering the development and poverty reduction activities. in those nations, strong cultural and social strengths convert the nations into hybrid states where the public resources are used by the elites leaving marginalized poor citizens far from the resources consumption and those nations have number of common characteristics. those include; a) political parties or rulers above the rule b) corruption c) owning all or zero type of strategies d) nepotism e) emergence of identity based nationalism f) lack of ideology in politics f) patronage as politics. due to this, informal regulations will be made by the elites and rulers to affect the development activities rather than formal state rules. that benefits the rulers but nations become poor at the end. in low income countries, state organs are used by the political parties and rulers as milking cow and exploit the resources. during the elections, political parties distribute different needy things to the people for vote and after election they never come back to the place. for example, leaders of different political parties give some cash to voters and organize party for poor people before election in nepal. but this type of activities never going to improve the poverty condition of such nations as thus elected leaders use governmental treasury to compensate that amount of money. from the side of ordinary people, they prefer to accept the present hegemony of elites hoping loyalty to them will provide them with some good outcomes in their life. in this way, there is a web of poverty and inequality in poor nations. b) corruption there are ample and growing evidences that the corruption in least developed countries (ldcs) is high. in 2014, transparency international corruption perception index, of 174 countries ranked by the extent of corruption, economy, 2016, 3(1): 24-30 26 ldcs like somalia, sudan, bangladesh, afganistan, south sudan, eritrea, yemen, haiti, myanmar and nepal show miser performance. overall, the position of ldcs aren’t satisfactory beside the position of few of them. increasing or high level of corruption has direct positive impact on inequality and poverty by reducing the economic growth, progress of tax system, the level and effectiveness of government spending on public sector (gupta et al., 1998). in view of sindzingre and milelli (2009) the relationship between corruption and economy may not be linear and subject to threshold effects which are built up by social, economical and political condition of the nations. chetwynd et al. (2003) divided the effect of corruption on poverty and inequality in two models; economic model and governance model. according to economic model, corruption increases the income inequality reducing the growth and ultimately increasing the poverty. similarly, corruption gives birth to permanent distortions due to which some group of people may get more benefit from government than the poor citizens. in this way, the income inequality and poverty both increases. from above, it is clear that poverty and inequality condition both are worsened with the increase in corruption. therefore, it is important to understand the reasons behind the corruption in low income countries. according to tanzi (1998) there are direct and indirect drivers of corruption across the nations. direct drivers involve; monopoly of government officials in authorizing activities of citizens giving ample space for them to ask bribery from citizens to authorize their work, tax payment in poor nations require the direct contact between tax payer and tax officer that gives space to the latter to have bigger money, government spending on infrastructures and other sectors in poor nations provide an opportunity to a group of officials to earn money. indirect sources of involve; quality of the bureaucracies which says that the less is recruitment and promotion based on merit, the higher is corruption in bureaucracy (rauch and evans, 2000). such trend is prevalent in low income countries. other sources include; low level of wage to public servants and activities of leaderships in poor nations. according to khan (2006) there are four types of corruption in developing nations and include; neoclassical corruption driven by legal power of states, statist corruption creating rents and market restrictions, political corruption and the last one is theft or primitive accumulation in which government officials grab public resources through the private factions. there has been lots of debates about minimizing corruption in low income countries for the economic growth of those nations and minimizing inequality of those nations. in developing nations, there are different structural drivers enhancing corruption due to weak fiscal coverage and weak property rights. in the low income countries, structural drivers are aggravated by the weak institutions and governance capabilities (khan, 2006). those nations have weak institutions and governance due to weak economic condition, political instability, poor presence of state power and lack of social welfare (rice and patrick, 2008). the governments, political parties and all the stakeholders need to focus on implementing participation of citizens, rule of law, transparency, responsiveness, consensus, equity and inclusion, effectiveness and efficiency and accountability as highlighted by united nations economic and social commission on asia pacific. similarly, in the poor nations, there are vagaries of regulations which allows the supremacy of government officials over citizens which help in increasing corruption and decreasing the trust of people towards government. therefore, in order to improve the corruption level, governments should try to limit the vagaries of regulations. similarly, the advancement of technologies can also minimize the corruption and improve the governance condition (magno and serafica, 2001). information technology helps in good governance in many ways. it helps by facilitating in participatory decision making process, by enhancing the proper delivery of public and private services and by enhancing transparent decision making process. at last, learning the good governance activities of other developed economies can help reduce corruption and improving the governance condition and ultimately paving path for poverty and inequality reduction. for instance, the good governance activities of countries like new zealand, denmark, sweden and finland which are consistently on top of the corruptions perceptions index. those nations have managed to engage public in corruption minimizing by the system of disclosure of information. the good governance programs in those nations is in bottom-up fashion rather than top-down approach just like in many poor nations. different studies suggest that the integrity systems in those nations are relatively well. c) civil societies in low income countries civil society is the collective term used for non-governmental institutes and organizations raising the voices of people. the role of civil societies in poverty reduction can be divided into three ways; advocacy, policy change and enhancing the speed of service delivery (ibrahim and hulme, 2010). ideally, the positive transformation of any nations specially of the developing and low income countries depend upon how well the state problems of poverty and governance are responded by people and government and how well they are interconnected. therefore, it becomes obvious to explain about the civil societies in the low income countries. in most of the low income countries, majorities of population live outside the urban areas. in the rural areas, people aren’t supplied with supply of facilities like communication, road ways and power. these factors make the poverty and inequalities those nations unheard because most of the media and ngos focus on urban areas and the elites of rural areas, proving them unreliable. in most of the sub-saharan african nations, people don’t depend upon civil society for service delivery rather they depend upon local landlord or patrons (handley et al., 2009). in some low income countries like nepal, the civil societies are divided on the basis of political parties making them ineffective and dividing civil societies as ruler and opposition civil societies (shah, 2008). this has increased the inequality in the nation as ngos and civil societies work extensively in areas of voters of their political parties and neglecting the problems in other areas. in poor countries of sub-saharan africa from swaziland to ethiopia, political parties and states support those civil society organizations which are biased towards them rather than those organizations who advocate for radical policy changes (handley et al., 2009). apart from these, most worrying problem in poor low income countries is that in many countries, different political parties including ruling parties have paramilitary structures of youth groups which are used to mull critics. for example, paramilitary structures of communist parties of nepal and practice of parallel government, malawi’s young pioneers which are/were used by economy, 2016, 3(1): 24-30 27 political powers to punish their opposite voices. the civil societies can’t thrive into such conditions and already existing civil societies are being biased for security and economic purposes. in this way, the weaker civil societies and poverty are related in a positive way. the question remains how can civil societies be made more responsiveness to the problems of poverty in those nations. off course, good politics and unbiased civil societies are supplementary to each other. therefore, politicians need to empower the civil societies so that the latter can push the former with the voices of poor and historically marginal people in those nations. the difficult conditions as above mentioned in poor income countries often come due to the distance between governments and people due to lack of participatory policy making and implementing activities as a result societies always become turbulent in those nations. therefore, it is necessary to include the civil societies in the process. in those nations, where civil societies are divided on the basis of politics, political and communal attempts need to be done to formulate civil societies not on the basis of politics and enough opportunities need to be created beside the politics. d) media in low income countries media like radio, tv and newspapers are the most widely used tools for communication. the status of media in democratic societies are well studied and the role of media in uplifting the people from poverty are also well discussed subject especially in poor and fragile economies. media make policy makers and leaders more accountable towards the policies of nation. in many poor nations in sub-saharan africa and asia, large media houses are owned by political parties and the former act as mouth pieces of latter (handley et al., 2009). news published in such newspaper can be according to the want of educated middle class people of urban areas. such newspaper rarely publish the failure of government and political parties to address the issue of poverty and inequalities on the basis of income, religion, gender and culture. in some poor countries, each political parties have own news station and they are dominant. the duty of such media is to write against other parties and write paeans of own party. for example, in nepal, big media houses are near to either of political parties and their affiliation can be known by the type of articles. in fact, such trending is helping the nation to have more inequality increasing the chance of violence. a neutral media can help in poverty reduction by acting as a bridge between the people in needs and the policymakers or politicians. there are three attributes of neutral and free media; independence, quality and reach. in one cross country study, roy and siegel (2011) found a strong relationship between political instability and lack of financial market leading to poverty and inequality. another literature by roy (2011) suggests that media in low income countries which are political unstable needs to empower media because media helps in political stability. lack of resources in media and media workers are the major reasons behind the biased media in poor and fragile income countries. therefore, it is necessary to make media and media workers resourceful in those nations. the first step towards that is to make journalism profession an admiring profession in those nations. media workers which lack proper compensation for their job in fragility, needs to be provided with quality training and monetary compensation and insurance. second step is to form a network of independent media groups from grass root levels to the national levels so that poverty and inequality related issues can get space in national media on the platform of networks. third step is to publish and broadcast the failure of governments and political parties about their failure in addressing the problems of poverty and make the civil societies aware about the status. fourth and last step is to form an independent council of independent news broadcasters so that critical issues related to journalism, status of people in the nations and governance can be discussed and advocated for policy change from media level. 3. policies for minimizing poverty and inequality as mentioned above, there are still 897 million people living below the poverty line of 1.9$/day. most of them live in developing or low income nations of sub-saharan africa and asia. poverty in those nations are associated with number of socio-economic and political factors as mentioned above. it is obvious fact that, the world can’t achieve sustainable development goals without increasing the life standard of people in those nations and without minimizing the inequalities. however, there are many hurdles in those nations owing to political instability and lack of well developed institutions. however, those nations can uplift the living standard of people by adopting fiscal policies wisely. fiscal policies, their effectiveness and fiscal short comings are discussed as below. 4. fiscal policies fiscal policies are the governmental decisions about governmental spending and taxation so that national economies can be strengthened and contracted according to the condition of economies. according to the keynesian economics, when there is change in fiscal policies, aggregate demand and overall economic activities are affected. fiscal policies are one of the major policy tools of governments to address the social problems caused due to poverty and income inequalities. there are ample literature about fiscal policies in combating against the poverty and inequality. however, such policies have been working differently in low income and developed countries. in order to understand such differences, it is necessary to understand the nature of fiscal policies. in most of the developed countries, counter cyclical fiscal policies are used while in developing nations, pro cyclical fiscal policies are used. pro-cyclical fiscal policies are those policies which motivate public spending and reduction in tax revenue during boom in economy. counter-cyclical fiscal policies are just opposite of this. the nations which are fiscally procyclical are found to have low economic growth and high inflation (mcmanus and ozkan, 2015). economic growth is negatively related to poverty while inflation is positively related to poverty (chani et al., 2011). heavy revenue needs to be generated in order to minimize the macroeconomic vulnerabilities and to promote economic growth in low income and fragile nations. different papers on economics suggest that a consistent economic growth with rate of 5-6%/year is necessary to minimize poverty from least developed countries. tax is one of the viable revenues for the governments. however, governments in low income nations aren’t being able to raise economy, 2016, 3(1): 24-30 28 tax in proper way. in case of asian low income countries, the average tax to gdp percentage is 8.41 when processing the data found in website of heritage foundation for 2015. in the data, tax to gdp percentage of east timor was not given. similarly, in case of african low income countries, average tax gdp is 13.76, 21.06 in oceania and 9.4 in case of haiti. altogether, the average tax gdp percentage in low income countries comes to be 22.3 but with standard deviation of 60.9. but the average of the same has been found to be 35.69 in case of oecd nations with the standard deviation of 7.26. this finding echoes the finding by tanzi (1992) which says the tax revenue share are found to be lower in developing worlds than those in industrialized countries. low tax revenue in the nations which are yet to achieve development, has important meanings. less tax revenue means lower investment in education, health and infrastructures in governmental level (world bank group, 2015). this may further trigger, the poverty in the nations and further increasing the gini coefficient. weak performances of low income countries fiscally are related to number of reasons belonging to social, cultural, political, economical and sometime due to international rules as well. in most of the low income and developing nations, centralized fiscal policies are enjoyed. centralized fiscal system may make the central government biased towards some of its places regarding the distribution of public sources like education, health, transportation and others (son, 2006). therefore, continuation of centralized fiscal policies and thus resulted biasedness may foment the political instability in low income fragile nations where regional disputes are ongoing. as we all know that such unrest increases the poverty and inequality. however, proper consideration must be given while decentralizing the fiscal system because it may cause the conflicts between the local and central governments. such conflicts may arise due to the ambiguity about handling and collecting of tax revenues. ambiguity may also arise due to vagueness of taxable resources. in order to avoid such probable conflicts, governments may unify the groups of taxable goods and have a well understood agreements between central and local governments. regarding the decentralization, fiscal decentralization in china may provide valuable lessons to low income countries. in china, local and central governments have developed transparent way of dealing with the fiscal policy. in china, central government has provided local governments with incentive in collecting tax revenue which is on the rise after tax reform in 1994 (shen et al., 2012). preferred sectors of investment by the central and local governments need to be separated. however, investment on poverty reduction like; investment on education, health, technological skills learning and entrepreneurial skills learning should be under the duty of local government as wells as that of central government so that effectiveness in poverty reduction programs can be made visible in public level. decentralization in fiscal system also helps to make local governance effective and resourceful. in poor income countries, local government authorities are often considered to have lack of resources and central governments are blamed to work in monopoly manner. by providing the responsibility of revenue and expenditure to the local authorities, people in the ground also feel integrated to the nation which makes easier to implement poverty related programs to both local and central governments. in case of low income countries, low tax revenue is also due to smaller proportion of tax payer. according to the world bank report published in 2015, less than 1 percentage of population were found to pay income tax in nepal, 1 percentage in bangladesh and about 8 percentage in bhutan (wbg, 2015). presence of strong informal sector in the economy is one of the reasons behind low income tax. the population of people working in informal sector is higher than working in formal sector giving sense to the low number of population with low income countries. in order to avoid this condition, governments of less developed countries need to bring the informal economy under formal channel. different literature suggest that major problems for converting informal economy into formal is the boring administrative procedure and high cost of entry into formal economy. problem also persists from the part of tax payer as well who aren’t as aware as the same in developed nations due to social, political or economic reasons. giving local authorities up to villages level also help the registering the number of firms and workers being employed in local level. local authorities enforce the use of keeping records of local business and they can charge tax accordingly as per the volume of individual business. governments need to design taxation system according to the level of income and wealth. the higher the income, the higher is the taxation rate. in doing that, a certain class of people owning below certain standards may be exempted for taxation. low tax base in least developed countries is one of the reasons behind low tax revenue in those nations. tax base means the goods and services which is taxable. lower tax base means low area of tax collection. in this case, low income countries need to transform the structure of tax system. some of the sectors which haven’t been taxed but has the potentiality of higher revenue, needs to be taxed. for example, in many of the ldcs like nepal, agriculture isn’t taxed. in many of the districts of the nation, food insecurity is in chronic level. so simply by taxing the agriculture sector, food insecurity will be escalated. for making agriculture sector taxable, governments in nepal and other low income countries need to promote commercial scale (large scale) and value addition though subsistence agriculture don’t need to be taxed. like in case of nepal, other low income countries may have different sectors in high preferences and taxation should be fixed accordingly. in addition, governments in least developed countries are recognized for weak administrative capacity in collecting taxes. they lack the educated human resources and proper technologies to handle this. therefore, administration and human resources should be enhanced with technologies and relevant administrative training. apart from these issues, international economic trends and agreements are playing important role in determining how much to raise as revenue, where to spend and from whom to raise the money. presently, the world bank, imf and other multilateral agencies are helping low income countries formulate fiscal policies on the condition of former’s aid. these organizations have been lobbying for low tax and tariffs across the world since 1980/90 this is good for international trade. however, less developed countries are losing significant amount of revenue from taxation due to this trend and only a few countries have been able to get rid of this shock. due to lowering of trade tariffs and followed by 2008 economic crisis, least developed countries are left with deficit of $64.4 billion in their budget (green et al., 2010). after lowering of tax rates world wide upon the recommendation of multilateral economy, 2016, 3(1): 24-30 29 agencies, there has been significant decrease in the revenue of low income developing countries while revenue amount in developed nations being unaffected (itriago, 2011). according to some researches, there has been a reduction of 20 percentages in corporate tax amount of least developed countries between 1990 to 2001. another issues arising from international condition affecting the economy of least developed countries are; tax ignorance and capital flights. froberg and wari (2011) suggest that developing nations were losing between $850 million to 1 trillion during 2006. the rate of flight of capital from developing nations to developed nations was found to be increased by 18% per year from 2002-2006. capital flights harasses the investment, reduces tax collection, escalates income inequality and drains hard-currency reserve of the nations (froberg and wari, 2011). in this way, international contexts are also affecting the tax revenue in developing nations. least developed nations are affected badly due to their political structure, smaller size of economy and inability of administrations to handle any shocks resulted in economies. of course, least developed countries need assistance from multilateral organization and agreements. however, such assistance shouldn’t be restricting the governments ability to formulate national fiscal policies. assistance of multilateral organizations shouldn’t be based on the precondition of acceptance of their terms by least developed countries. 5. revenue mobilization in ldcs according to itriago (2011) significant improvement in taxation system of developing nations would raise an additional revenue by $269 billion. in that study, african low income countries like benin, congo republic, tanzania, burkina faso, burundi, chad, guinea, madagascar, mali, mauritania, mozambique, niger, senegal, zambia and asian low income nation bangladesh could collectively raise additional revenue of $967.3 million if underground economy could be reduced by 7.5 parentage in countries from benin to tanzania, 4 percentages from botswana to senegal & bangladesh and 1 percentage in zambia. in least income countries, revenue collection and utilization both are arduous thing and depends strongly upon political will of the leaders. the istanbul program of action for least income countries has envisioned domestic saving as requisite for investment in order to stimulate 7% increase in gdp of those nations. poverty is the most important challenges in those nations as mentioned above. therefore, governmental spending needs to be focused on poverty reduction programs in short term, medium term and long term policies agenda. tax revenue, remittance income and foreign investment are the capital resources of least developed economies. however, different literature suggest that foreign direct investment increases the inequality in the host nations. therefore, low income nations need to focus on utilizing the internal resources i.e. tax revenue and remittance income. least developed countries are those countries which aren’t undergone significantly through structural change. conventional agriculture is backbone of many least developed countries and higher fraction of population are engaged in agriculture. despite of these facts, many least developed countries are food insecure. investment in agriculture is one of the most viable options for boosting the economy of poor income nations and minimizing poverty. in developed nations, investment in agriculture accounts for more than 20 percentages of total national budget while in developing world it accounts for less than 10 percentages (fan and rao, 2003). in case of some low income countries, the percentage of agriculture budget may account for less than 4 percentage as well and mostly focused on administrative aspects. different researches report that, of all the agricultural investment, investment in agriculture research and development is most crucial for agriculture growth and food production. governments in low income countries need to realize the potentiality of agriculture and need to invest more on agriculture research and development. this means, governments need to invest in different parameters of agriculture like; preparation of technologically sound labor force, management of land resources, fertilizer or manures, commercialization tools, animal production, road infrastructures and investment in agricultural education and irrigation. fan et al. (2004) suggest that public spending on rural electrification had most impact on poverty reduction in rural areas of thailand and the result of that study can be linked up with low income countries. electrification in rural life paves way for rural entrepreneurship and value addition in agricultural crops in rural level. this helps in poverty reduction in rural areas where most of the poor people are residing. biggest challenges for low income countries for accelerating their economies and reduce poverty in long term is production of skilled and educated human capital. the major determinant of living standard of nations depends upon success in developing and utilizing knowledge, skills and educating the people (roberts, 2011). this highlights the importance of education in modernizing economies of least developed countries. different literature suggest that high income countries invest more in education than low income countries do. investment in education has helped developed countries to combat with different types of inequalities and providing them with market oriented education has helped developed nations to combat with poverty . though, investment by governments in low income countries in education has been increasing and access of the children to formal education has also been increased. however, the governments need to focus on providing quality and competitive education as well. institutional reform is another preferred sector for least developed countries to channelize the revenue. those nations need to give more autonomy to the institutions and need to make institutions more resourceful together with making more responsible. avoiding politics in administrative and development activities may help this issue. for this, strong civil societies need to be formed. for that, all the responsible stakeholders need to come. 6. conclusion and recommendations because of globalization and trade facilitated by multilateral organizations like world bank group, imf, asian development bank etc., the number of people living below the poverty line has been drastically reduced from the globe. however, poverty and income inequalities have been the burgeoning issues of the low income countries in africa and asia. there are many political economic drivers of poverty and income inequalities in those nations due to which the nations are in low level equilibrium trap. as the world is heading toward the implementation of post economy, 2016, 3(1): 24-30 30 2015 sustainable development goals, reduction of poverty and income inequalities in poor income nations are national as well as global responsibilities. proper collection of internal revenues like tax and its proper utilization can minimize the poverty of those nations, as the history of many countries show. however, existing economic problems are smaller number of tax bases, dominance of informal markets, centralized systems, administrative shortcomings for which political economics drivers are also responsible. low income countries need heavy governmental spending to improve the living standard. for that priority sectors need to be identified. investment in agriculture seems the viable and the primary option for such nations to proceed further together with maintaining food security. therefore, the governments need to increase investment in agriculture research and development. similarly, government needs to increase the investment in education, rural electrification, infrastructures so that poverty minimization can be done. however, all the poverty reduction attempts and their success depend upon will power of political leadership. therefore, all the stakeholders including political leadership needs to come together and forge a poverty reduction activities on consensus basis especially in fragile nations. references ackerman, f., n.r. goodwin, l. dougherty and k. gallagher, 2010. the political economy of inequality. washington dc: island press. almond, g.b. and g.a. powell, 1966. comparative 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goldin and l. a. winters (eds.), open economies: structural adjustment and agriculture. cambridge: cambridge university press. pp: 267-281. tanzi, v., 1998. corruption around the world: causes,consequences, scope and cures. imf working paper no. 98/63. unrisd, 2010. combating poverty and inequality; structural change, social policy and politics. united nations research institute for social development, palais des nations,1211 geneva 10, switzerland. world bank group, 2015. global economic prospects: having fiscal space and using it. a world bank group flagship report january. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. economy issn: 2313-8181 vol. 1, no. 2, 37-53, 2014 www.asianonlinejournals.com/index.php/economy 37 the brics and nigeria’s economic performance: a trade intensity analysis maxwell ekor 1 --oluwatosin adeniyi 2 --jimoh saka 3 1 preston consults limited, abuja, nigeria 2 department of economics, university of ibadan, nigeria 3 department of economics, lagos state university, nigeria abstract this work is licensed under a creative commons attribution 3.0 license asian online journal publishing group 1. introduction nigeria is touted as one of the countries with potentials to become one of the top economies in the world and this view is shared by proponents of the brics (brazil, russia, india, china and south africa). nigeria is even now grouped among the new emerging powers, the mint (mexico, indonesia, nigeria and turkey) countries. the robust performance of the nigerian economy as well as the goal of the government to propel the economy to become one of the top 20 in the world by the year 2020 is also boosting the profile of the economy. to this end, the relationship between nigeria and the brics has been of interest to stakeholders. for example, alao (2011) provided an insight into the relationship between nigeria and the brics (excluding south africa) from a diplomatic, trade, cultural and military relations perspectives. also, the relationship between nigeria and south africa is considered strategic for the whole of africa given the latter’s involvement in the brics. studies have dwelt on relationships among the brics, for example, naresh and alina (2011). however, one of the arguments against the brics arrangement is that rather than adopt a multilateral strategy, the individual countries are pursuing bilateral approach with different countries, including nigeria. to this end, it is opined that there is an implicit struggle by the individual brics to penetrate the nigerian economy. also, nigeria is believed to be strategic in identifying those markets, including the brics, where its bilateral interests are better served. therefore, providing evidence on the trading relationship between nigeria and the brics will shed light on the relevance of the brics economies to nigeria. following from the above, the broad objective of this study is to discuss the extent of trade intensity between nigeria and the individual brics. specifically, the study examines how shocks to nigeria’s economy affect its exports to and imports from the brics. the rest of the study is organized as follows: section 2 provides an overview of the nigerian economy while section 3 presents the methodology for estimating the trade intensity and shocks. section 4 presents the data and results while section 5 gives the policy implications of the results. 2. overview of the nigerian economy following the rebasing of the gdp in april 2014, nigeria is now the largest economy in sub-saharan africa (ssa) and 26 th in the world with an estimated nominal gdp of $509 billion as shown in figure 1. since 1999 when the study examined nigeria’s trading relationship with the individual brics (brazil, russia, india, china and south africa) by applying a combination of descriptive and econometric techniques. the findings show that nigeria’s trade intensity is highest with brazil followed by trade with india and then south africa. the outcome of the vector autoregressive analysis indicated that nigeria’s gross domestic product (gdp) reverts faster to equilibrium when there is a shock to exports to and imports from brazil, as against nigeria exports to and imports from the other brics countries. a key policy implication of the results is that of all the brics countries, brazil appears to have the most potential in terms of improving nigeria’s trade position. keywords: trade intensity, vector autoregression, impulse-response, brics, mint, policy. jel classification: c32; c51; f14. http://creativecommons.org/licenses/by/3.0/ economy, 2014, 1(2): 37-53 38 series of reforms have been initiated and implemented, average real gdp growth has been robust at over 6% as indicted in figure 2. fig-1. nigeria's real gdp size 1961-2011 (million) source: world development indicators fig-2. nigeria's real gdp growth 1961-2011 (%) source: world development indicators with respect to the structure of the economy, figure 3 shows that between 2002 and 2007, the nigerian economy was substantially agrarian with the agriculture sector contributing approximately 37% to the gdp, the service sector contributed 24% while manufacturing sector had the least contribution of 3.1% in the period. the industrial sector contribution of 39% is as a result of the inclusion of oil and gas activities in the computation of the sector’s contribution to the gdp. however, after the rebasing of the gdp in april 2014, the structure of the nigerian economy has changed has changed with the share of agricultural sector to the gdp declining from 33% to 22% while the share of the services sector has increased from 26% to about 51% of gdp. fig-3. composition of nigeria's gdp (%) source: world development indicators economy, 2014, 1(2): 37-53 39 fig-4. growth in gdp per capita and inflation source: world development indicators in terms of welfare, the purchasing power as shown in figure 4 has been eroded by rising inflation over the years. between 1961 and 2011, the inflation rate in nigeria averaged 16% while the growth in gdp per capita was 1.6%. this erosion in real income was prevalent in the mid-1990s when inflation rate spiked significantly as against growth in income that was relatively stable in the period. however, inflation rate has been at single digit in the recent times. nigeria’s integration into the global economy has been on the rise since the 1990s with the trade balance increasing relative to the gdp. figure 5 shows that between 1960 and 1989, the country’s trade balance (% of gdp) averaged 34.2%. however, in the period 1990 to 2011, it averaged 76.2%, implying more integration with the global economy. with respect to the current account balance, since 2005 nigeria has maintained a positive balance (% of gdp), meaning that inflows into the economy have been higher than the outflows. fig-5. nigeria's trade balance (% of gdp) source: world development indicators fig-6. nigeria's current account balance (% of gdp) source: world development indicators economy, 2014, 1(2): 37-53 40 3. methodology 3.1. descriptive analysis in line with studies in the literature, e.g., oehler-şincai (2011) the first objective of the study is to estimate the level of trade intensity between nigeria and the individual brics. the trade intensity between exporter i and importer j is defined as: trade intensity (ti) = (1) where = country exports to country = country total exports = world exports to country = total world exports. an index above one indicates larger exports from country i to country j than would be expected from country j’s importance in world trade. 3.2. estimation technique the estimation approach for the study is the hjalmarsson and österholm (2007) 1 multivariate vector autoregressive (var) cointegration technique which assumes that all the variables are endogenous. a var with p lags is stated in the form below; tptpttt yayayavy   ...2211 (2) where ty is a k × 1 vector of endogenous variables, v is k × 1 vector of parameters, paa 1 are k × k matrices of parameters, and t is k × 1 vector of disturbance terms. the var is used when there is no cointegration among the variables and it is estimated using time series that have been transformed to their stationary values. however, if evidence of cointegration exists, the vector error correction (vecm) is estimated. the number of cointegrating vectors is determined using the trace test and the maximum-eigenvalue test. therefore, we estimate the following equation; ),( ,, tttt infimfiextigdp  (3) where; gdpt = nigeria’s gross domestic product extit = nigeria’s exports to each of the individual brics imfit = nigeria’s imports from each of the brics inft = nigeria’s africa’s domestic inflation rate given that the main limitation of the var/vecm model is the lack of a strong theoretical basis for estimated coefficients, the study will focus on discussing the impulse response and the variance decomposition analyses. however, before estimating equation 3, the augmented dickey–fuller (adf) test will be used to test the time series properties of the selected variables while appropriate lag length will be determined using the relevant criteria such as the akaike information criterion [aic] and the bayesian information criterion [bic]. 3.3. data type and source annual time series data from 1995 to 2011 is used to estimate the trade intensity index between nigeria and each of the brics. in order to have sufficient data points for the empirical analysis, quarterly data between 2005q1 and 2012q1 is applied. the sources of the data include unctad – for the exports and imports variables, while the gdp and inflation rates were sourced from the central bank of nigeria statistical bulletins. 4. data presentation trade flows between nigeria and the brics the trade flows between nigeria and the individual brics between 1995 and 2011 is depicted in figures 7 to 11. specifically, and as shown in figure 7, brazil recorded an average $2,156.9 million trade deficit with nigeria in the period given that its exports to nigeria averaged $703.4 million while its imports from nigeria averaged $2, 860.4 million. figure 8 shows that russia maintained trade surplus with nigeria as its exports averaged $109.5 million and imports $6.3 million, implying that the country maintained an average trade surplus of $103.2 million with nigeria in the period. the trade flow between india and nigeria as shown in figure 9 indicates that apart from 2004 and 2005 when india recorded positive trade balance with nigeria, all other years were negative. overall, india’s exports to nigeria averaged $801.9 million in the review period while imports were $3,939.1 million, bringing the trade deficit to an average of $3,137.2 million. the trade flow between china and nigeria as shown in figure 10 indicates that the asian country recorded trade surplus with nigeria in the review period. china’s exports to nigeria and imports from nigeria averaged $2.6 billion and $404.7 million respectively between 1995 and 2011, resulting in a trade surplus of $2.2 billion in the period. south africa’s trade flows with nigeria as shown in figure 11 indicates that total exports to nigeria averaged $390.3 million while imports were $885.4 million, thereby giving a trade deficit of $495.1 million. 1 cited in hjalmarsson and österholm, (2007). economy, 2014, 1(2): 37-53 41 the trade intensity analysis as shown in figure 12 indicates that between 1995 and 2011, nigeria’s trade intensity was highest with india, followed by trade with brazil and then with south africa. the intensity index with china and russia are less than 1 but was lowest with russia. this implies that among the brics, russia was the smallest trading partner with nigeria in the period 1995 – 2011. fig-7. nigeria brazil trade balance source: unctad and authors estimations fig-8. nigeria russia trade balance source: unctad and authors estimations fig-9. nigeria india trade balance source: unctad and authors estimations fig-10. nigeria china trade balance source: unctad and authors estimations economy, 2014, 1(2): 37-53 42 fig-11. nigeria s/africa trade balance fig-12. nigeria brics trade intensity source: unctad and authors estimations source: unctad and authors estimations 5. empirical results in this section, attempt is made to provide empirical support for the trading relationship between nigeria and the individual brics using the traditional var technique, although some studies, for example mustafa and kabundi (2011) used the global var. the analysis focuses on nigeria and brazil, nigeria and china and then nigeria and south africa, all between 2005q1 and 2012q1. however, the unavailability of data for russia and india means that both countries are omitted from the analysis. 5.1. nigeria and brazil 5.1.1. unit root, lag length and cointegration table 1 shows the results of the test for time series properties of the variables using the augmented dicker fuller (adf) test. the outcome indicates that all the indicators, gross domestic product (gdp), nigeria’s exports to brazil (extbr), nigeria’s imports from brazil (imfbr) and nigeria’s inflation rate (inf) are i (1) series as they are stationary after first differencing. table-1. augmented dickey fuller test p-value at level p-value at first difference gdp 0.7576 0.0000 extbr 0.3715 0.0000 imfbr 0.7594 0.0000 inf 0.4866 0.0158 source: authors’ estimations in order to proceed to ascertaining if there are cointegrating vectors in the equation, we first choose the appropriate lag length using the akaike information criterion (aic), the schwarz bayesian criterion (sbic), and the hannan-quinn criterion (hqc). therefore, table 2 provides that the appropriate lag length is 2 as suggested by the aic and hqc criterion. table-2. lag length selection lags loglik p(lr) aic bic hqc 1 44.0471 -1.9237 -0.9486* -1.6533 2 67.1352 0.0000 -2.4908* -0.7356 -2.0040* note: aic = akaike criterion, sbic = schwarz bayesian criterion and hqc = hannan-quinn criterion. the result of the johansen cointegration test as shown in table 3 indicates that using the eigenvalue and trace tests, there exist at least one cointegrating vector in the equation. therefore, the vector error correction model is estimated prior to using the impulse response analysis to ascertain how nigeria’s gdp responds to shocks in exports to and imports from brazil. table-3. johansen co-integration test rank eigenvalue trace test p-value 0 0.8755 108.7700 0.0000 1 0.7259 56.6790 0.0000 2 0.5107 24.3210 0.0014 3 0.2274 6.4510 0.0111 source: authors’ estimations 5.1.2. impulse response analysis the response of nigeria’s gdp to a one standard error shock to exports to brazil is depicted in figure 13 and the gdp responds positively in q1, moderates afterwards and was negative in q4. following from this, the response economy, 2014, 1(2): 37-53 43 gets positive but unstable until the effect gets flat from q10. on the contrary, the response of gdp to a shock in imports from brazil as shown in figure 14 indicates that the effect of the response was mixed in the initial quarters. while the response was positive and sharp between q1 and q2, the response in q3 was negative before becoming positive again in q4 and then dies out from q5. when compared with the response to a shock to exports to brazil, it means that the gdp reverts faster to equilibrium when there is a shock to imports from brazil. when emphasis is placed on how nigeria’s exports to brazil respond to a one standard error shock to the gdp, figure 15 shows that the response declined in q1 and eventually dies out from q10. similarly, the response of nigeria’s imports from brazil to a one standard error shock to the gdp as shown in figure 16 also dies out from q10 after declining in q1 and also negative in q2. the response of nigeria’s gdp to a one standard error shock to the domestic inflation rate shows that the initial response is sharp and negative between q1 and q3 before becoming relatively stable, although still negative. this negative response of the gdp to a shock to inflation, however, becomes flat from q10 and remained so throughout the period. fig-13. response of gdp to shock in exports to brazil fig-14. response of gdp to shock in imports from brazil fig-15. response of exports to brazil_to a shock in gdp fig-16. response of imports from brazil_to a shock in gdp fig-17. response of gdp to a shock in domestic inflation 5.1.3. variance decomposition analysis the objective of the variance decomposition analysis is to provide the extent to which the variation in a particular variable is explained by the other variables in the equation. table 1 in appendix 2 a shows that on average 87% of the variation in nigeria’s gdp is explained by own effect, followed by imports from brazil (9.2%), exports to brazil (2.9%), while inflation rate explains the least average variation of approximately 0.7% of the gdp. similarly, table 2 indicates that own effect explains the highest variation of 89% in nigeria’s exports to brazil followed by inflation (7%), imports from brazil (2.3%), while the least variation of 2.1% is explained by the gdp. also, own effect explains the highest average variation of 74% in imports from brazil while gdp explains 14.8%, followed by exports to brazil (9.1%), while inflation explains the least average variation of 1.8%. with respect to the level of variation in the domestic inflation rate, table 4 explains that own effect is responsible for average 67% while exports to brazil is responsible for 32%, followed by imports from brazil (1.2%) and gdp (0.09%). 2 it is noteworthy that all the variance decomposition analysis (vdcs) results are housed in the appendix to the paper in order to conserve space. in other words, the vdcs associated with the bilateral trade flows between nigeria and brazil, nigeria and china as well as nigeria and south africa are located tables 1 to 4 in appendix a, b and c respectively. economy, 2014, 1(2): 37-53 44 5.1.4. diagnostic tests diagnostic tests are conducted in order to provide validation to the results of the trading relationship between nigeria and brazil. the results as shown in table 4 below indicate that the errors are normally distributed while there is no evidence of the presence of autocorrelation and heteroskedasticity. table-4. post estimation tests source: authors’ estimates 5.2. nigeria and china 5.2.1. unit root, lag length and cointegration table 5 shows that in addition to the gross domestic product and inflation rate that are stationary after first differencing, nigeria’s exports to china (extch) and imports from china (imfch) are also i (1) series and are appropriate to be included in the var estimation. table-5. stationarity test p-value at level p-value at first difference gdp 0.7576 0.0000 extch 0.6504 0.0000 imfch 0.5177 0.0000 inf 0.4866 0.0158 source: authors’ estimates in addition to testing for the time series properties of the variables, table 6 shows that the lag length selection of 2 is the appropriate level as suggested by the akaike criterion and the hannan-quinn criterion. table-6. lag length selection lags loglik p(lr) aic bic hqc 1 30.3923 -0.8314 0.1437* -0.5609 2 53.9310 0.0000 -1.4345* 0.3207 -0.9476* note: aic = akaike criterion, bic = schwarz bayesian criterion and hqc = hannan-quinn criterion. from the results of the johansen cointegration test in table 7, at least one cointegrating vector is present in the equation using the eigenvalue and trace tests. this means that we estimate the vecm with the aim of ascertaining the impulse response and error variance decomposition. table-7. johansen co-integration test rank eigenvalue trace test p-value 0 0.8362 89.0660 0.0000 1 0.5592 43.8410 0.0005 2 0.4411 23.3640 0.0021 3 0.2973 8.8198 0.0030 source: authors’ estimations 5.2.2. impulse response analysis the impulse response analysis for nigeria’s gdp and exports to china is shown in figure 18. the response of the gdp to a shock in exports to china is positive in the initial quarters but by q4 the response becomes negative. although this improved by q5, the effect was flat from q9 and remained so afterwards. when the impulse response analysis is reversed, that is, considering the response of nigeria’s exports to china to a one standard error shock to gdp, figure 19 shows that the unstable response between q1 and q4 gave way for stability, with the effect remaining flat and positive from q5. the response of the gdp to a one standard error shock in imports from china as shown in figure 20 depicts that the effect dies out from q6 after the sharp positive response in q1 and the negative response between q3 and q4. again, the reversal of the impulse response analysis as shown in figure 21 indicates that in the event of a shock to the gdp, the response of imports from china is a sharp decline from the positive level in q1 to a negative response in q2. the response improved between q3 and q4 and then dies out from q6. with respect to the response of nigeria’s gdp to a one standard error shock to the domestic inflation rate, figure 22 shows that the response is a sharp negative decline between q1 and q5 before becoming flat for the rest of the period from q6. null hypothesis p-value normality error is normally distributed 0.6231 autocorrelation autocorrelation not present 0.8560 heteroskedasticity no presence of heteroskedasticity 0.2156 economy, 2014, 1(2): 37-53 45 fig-18. response of gdp to shock in exports to china fig-19. response of gdp to shock in imports from china fig-20.response of exports to china_to a shock in gdp fig-21.response of imports from china_to a shock in gdp fig-22.response of gdp to a shock in domestic inflation 5.2.3. variance decomposition analysis the results of the variance decomposition analysis for the trading relationship between nigeria and china are provided in appendix b. table 1 show that own effect explains the highest variation of 81% in nigeria’s gdp while inflation rate explains the second highest variation of 9%. imports from china explain 8.8% in the variation in the gdp while exports to china explain the least variation of 1.2% in the gdp. the results of the variance decomposition for nigeria’s exports to china is shown in table 2 and indicates that own effect explains 81% of the variation followed by the inflation rate and then the gdp. imports from china explain the least variation in nigeria’s exports to china. also, table 3 shows that the gdp explains the highest variation of 43% in nigeria’s imports from china followed by own effect of 40% and then inflation rate with approximately 11%. exports to china explain the least variation of 6% in nigeria’s imports from china. the highest variation in the domestic inflation rate of 94% is explained by own shock as shown in table 4, while exports to china is responsible for 3% of the variation in domestic inflation. the gdp and imports from china are responsible for 2% and 0.6% of the variation in nigeria’s domestic inflation rate in that order. 5.2.4. diagnostic tests in order to provide some evidence of validity for the results of the trading relationship between nigeria and china, the combined residual plot shown in figure 23 indicates that the residuals are stationary. this suggests that the results obtained are valid. economy, 2014, 1(2): 37-53 46 figure-23. combined residual plot in addition to the combined plots, table 8 shows the results of other diagnostic tests and indicates that the errors are normally distributed, while we also fail to reject the null hypotheses of no presence of autocorrelation and heteroskedasticity. table-8. post estimation tests source: authors’ estimations 5.3. nigeria and south africa 5.3.1. unit root, lag length and cointegration table 9 shows that nigeria’s exports to south africa (extsa) and imports from south africa (imfsa) have unit root at level before becoming stationary after first differencing, making them i (1) series alongside gdp and inflation. in addition, table 10 shows that all the selection lag length selection criteria indicate that 1 is the appropriate lag length. table-9. augmented dickey fuller test p-value at level p-value at first difference gdp 0.7576 0.0000 extsa 0.1060 0.0000 imfsa 0.7985 0.0000 inf 0.4866 0.0158 source: authors’ estimations table-10. lag length selection lags loglik p(lr) aic bic hqc 1 27.1746 -0.5739* 0.4011* -0.3035* 2 36.9062 0.2454 -0.0725 1.6826 0.4143 note: aic = akaike criterion, bic = schwarz bayesian criterion and hqc = hannan-quinn criterion the results for the eigenvalue and trace tests as reported in table 11 indicate that there exists at least one cointegrating vector in the equation. this implies that the vector autoregressive model can be estimated with the aim of tracing out the response of nigeria’s gdp to shocks to its exports to south africa, its imports from south africa as well as the domestic inflation rate. following from this, the variance decomposition analysis is also carried out. table-11. johansen co-integration test rank eigenvalue trace test p-value 0 0.85098 98.7520 0.0000 1 0.60524 49.2560 0.0000 2 0.53278 25.0900 0.0010 3 0.18456 5.3048 0.0213 source: authors’ estimations 5.3.2. impulse response analysis the response of nigeria’ gdp to a one standard error shock to exports to south africa is depicted in figure 24. the response between q1 and q6 was unstable, fluctuating in the positive and negative regions before moderating between q7 and q10. the effect of the shock finally dies out from q11. figure 25 shows that the response of -3 -2 -1 0 1 2 3 2005 2006 2007 2008 2009 2010 2011 2012 system residuals d_l_gdp d_l_extch d_l_imfch d_l_inf null hypothesis p-value normality error is normally distributed 0.7524 autocorrelation autocorrelation not present 0.7450 heteroskedasticity no presence of heteroskedasticity 0.2405 economy, 2014, 1(2): 37-53 47 nigeria’s gdp to a shock in imports from south africa is negative in q1. although the response improved in q2, it stayed negative before becoming flat from q6. however, in the event of a shock to the gdp, nigeria’s exports to south africa as shown in figure 26 indicates a sharp decline from a positive level to negative in q2. the volatility in the response reduced from q3 before the effect finally dies out from q10. also, when a shock to gdp is considered, the response of nigeria’s imports from south africa as shown in figure 27 indicates that from a positive state in q1, the response is negative in q3 and becomes flat from q4. with respect to the response of nigeria’s gdp to a one standard error shock to the domestic inflation rate, figure 28 shows that the response is a sharp negative decline between q1 and q2 before becoming flat for the rest of the period from q4. fig-24. response of gdp to shock in exports to s/africa fig-25. response of gdp to shock in imports from s/africa fig-26. response of exports to s/africa_to a shock in gdp fig-27. response of imports from s/africa_to a shock in gdp fig-28. response of gdp to a shock in domestic inflation 5.3.3. variance decomposition analysis appendix c provides the results of the variance decomposition analysis for the trading relationship between nigeria and south africa. from table 1, own effect explains average 91% of the variation in nigeria’s gdp while import from south africa is responsible for 3.8%. in addition, exports to south africa explain 3.7% of the variation in nigeria’s gdp while inflation explains the least variation of average 1.8%. similarly, the highest variation in nigeria’s exports to south africa is explained by own shock of 93%, while gdp accounts for 5.9%. imports from south africa and the domestic inflation rate explain less than 1% of the variation in exports to south africa. also, own shock explains the highest variation of average 68% in nigeria’s imports from south africa while gdp is responsible for 17% and then exports to south africa explains 10%. the domestic inflation rate explains the least variation of 4% in nigeria’s imports from south africa. with respect to how other variables in the equation explain the variation in the domestic inflation rate, table 4 indicates that own shock accounts for approximately average 86% economy, 2014, 1(2): 37-53 48 of the variation, while imports from south africa explains 9.3% followed by gdp 1.2% and exports to south africa 0.06%. 5.3.4. diagnostic tests figure 29 is a combined residual plot for the results of the trading relationship between nigeria and south africa. given that the residuals are stationary this implies that the results obtained from the estimated model are valid. figure-29. combined residual plot table 12 also shows that the results of other diagnostic tests. from the results, while we fail to accept the null hypothesis that the errors are normally distributed, the null hypotheses of no presence of autocorrelation and heteroskedasticity are not rejected. table-12. post estimation tests source: authors’ estimations 6. policy implications of findings the findings in this study have a number of policy implications:  nigeria’s trade intensity is highest with brazil while on the average, the intensity index with brazil, india and south africa is above 1, implying that an improved relationship between the brics and nigeria will be beneficial. however, the downside and general perception is that the individual brics are pursuing a bilateral as opposed to a joint approach in their dealings with key countries in africa, including nigeria.  the finding that nigeria’s gdp reverts faster to equilibrium when there is a shock to exports to and imports from brazil further confirms the growing bilateral ties between nigeria and brazil when compared with other brics members. however, the fact that the equilibrium adjustment of nigeria’s exports to brazil and south africa is at the same period when there is a shock to the gdp also implies the growing relevance of the bilateral relationship between nigeria and south africa.  the relatively strong link between the nigerian economy and brazil is explained by the fact that apart from own effect, imports from brazil and exports to brazil are responsible for the second and third highest variations in nigeria’s gdp. similarly, the rising bilateral relevance with south africa explains why import from and exports to south africa are responsible for the second and third highest variation in nigeria’s gdp when the trading relationship between both countries is considered.  given that the gdp explains the second highest variation in nigeria’s exports to south africa, it implies that a growing nigerian economy may result in increased exports to south africa in the future. this scenario may be different for brazil and china as the inflation rate explains the second highest variation in nigeria’s exports to the two countries. in other words, nigeria may only maintain its competitiveness with increased trading with brazil and china if inflation is low and stable.  a growing nigerian economy may experience more imports from china given that the highest variation in nigeria’s imports from china is explained by the gdp.  there is no threat of imported inflation from china into nigeria given that imports from china explain the least variation in nigeria’s inflation rate. however, this threat is not misplaced in the case of south africa given that nigeria’s imports from south africa explain the second highest variation in nigeria’s inflation rate. references alao, a., 2011. nigeria and the brics: diplomatic, trade, cultural and military relations. saiia occasional paper, no. 101. hjalmarsson, e. and p. österholm, 2007. testing for cointegration using the johansen methodology when variables are near-integrated. international monetary fund working paper no. 07/141. mustafa, y. and a. kabundi, 2011. trade shocks from bric to south africa. a global var analysis. available from http://ideas.repec.org/p/rza/wpaper/250.html [accessed august 12th 2012]. -5 -4 -3 -2 -1 0 1 2 3 2005 2006 2007 2008 2009 2010 2011 2012 system residuals d_l_gdp d_l_extsa d_l_imfsa d_l_inf null hypotheses p-value normality error is normally distributed 0.0005 autocorrelation autocorrelation not present 0.6410 heteroskedasticity no presence of heteroskedasticity 0.2640 http://ideas.repec.org/p/rza/wpaper/250.html economy, 2014, 1(2): 37-53 49 naresh, k. and f. alina, 2011. perspective on economic growth of bric countries. a case of brazil and india. available from http://ssrn.com/abstract=1342255 [accessed august 12th 2012]. oehler-şincai, i.m., 2011. trends in trade and investment flows between the eu and the bric countries. theoretical and applied economics, 6(559): 73-112. appendix-a. nigeria and brazil table-1. decomposition of variance for nigeria’s gdp period gdp extbr imfbr inf 1 100.0000 0.0000 0.0000 0.0000 2 89.4179 2.7213 7.8572 0.0036 3 87.6937 2.6976 9.4993 0.1094 4 87.2655 2.7096 9.8340 0.1909 5 86.9457 2.9344 9.8650 0.2549 6 86.8476 2.9311 9.8847 0.3366 7 86.7060 3.0155 9.8722 0.4063 8 86.6200 3.0294 9.8678 0.4828 9 86.5124 3.0770 9.8556 0.5551 10 86.4207 3.1030 9.8468 0.6296 11 86.3213 3.1405 9.8357 0.7025 12 86.2270 3.1711 9.8258 0.7761 13 86.1302 3.2055 9.8152 0.8491 14 86.0353 3.2375 9.8051 0.9221 15 85.9396 3.2708 9.7947 0.9949 16 85.8447 3.3032 9.7845 1.0676 17 85.7497 3.3360 9.7742 1.1401 18 85.6550 3.3685 9.7641 1.2124 19 85.5605 3.4011 9.7539 1.2846 20 85.4663 3.4335 9.7437 1.3566 ave. 87.1680 2.9543 9.2140 0.6638 source: authors’ estimates table-2. decomposition of variance for nigeria’s exports to brazil period gdp extbr imfbr inf 1 2.5209 97.4791 0.0000 0.0000 2 2.3072 94.6609 1.5630 1.4688 3 2.2222 93.5693 2.2025 2.0060 4 2.2197 92.3060 2.6082 2.8661 5 2.1917 91.6461 2.6261 3.5361 6 2.1726 90.8580 2.6722 4.2971 7 2.1462 90.2341 2.6386 4.9811 8 2.1237 89.5594 2.6301 5.6869 9 2.0994 88.9435 2.6013 6.3557 10 2.0768 88.3178 2.5827 7.0226 11 2.0541 87.7199 2.5584 7.6676 12 2.0322 87.1268 2.5379 8.3031 13 2.0105 86.5511 2.5158 8.9226 14 1.9894 85.9847 2.4953 9.5305 15 1.9687 85.4317 2.4747 10.1249 16 1.9485 84.8893 2.4548 10.7075 17 1.9286 84.3584 2.4350 11.2780 18 1.9092 83.8379 2.4159 11.8371 19 1.8901 83.3280 2.3970 12.3849 20 1.8715 82.8281 2.3785 12.9219 ave. 2.0842 88.4815 2.3394 7.0949 source: authors’ estimates table-3. decomposition of variance for nigeria’s imports from brazil period gdp extbr imfbr inf 1 15.2295 4.2953 80.4752 0.0000 2 15.5809 6.6001 77.6241 0.1949 3 15.3391 7.5675 76.6307 0.4626 4 15.0705 8.9279 75.4137 0.5880 5 15.0111 8.9405 75.2391 0.8093 6 14.9279 9.2697 74.8307 0.9718 7 14.8927 9.2617 74.6782 1.1674 8 14.8420 9.3942 74.4212 1.3426 9 14.8042 9.4292 74.2384 1.5282 10 14.7606 9.5140 74.0191 1.7063 11 14.7211 9.5680 73.8238 1.8872 continue http://ssrn.com/abstract=1342255 economy, 2014, 1(2): 37-53 50 12 14.6797 9.6384 73.6170 2.0649 13 14.6398 9.6987 73.4186 2.2429 14 14.5994 9.7642 73.2172 2.4192 15 14.5596 9.8261 73.0193 2.5950 16 14.5198 9.8895 72.8211 2.7695 17 14.4804 9.9515 72.6248 2.9433 18 14.4411 10.0138 72.4291 3.1160 19 14.4021 10.0754 72.2347 3.2878 20 14.3632 10.1368 72.0412 3.4587 ave. 14.7932 9.0881 74.3409 1.7778 source: authors’ estimates table-4. decomposition of variance for nigeria’s inflation period gdp extbr imfbr inf 1 0.4019 24.7439 4.4182 70.4360 2 0.2561 31.0384 2.1466 66.5590 3 0.1805 30.4113 1.9760 67.4322 4 0.1407 31.6554 1.5213 66.6827 5 0.1129 31.5874 1.3758 66.9238 6 0.0952 31.9444 1.2136 66.7469 7 0.0819 31.9981 1.1273 66.7927 8 0.0722 32.1392 1.0474 66.7413 9 0.0645 32.1974 0.9928 66.7454 10 0.0584 32.2705 0.9451 66.7260 11 0.0533 32.3165 0.9082 66.7219 12 0.0492 32.3621 0.8764 66.7123 13 0.0456 32.3968 0.8500 66.7075 14 0.0426 32.4287 0.8271 66.7016 15 0.0400 32.4552 0.8074 66.6975 16 0.0377 32.4789 0.7900 66.6933 17 0.0357 32.4996 0.7748 66.6900 18 0.0339 32.5181 0.7612 66.6868 19 0.0323 32.5346 0.7491 66.6841 20 0.0308 32.5495 0.7382 66.6816 ave. 0.0933 31.7263 1.2423 66.9381 source: authors’ estimates appendix-b. nigeria and china table-1. decomposition of variance for nigeria’s gdp period gdp extch imfch inf 1 100.0000 0.0000 0.0000 0.0000 2 88.2973 0.2383 10.6027 0.8616 3 86.8884 0.7321 10.4724 1.9072 4 85.2235 1.2732 10.3763 3.1270 5 84.3862 1.2640 10.2663 4.0836 6 83.4597 1.2872 10.1575 5.0956 7 82.5803 1.2980 10.0475 6.0742 8 81.7039 1.3205 9.9382 7.0374 9 80.8569 1.3357 9.8327 7.9747 10 80.0239 1.3527 9.7291 8.8944 11 79.2096 1.3687 9.6276 9.7940 12 78.4118 1.3847 9.5283 10.6752 13 77.6308 1.4001 9.4311 11.5381 14 76.8655 1.4154 9.3358 12.3834 15 76.1157 1.4302 9.2424 13.2116 16 75.3809 1.4448 9.1509 14.0233 17 74.6607 1.4592 9.0612 14.8189 18 73.9546 1.4732 8.9733 15.5989 19 73.2622 1.4869 8.8871 16.3638 20 72.5831 1.5004 1.5004 17.1139 ave. 80.5748 1.2233 8.8080 9.0288 source: authors’ estimates table-2. decomposition of variance for nigeria’s exports to china period gdp extch imfch inf 1 4.3091 95.6909 0.0000 0.0000 2 6.1423 90.0867 0.4633 3.3077 3 7.2798 88.2793 0.4497 3.9913 4 7.1405 86.9989 0.4757 5.3849 5 7.1287 85.9134 0.4698 6.4881 continue economy, 2014, 1(2): 37-53 51 6 7.0459 84.8081 0.4640 7.6821 7 7.0015 83.7495 0.4592 8.7898 8 6.9407 82.7125 0.4546 9.8922 9 6.8879 81.7042 0.4500 10.9579 10 6.8339 80.7199 0.4455 12.0007 11 6.7823 79.7604 0.4411 13.0161 12 6.7315 78.8241 0.4369 14.0075 13 6.6821 77.9104 0.4327 14.9748 14 6.6338 77.0184 0.4287 15.9192 15 6.5867 76.1473 0.4247 16.8413 16 6.5406 75.2965 0.4208 17.7420 17 6.4956 74.4652 0.4171 18.6221 18 6.4516 73.6528 0.4134 19.4822 19 6.4087 72.8587 0.4097 20.3229 20 6.3666 72.0821 0.4062 21.1450 ave. 6.6195 80.9340 0.4182 12.0284 source: authors’ estimates table-3. decomposition of variance for nigeria’s imports from china period gdp extch imfch inf 1 50.4434 3.6157 45.9409 0.0000 2 47.4678 6.7550 44.6818 1.0954 3 46.2972 6.8699 44.1737 2.6592 4 45.7294 6.9525 43.4617 3.8563 5 45.2079 6.8782 42.9319 4.9820 6 44.6604 6.8203 42.3943 6.1250 7 44.1273 6.7742 41.8591 7.2395 8 43.6126 6.7268 41.3393 8.3212 9 43.1103 6.6792 40.8338 9.3766 10 42.6194 6.6333 40.3401 10.4072 11 42.1405 6.5885 39.8581 11.4129 12 41.6729 6.5448 39.3876 12.3947 13 41.2162 6.5020 38.9281 13.3537 14 40.7701 6.4603 38.4792 14.2904 15 40.3342 6.4195 38.0405 15.2058 16 39.9082 6.3796 37.6118 16.1004 17 39.4916 6.3407 37.1926 16.9751 18 39.0843 6.3025 36.7827 17.8304 19 38.6859 6.2653 36.3818 18.6671 20 38.2960 6.2288 35.9895 19.4856 ave. 42.7438 6.4369 40.3304 10.4889 source: authors’ estimates table-4. decomposition of variance for domestic inflation period gdp extch imfch inf 1 0.0000 0.8554 2.9450 96.1996 2 0.4040 3.4839 1.6270 94.4851 3 1.5604 3.3688 1.0945 93.9763 4 1.8444 3.2318 0.8708 94.0530 5 1.9818 3.1352 0.7161 94.1668 6 2.0831 3.1066 0.6105 94.1998 7 2.1636 3.0745 0.5366 94.2254 8 2.2204 3.0517 0.4812 94.2467 9 2.2648 3.0335 0.4379 94.2637 10 2.3004 3.0194 0.4033 94.2768 11 2.3297 3.0077 0.3750 94.2877 12 2.3540 2.9980 0.3514 94.2967 13 2.3746 2.9897 0.3314 94.3043 14 2.3922 2.9826 0.3143 94.3109 15 2.4075 2.9765 0.2994 94.3165 16 2.4209 2.9711 0.2864 94.3215 17 2.4327 2.9664 0.2750 94.3259 18 2.4432 2.9622 0.2648 94.3298 19 2.4526 2.9584 0.2557 94.3333 20 2.4611 2.9551 0.2475 94.3364 ave. 2.0446 2.9564 0.6362 94.3628 source: authors’ estimates economy, 2014, 1(2): 37-53 52 appendix-c. nigeria and south africa table-1. decomposition of variance for nigeria’s gdp period gdp extsa imfsa inf 1 100.0000 0.0000 0.0000 0.0000 2 93.9798 1.5137 4.1207 0.3857 3 92.2790 3.1688 3.1688 0.5295 4 91.4777 3.8171 3.9874 0.7177 5 91.0844 4.0233 4.0089 0.8834 6 90.8203 4.0997 4.0130 1.0670 7 90.6131 4.1212 4.0273 1.2385 8 90.4200 4.1263 4.0372 1.4165 9 90.2377 4.1220 4.0507 1.5896 10 90.0571 4.1160 4.0622 1.7647 11 89.8793 4.1083 4.0750 1.9375 12 89.7020 4.1005 4.0869 2.1106 13 89.5260 4.0924 4.0993 2.2823 14 89.3504 4.0844 4.1113 2.4538 15 89.1757 4.0764 4.1235 2.6244 16 89.0017 4.0684 4.1355 2.7944 17 88.8283 4.0604 4.1476 2.9637 18 88.6557 4.0524 4.1595 3.1324 19 88.4837 4.0445 4.1714 3.3004 20 88.3124 4.0366 4.0366 3.4677 ave. 90.5942 3.6916 3.8311 1.8330 source: authors’ estimates table-2. decomposition of variance for nigeria’s exports to south africa period gdp extsa imfsa inf 1 7.7717 92.2283 0.0000 0.0000 2 6.3879 93.3158 0.1711 0.1251 3 5.9681 93.6439 0.2557 0.1323 4 5.8135 93.7390 0.2489 0.1986 5 5.7691 93.7367 0.2654 0.2288 6 5.7437 93.7103 0.2648 0.2812 7 5.7369 93.6685 0.2741 0.3205 8 5.7301 93.6249 0.2767 0.3682 9 5.7278 93.5781 0.2833 0.4108 10 5.7243 93.5317 0.2874 0.4566 11 5.7222 93.4844 0.2930 0.5003 12 5.7196 93.4375 0.2977 0.5453 13 5.7173 93.3903 0.3029 0.5895 14 5.7149 93.3433 0.3078 0.6341 15 5.7126 93.2963 0.3129 0.6783 16 5.7102 93.2493 0.3178 0.7227 17 5.7079 93.2024 0.3228 0.7669 18 5.7055 93.1555 0.3278 0.8112 19 5.7032 93.1087 0.3328 0.8554 20 5.7008 93.0619 0.3377 0.8995 ave. 5.8744 93.3753 0.2740 0.4763 source: authors’ estimates table-3. decomposition of variance for nigeria’s imports from south africa period gdp extsa imfsa inf 1 14.5471 10.6457 74.8071 0.0000 2 18.0150 10.3120 71.0826 0.5904 3 18.1251 10.6796 70.1096 1.0858 4 18.0178 10.7389 69.6792 1.5641 5 17.9199 10.7093 69.3457 2.0251 6 17.8241 10.6659 69.0150 2.4951 7 17.7356 10.6128 68.6996 2.9521 8 17.6456 10.5592 68.3863 3.4089 9 17.5584 10.5038 68.0796 3.8581 10 17.4713 10.4493 67.7750 4.3044 11 17.3857 10.3947 67.4747 4.7449 12 17.3006 10.3409 67.1769 5.1816 13 17.2167 10.2874 66.8826 5.6133 14 17.1334 10.2346 66.5911 6.0408 15 17.0511 10.1823 66.3028 6.4638 16 16.9696 10.1306 66.0173 6.8825 17 16.8890 10.0793 65.7347 7.2970 continue economy, 2014, 1(2): 37-53 53 18 16.8091 10.0286 65.4549 7.7073 19 16.7301 9.9784 65.1780 8.1135 20 16.6518 9.9287 64.9039 8.5157 ave. 17.2499 10.3731 67.9348 4.4422 source: authors’ estimates table-4. decomposition of variance for nigeria’s inflation period gdp extsa imfsa inf 1 2.5177 0.2430 4.2599 92.9795 2 1.4792 0.1319 7.4757 90.9133 3 1.3379 0.0917 8.5252 90.0452 4 1.2731 0.0711 8.9443 89.7116 5 1.2252 0.0602 9.2017 89.5129 6 1.1951 0.0522 9.3761 89.3766 7 1.1735 0.0469 9.4989 89.2808 8 1.1574 0.0427 9.5911 89.2088 9 1.1449 0.0395 9.6625 89.6625 10 1.1349 0.0370 9.7197 89.1084 11 1.1267 0.0349 9.7664 89.0720 12 1.1199 0.0332 9.8053 89.0417 13 1.1141 0.0317 9.8381 89.0160 14 1.1092 0.0305 9.8663 88.9941 15 1.1049 0.0294 9.8906 88.9750 16 1.1012 0.0284 9.9120 88.9584 17 1.0979 0.0276 9.9308 88.9437 18 1.0950 0.0269 9.9475 88.9307 19 1.0924 0.0262 9.9624 88.9190 20 1.0900 0.0256 9.9759 88.9085 ave. 1.2345 0.0555 9.2575 85.4779 source: authors’ estimates views and opinions expressed in this article are the views and opinions of the authors, economy shall not be responsible or answerable for any loss, damage or liability etc. caused in relation to/arising out of the use of the content. 19 © 2020 by the authors; licensee asian online journal publishing group economy vol. 7, no. 1, 19-24, 2020 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2020.71.19.24 © 2019 by the authors; licensee asian online journal publishing group causality of fiscal policies and per capita income development: evidence from the nigerian economy suoye igoni1 itotenaan henry ogiri2 ( corresponding author) 1department of banking and finance university of nigeria, nsukka, nigeria. 2co-ordinator, ph.d. international collaboration postgraduate business school gregory university, uturu, nigeria. abstract the growing dependency among the working population of nigerians and basic infrastructures decay despite the upward budgetary allocation initiated to this study. the purpose of this study is to examine the response of nigerians welfare to budgetary increase. the study, therefore, measures the causality of selected fiscal policiesgovernment capital expenditure (gcx) and government recurrent expenditure (grx), and its prevailing development on per capita income (pci) development in the nigerian economy. the study employed data sourced from the central bank of nigeria over the period 1981-2016. the augmented dickey-fuller (adf) and granger causality tests were applied. the results of the adf test shown are stationary at first levels differenced. the results of the granger causality test indicate government recurrent expenditure (grx) significantly promotes per capita income (pci). the study concludes that grx constitutes a significant variables policy that predicts per capita income development. the study recommends that the federal ministry of finance provide employment and business credits assistance to reduce the level of the unemployment rate. recurrent expenditures like wages and salaries as well as transfer payments should be prompt to help invigorate small businesses in nigeria. keywords: fiscal policy, granger causality, per capita income, gcx, grx & nigeria. jel classification: fiscal policy is macroeconomic indicator, granger causality is test model, per capita income is a measurement of development, gcx is project expenditure provided in government budget, grx is recurrent expenditure salaries and administrative expenses in the budget, nigeria is the country of study. citation | suoye igoni; itotenaan henry ogiri (2020). causality of fiscal policies and per capita income development: evidence from the nigerian economy. economy, 7(1): 19-24. history: received: 7 february 2020 revised: 9 march 2020 accepted: 13 april 2020 published: 1 may 2020 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group acknowledgement: both authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ...................................................................................................................................................................................... 20 2. literature review ............................................................................................................................................................................ 20 3. methodology ..................................................................................................................................................................................... 21 4. results presentation and discussions of findings ................................................................................................................... 22 5. conclusion ......................................................................................................................................................................................... 23 6. recommendations ............................................................................................................................................................................ 23 references .............................................................................................................................................................................................. 24 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2020.71.19.24&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ https://www.asianonlinejournals.com/index.php/economy/article/view/1562 https://orcid.org/0000-0003-3749-1563 https://www.asianonlinejournals.com/index.php/economy/article/view/1562 https://orcid.org/0000-0003-3749-1563 https://www.asianonlinejournals.com/index.php/economy/article/view/1562 https://orcid.org/0000-0003-3749-1563 economy, 2020, 7(1): 19-24 20 © 2020 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study contributes to existing literature by examining the response of nigerians welfare to budgetary increase. 1. introduction the challenge of the rapid growth of the unemployment rate, the unstable balance of payment equilibrium and the poor living standard persist in nigeria. despite the lofty expectations from the fiscal policies, authorities appear no significant impact in the nigerian economy development. nigerian government through the fiscal policy in 2018 presented by his excellency, president muhammadu buhari as reported by steven (2017) in the highlights of 2018 fgn budget of consolidation presentation speech, projected revenue of ₦11.983 trillion and expected capital and recurrent expenditures of ₦2.428 trillion and ₦3.494 trillion respectively. others were debt services ₦2.014 trillion, statutory transfer of about ₦456 billion and sinking fund ₦220 billion. the problem of per capita income in comparison with developed countries despite huge budgetary allocation is still nothing to write home about. the federal government of nigeria in an attempt to control these national instabilities established ministries and departments. this serves as a regulatory agency with the responsibility to collaborate with the ministry of finance to maintain stable economic growth rate through the application of fiscal policies and improve per capita income of nigerians. fiscal policy is a vital instrument used by the government to influence and maintain a stable desired economic growth and development. economists have been well aware of its two-side effects in promoting economic growth. previous studies have found no consensus on the impact of fiscal policy on economic growth rate. the effects of fiscal policy although are confirmed as positive in most of the studies. however, the degree of such impact depends on the absorbable capacity of the host country, which consists of the class of human capital, infrastructure, financial and institutional development as well as trade policies. the attempt for considering the relationship between fiscal policy and regulations in determining the economic growth in per capita income has remained important. some economists believe that while government consumption hurts the economic growth of any economy. that is if those government investments can be considered one of its paramount beneficial factors. tsoukis and miller (2003) in their studies, include the determinant factors of economic growth as tax rate, public capital, and recurrent expenditures. the inclusions of taxes were based on the notion that the size of government is limited by the need to finance such spending. most studies have utilized aggregate measures of government size in the form of growth in government consumption as a ratio to gdp. the study by seymour and oral (1997) addresses the issue of the impact of the composition of fiscal policy on growth through the framework developed by devarajan, swaroop, and zou (1996). their analysis evaluates which categories of fiscal policy are productive, and which categories can be pruned during fiscal adjustment. according to ogbole, amadi, and essi (2011) only 14 percent contribute to gdp during deregulation than regulation periods in fiscal policies. most nigerians have doubts about full compliance with the budget. and it seems there are pockets of misappropriation. abata, kehinde, and bolarinwa (2012) were a concern for budgetary malpractices in the government sector and such employed theoretical exploration. these efforts have not yet healed the injuries of nigerians welfare. this problem of low per capita income has generated questions on whether its causes are related to overpopulation, wrong statistical information, and low level of production by the citizens or improper policies management on the side of the government. there is a serious concern to the negative turning point of the nigerian economy in these recent times. the most recent is the recession between 2016 and 2017. several researchers have variedly evaluated this problem but conflict in results prevails. in the light of the above, there is an urgent need to evaluate the extent to which these selected fiscal policies government capital expenditures, and government recurrent expenditures and how these variables promote growth rate in per capita income or support each other using recent data within nigeria. the above key issues constitute the core problem and motivation for this study. this study hypothesized that fiscal policies did not significantly direct per capita income in the nigerian economy. the study sought to answer the question: to what extent does fiscal policy significantly granger causes per capita income in the nigerian economy? to examine this question, the study intends to evaluate the causality of fiscal policies and per capita income development in the nigerian economy. 2. literature review scholars of the fiscal school of thought have been in a battle on its efficacy of a better policy for regulations. the combination of both monetary and fiscal policies for refocusing economic growth and combating distress makes it important. at the time of great depression, a good number of economists confirmed that fiscal policy vehicles played complementary roles with monetary. although, according to public interest theory analyzed by hertog (1999). the public interest theory of regulation emphasized that government policies may be efficient when market failures are present and private law offers no efficient solution. this theory assumed that market failures exist and that regulation is the most effective means of combating unbalance situations. this theory further explains that regulation can be accounted for as an efficient solution to an unbalance environment due to market failures. so, regulation is imperative when economic activities are unbalanced. an unbalance situation may result in structural unemployment which could lead to low per capita income. and to achieve a desirable per capita income, there is every need for proper regulations gears towards economic stabilization. stabilization of the trade cycle can be desirable to prevent the decline of production and employment such that different social groups are unequally affected by the economic rise and fall. the theory of unbalance as it is stated, that the trade cycle policies are put together with instruments of budgetary and monetary policies, snowdon, vane, and wynarczyk (1994). fiscal policy remains a vital instrument used by the government to influence and maintain a stable desired economic growth and development. economists have been well aware of its two-side effects in promoting economic growth. previous studies have found no consensus on the impact of fiscal policy on economic growth rate. the economy, 2020, 7(1): 19-24 21 © 2020 by the authors; licensee asian online journal publishing group effects of fiscal policy although are confirmed as positive in most of the studies. however, the degree of such impact depends on the absorbable capacity of the host country, which consists of the class of human capital, infrastructure, financial and institutional development as well as trade policies. the attempt for considering the relationship between fiscal policy and regulations in determining the economic growth in per capita income has remained important. some economists believe that while government consumption hurts the economic growth of any economy. that is if those government investments can be considered one of its paramount beneficial factors. tsoukis and miller (2003) included the determinant factors of economic growth as tax rate, public capital, and recurrent expenditures. the inclusions of taxes were based on the notion that the size of government is limited by the need to finance such spending. most studies have utilized aggregate measures of government size in the form of growth in government consumption as a ratio to gdp. 2.1. empirical review the debate on fiscal policy on nigerian per capita income development has generated a number and different opinions. the work conducted by michael and olufemi (2017) employ ols and st. louis's evaluation to examine the relative impact of fiscal policy using government expenditure has a negative and insignificant influence on gdp. again, anyalechi, onwumere, and boloupremo (2017) show no evidence of a significant impact of fiscal policies on the nigerian economy. conversely, monogbe, achugbu, and davies (2016) identify that fiscal policies regulations promote the nigerian economy process, but failed to establish the aspect of per capita income. however, victor (2017) uses a set of theoretical approaches to determine the extent of fiscal policy regulations on the inflation rate and gdp in nigeria. the results show a weak level of regulation. there was no coordination during periods of high inflation and gdp. furthermore, morakinyo, david, and alao (2018) applied the ordinary least square (ols) and vector error correction model to find out the impact of fiscal policy instruments on nigerian economic growth. the results revealed a negative relationship between recurrent expenditure and public domestic debt, while capital expenditures and external debt showed a positive long-run relationship. the study however opined for effective debt management formulations. in light of the above, it can be observed that fiscal policy is an accepted avenue to impact the nigerian economy positively. its core objective of adding value to per capita income has not been achieved. this subject matter has manifested to concerned academic debate. the few studies in nigeria reviewed here indicates a mixture of results and conclusions. these results can largely be said to have followed the same pattern. hence, the above studies were only interested in short-run relationships and lags events, and this was more reasons for employing ols, var, co-integration, and auto-regressive distributed lag (ardl). largely, these studies omit to examine the extent to which fiscal policy development promotes growth rate in per capita income. 3. methodology the study adopted the ex-post facto research design. the study employed secondary data to measure the causal impact of fiscal policies on per capita income in the nigerian economy. the fiscal policies included government capital and recurrent expenditure. the data is sourced from the central bank of nigeria (cbn) statistical bulletin (various issues) over the period 1981 to 2016. they consisted of per capita income as a proxy for gdp growth rate and also, the selected fiscal policy variables which include government capital expenditure rate, and government recurrent expenditure rate. given the objective of evaluating the interrelationship between those set of variables, the functional model is therefore stated as follows: (1) taking pci to be per capita income indicator and fiscal policies predictors such as government capital expenditure rate, and government recurrent expenditure rate, the study empirically estimate functional relationships as follows: )) ) where pci = per capita income over time. grx = government recurrent expenditure over time, t. gcx = government capital expenditure over time, t . from the theoretical standpoint, this study is designed to prove the reality or otherwise of the social welfare policy using variables from the nigerian economy. generally, the regression form, following (neter, wasseraman, & kutner, 1989), equation 1 and 2 can be rewritten in econometric form, thus: ) this equation try explained that, to achieve higher per capita income it’s the proper combination of government capital and recurrent expenditures. where all the variables are as stated above and = the constant (the value of the dependent variable when all the regressors are at zero); are coefficient of the independent variables and is the noise or error term. the model's variables of this study consisted of monetary policy as a broad dependent variable that is being influenced in the per capita income, which serves as independent variables. the dependent variables of this study consist of the sustainable economic development of the central bank of nigeria and serve as the proxy for per capita income. the independent variables of this study consist of government recurrent expenditure and government capital expenditure of the central bank of nigeria. they serve as the explanatory variables for the fiscal policies. the estimation procedure for this work followed granger causality, inferencestest of hypothesis and diagnostic/reliability tests considerations. these sets of tests are designed to validate the goodness of the data sets for unit root to be stationary at their particular orders. the traditional (dickey & fuller, 1976) test is adopted to show the unit root properties of the series following equation specified. economy, 2020, 7(1): 19-24 22 © 2020 by the authors; licensee asian online journal publishing group δyt= β1 + β2t +δyt-1 + αi  m t 1 δyt-1 + εt this is teat for stationary. both the dependent variable (pci), and independent variables of (gcx), (grx) are subjected for test to avoid spurious data information. (4) where the test is for 3.1. granger causality representation after establishing a possible causal relationship through the granger causality model will be used to test the level of support emanating from the fiscal policies. this will follow the form specified below: for the model pci as the dependent variable: ∑ ∑ ∑ ) the model above implies that the period’s value of x being grx and gcx has an explanatory influence on the current value y being pci. all the variables are discussed above with combined modeling of the casual coefficients in the granger causality framework. the prior expectations from the model's tests of the hypotheses are given as follows: 3.2. hypothesis one ho1: there are no significant causal relationships between the per capita income and fiscal policies of government recurrent expenditure and government capital expenditure in nigeria. controlling for government recurrent expenditure and government capital expenditure as the explanatory variables of interest, the model for the hypothesis is presented thus: ) therefore the prior expectation with regards to this will be greater than zero; i.e. this equation denotes that the independent variables employ are expected to be greater than 0, i.e. positive sign, since budget provision is an incremental to achieve the desired improve of per capita income in nigeria. 4. results presentation and discussions of findings table-1. data for per capita income (pci), government recurrent expenditures (grx), government capital expenditures (gcx) in the nigerian economy for the period 1981-2016. this table is periodic information of per capita income, government capital, and recurrent expenditures rates in nigeria from 1981 to 2017. year pci grx gcx 1981 685.35 4.85 6.57 1982 692.62 5.51 6.42 1983 729.44 4.75 4.89 1984 789.3 5.83 4.1 1985 879.55 7.58 5.46 1986 872.87 7.7 8.53 1987 1270.27 15.65 6.37 1988 1635.61 19.41 8.34 1989 2460.59 25.99 15.03 1990 2955.29 36.22 24.05 1991 3367.27 38.24 28.34 1992 5542.18 53.03 39.76 1993 6960.2 136.73 54.5 1994 8974.9 89.97 70.92 1995 18595.84 127.63 121.14 1996 25277.37 124.49 212.93 1997 25603.91 158.56 269.65 1998 24198.89 178.1 309.02 1999 27757.66 449.66 498.03 2000 38555.41 461.6 239.45 2001 39131.13 579.3 438.7 2002 55400.52 696.8 321.38 2003 66245.95 984.3 241.69 2004 86219.74 1110.64 351.25 2005 106055.7 1321.23 519.47 2006 131191.7 1390.1 552.39 2007 143022.4 1589.27 759.28 2008 164055 2117.36 960.89 2009 163443.7 2127.97 1152.8 2010 349791.7 3109.44 883.87 2011 391174.5 3314.51 918.55 2012 433955.8 3325.16 874.7 2013 471456.1 3214.95 1108.39 2014 510805.4 3426.94 783.12 2015 525316.4 3831.98 818.35 2016 551511.4 4178.59 634.79 economy, 2020, 7(1): 19-24 23 © 2020 by the authors; licensee asian online journal publishing group 4.1. data analysis 4.1.1. adf unit root test results the results of the unit root test as presented in table 2. table-2. adf unit root test (summary). differenced variables adf test statistic test of critical level order of integration probability value 1% 5% 10% d(pci) -4.779108 -3.639407 -2.951125 -2.614300 1(1) 0.0005 d(grx) -4.8124255 -3.639407 -2.951125 -2.614300 1(1) 0.0004 d(gcx) -7.487938 -3.639407 -2.951125 -2.614300 1(1) 0.0000 4.2. test of hypotheses 4.2.1. test of hypothesis one ho1: there is no significant unit root between per capita income and each of the government recurrent expenditure, government capital expenditure in nigeria. ha1: there is a significant unit root between per capita income and each of the government recurrent expenditure, government capital expenditure in nigeria. in the table above the adf test statistic of pci (-4.779108), grx (-4.8124255), and gcx( -7.487938) are greater than the test critical level -2.951125, -2.951125, -2.951125 at 0.05 test critical level respectively. also, the probability values of 0.0005, 0.0004 and 0.0000 are all less than 0.05 significance levels. hence, the null hypothesis that the variables have a unit root and non-stationary is rejected at the 0.05 level of significance. this is for the fact that the augmented dickey-fuller test statistics are greater than its critical, and its probability value is less the 0.05 level of significance as stated above. thus, we can say that there exists no unit root among the variables in their first difference. 4.3. granger causality test results the results of the granger causality test as presented in table 3. table-3. granger causality test (summary). granger causality test using lag 1 ho2: fiscal policies did not significantly granger cause per capita income development in the nigerian economy. ha2: fiscal policies significantly granger cause per capita income development in the nigerian economy. from the above results in table 3, the probability values indicate no significant causal relationship between fiscal policies and per capita income. the null hypothesis is accepted concerning them, while the alternate is therefore rejected. hence government recurrent expenditure is shown to be responding and adjusting to trends in per capita income while capital expenditure operates independently. conversely, these findings could be a result of poor management of the nigerian budget. also, it could be an indication of overpopulation and unemployment causing high dependency indices resulting in the dropping of per capita income. more so, poor data management could be a factor. 5. conclusion from the findings, it can be concluded that government recurrent expenditures constitute the significant policy variables of interest to promote and manage the desired growth rate of per capita income in the nigerian economy. and government capital expenditures only cause changes to government recurrent expenditures which constitute derived effect. some factors that were considered to be responsible for these findings were lack of political will in the distribution of budgetary provisions. secondly, the upward growth of population and unemployment were also identifying as possible factors. finally, poor data management was also traced as a possible indicator. 6. recommendations in light of the above findings, the study, therefore, suggested the below recommendation: 1. nigerian federal ministry should create employment opportunities or provide credits for businesses to reduce the rate of the unemployment rate. 2. recurrent expenditures like transfer payments, salaries and wages should be promptly are paid to also help invigorate small businesses to improve the standard living of nigerians citizens. 3. those in public trust should in bide the political wellness to collate the right information and upon according without fear or favor. pairwise granger causality tests date: 09/09/18 time: 19:14 sample: 1981 2016 lags: 1 null hypothesis: obs f-statistic prob. gcx does not granger cause pci 35 20.6876 7.e-05 pci does not granger cause gcx 0.04106 0.8407 grx does not granger cause pci 35 14.0626 0.0007 pci does not granger cause grx 4.01362 0.0537 grx does not granger cause gcx 35 0.24016 0.6274 gcx does not granger cause grx 10.4680 0.0028 economy, 2020, 7(1): 19-24 24 © 2020 by the authors; licensee asian online journal publishing group references abata, m. a., kehinde, j. s., & bolarinwa, s. a. (2012). fiscal/monetary policy and economic growth in nigeria: a theoretical exploration. international journal of academic research in economics and management sciences, 1(5), 75-88. anyalechi, k. c., onwumere, j. u. j., & boloupremo, t. (2017). fiscal policy and the nigeria economy: an econometric review. international journal of business and management, 12(4), 186-196. devarajan, s., swaroop, v., & zou, h. (1996). the composition of public expenditure and economic growth. journal of monetary economics, 37(2-3), 313-344. dickey, d. a., & fuller, w. a. (1976). distribution of estimators for time series regression with a unit root. journal of american statistical association, 74(366), 427-431. hertog, j. d. (1999). 5000 general theories of regulation: economic institute/clav: utrecht university. michael, a. a., & olufemi, a. a. (2017). evaluating the relative impact of monetary and fiscal policy in nigeria using the st. louis equation. acta universitatis danubius. oeconomica, 13 (1), 40-50. monogbe, t. g., achugbu, a., & davies, n. l. (2016). fiscal policy, co-integration and economic stability in nigeria (preliminary investigation). international journal of advanced academic research/social & management sciences, 2(10), 1-16. morakinyo, f. o., david, j. o., & alao, j. a. (2018). impact of fiscal policy instrument on economic growth in nigeria. international journal of economics and financial management, 3(1), 14-29. neter, j., wasseraman, n., & kutner, m. h. (1989). applied linear regression models (4th ed.). usa: richard d. iwin inc. ogbole, o. f., amadi, s. n., & essi, i. d. (2011). fiscal policy: its impact on economic growth in nigeria 1970 to 2006. journal of economics and international finance, 3(6), 407-417. seymour, d., & oral, w. (1997). impact of government expenditures and economic growth in the oecs: a disaggregated approach. snowdon, b., vane, h. r., & wynarczyk, p. (1994). a modern guide to macroeconomics: an introduction to competing schools of thought, alder-shot. uk and brookfield, us: edward elgar. steven, a. (2017). highlights of 2018 fgn budget of consolidation presentation speech. asset management research. retrieved from: www.infocusinternational.com. tsoukis, c., & miller, n. j. (2003). public services and endogenous growth. journal of policy modeling, 25(3), 297-307. victor, o. u. (2017). monetary and fiscal policy coordination in nigeria: a set theoretic approach. academic journal of economic studies, 3(1), 48-58. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. http://www.infocusinternational.com/ 56 © 2019 by the authors; licensee asian online journal publishing group economy vol. 6, no. 2, 56-64, 2019 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2019.62.56.64 © 2019 by the authors; licensee asian online journal publishing group the application of the hassan loan in algeria: social experience and solutions ahmed ameur ameur1 djamila ahssen2 ( corresponding author) 1,2faculty of economic sciences, business and management, university of abdelhamid ben badis kharrouba, algeria. abstract in this paper we try to address the theory of the hassan loan and the extent to which this type of loan, as an islamic solution, can achieve successfully its social and economic goals in algeria. we try also to address the experience of algeria in the adoption of the hassan loan and in investing zakat1, organizing the collection of zakat funds, establishing a fund for charitable operations, and exploiting zakat in the process of good lending. we will discuss the extent to which this type of loan, as an islamic solution, can achieve successfully its social and economic goals in algeria. on the other hand, we will tackle how this experience can be a catalyst for the foundation of investment associations, the establishment of islamic banks and the preparation for the existence of islamic banking in algeria. finally, we concluded that the experience of the zakat fund encouraged muzakin and investors to deal with islamic banks and expanded the applications of good loans at islamic banks. on the other hand, we concluded that the successful operation of hassan loan projects requires good management and strict monitoring and control. keywords: hassan loan, zakat, islamic banking, algeria, social responsibility, economic development, islamic solution. jel classification: n2; l2; l11; e44; d1. citation | ahmed ameur ameur; djamila ahssen (2019). the application of the hassan loan in algeria: social experience and solutions. economy, 6(2): 56-64. history: received: 7 june 2019 revised: 16 july 2019 accepted: 20 august 2019 published: 30 september 2019 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group acknowledgement: both authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ...................................................................................................................................................................................... 57 2. the problem of unemployment and poverty in algeria ......................................................................................................... 57 3. the islamic solution ....................................................................................................................................................................... 57 4. good loan ......................................................................................................................................................................................... 58 5. the zakat fund in algeria ............................................................................................................................................................ 58 6. zakat fund investment projects .................................................................................................................................................. 60 7. control tools of fund activities.................................................................................................................................................. 62 8. procedures for obtaining financial support from the zakat fund ...................................................................................... 62 9. procedures for obtaining the loan with al baraka bank ....................................................................................................... 62 10. other projects, their support and protection ......................................................................................................................... 63 11. risks and guarantees.................................................................................................................................................................... 63 12. conclusion and recommendations............................................................................................................................................. 64 references .............................................................................................................................................................................................. 64 1 see the concept and meaning of zakat in chapter 6 page 5. http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2019.62.56.64&domain=pdf&date_stamp=2017-01-14 mailto:1ameur_ameur@yahoo.com http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ http://www.asianonlinejournals.com/index.php/economy/article/view/1030 http://www.asianonlinejournals.com/index.php/economy/article/view/1030 economy, 2019, 6(2): 56-64 57 © 2019 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study contributes to existing literature by addressing the theory of the hassan loan and the extent to which this type of loan, as an islamic solution, can achieve successfully its social and economic goals in algeria. 1. introduction social solidarity and brotherly cooperation are considered to be one of the basic features that distinguish muslim societies from others. the muslim's faith in god calls upon him to help his muslim brother with a benefit that does not seek reward or thanks. rather, his goal is higher than that; it is about seeking the pleasure of allah. since this era is witnessing a growing number of the needy and a decreasing number of benefactors and in the absence of rights and unprecedented excessive consumption of goods, it has become a necessity to launch a project that benefits the society, especially those with limited income. hence, the idea of the hassan loan in islamic jurisprudence has come into existence contrary to capitalism which is founded on the basis of interest (usury, in arabic riba). the goodly loan is “giving money to someone for the sake of getting closer to the almighty god, in a way that the recipient benefits from the money then he returns the same amount”. lending and borrowing is an old practice known to man. it exists and is available in the various banks in algeria but operates according to the traditional financial system that charges interest. as the algerian society is a muslim one, it believes in the obligation of zakat. the algeria ministry of religious affairs and awqaf has established the zakat fund to collect and distribute zakat and donations in a systematic manner to those in need and to alleviate poverty among communities. to ensure that the project would play an active role and achieve its objectives, the task of administrative supervision of funds must be entrusted to an institution characterized by trust and excellence and works in the financial field, i.e. to a bank with a stress on halal transactions. in this study, we will try to address the algerian experience in investing zakat2, organizing the collection of zakat funds, establishing a fund for charitable operations, and exploiting zakat in the process of good lending. we will discuss the extent to which this type of loan, as an islamic solution, can achieve successfully its social and economic goals in algeria. on the other hand, we will tackle how this experience can be a catalyst for the foundation of investment associations, the establishment of islamic banks and the preparation for the existence of islamic banking in algeria. 2. the problem of unemployment and poverty in algeria in the recent period, there has been a rapid increase in the number of active people due to the fact that. algeria has a large youth power. the labour force is registering a growing number of job seekers among the active class every day. however, what attracts more attention is that the majority of applicants to labour offices are young between 15 and 25 years. many of them are trying to enter the working life for the first time, especially as they lack experience and qualification which makes it difficult for them to get a job. unemployment is a social phenomenon whose major result is poverty. especially as we live in a time when money is everything, and the purely materialistic orientation dominates people's minds and crystallizes them materially as morale, ideals, values and ethics no longer have any effect. poverty and destitution are equivalents to miserable life and have devastating effects on families and even communities; and coping with them is very difficult, especially if a person is accustomed to a decent life and a respectable social status. the development of any programs and future plans to address the problem of employment is useless if there is no exact scientific crystallization of both employment and unemployment concepts and their extent. the importance of studying this issue in terms of its relevance and impact on the social construction of society that lies in social and economic aspects first and then security and health ones. 3. the islamic solution lending and borrowing is a practice that exists and is practiced by various banks in algeria but operates according to the traditional interest based financial system. as the algerian community is a muslim society, it believes in zakat. the ministry of religious affairs and awqaf in algeria has established the zakat fund to collect and distribute zakat and donations in a systematic manner to those in need and to alleviate poverty among communities. god says, "cooperate on righteousness and piety and do not cooperate in sin and transgression."[al-maida verse 2]3. this is because of the great social and humanitarian benefits that cooperation would bring such as social solidarity, interdependence, brotherhood and love. the material cooperation is the provision of zakat and charity through paying zakat and applying sharia. cooperation is a key to any problem that can happen to muslims and enables them to meet the needs of their poor and needy people, and to eliminate poverty among their societies. in algeria, the ministry of religious affairs and awqaf established the zakat fund and fundraisers worked on the three levels: the basic, the provincial and the national. one of these solutions is the application of the zakat and the ability to raise funds and distribute them systematically to those in need, to meet the needs of the poor and needy, and to eliminate poverty among societies. including that governments, through the institutions concerned, invest the funds effectively and efficiently in housing delivery and selling them to workers, who can pay the price in instalments rather than lending them with interest they call administrative costs. the sale by instalments or payment by instalments is permissible in sharia, even at prices higher than the original value. this system also applies to vehicles that governments buy and sell to workers. other solutions, for example, the establishment of awqaf institutions, through which benefactors donates types of funds as ongoing charity, that would allow them to accumulate rewards while they are alive and even after they 2 see the concept and meaning of zakat in chapter 6 page 5. 3quran economy, 2019, 6(2): 56-64 58 © 2019 by the authors; licensee asian online journal publishing group pass away. we must also know that these institutions cannot be set up in a moment and that their fruits cannot be realized overnight. islamic banks are considered part of these islamic solutions. the idea of establishing them has emerged in the islamic world mainly it focuses on accumulating savings and investing them in accordance with the islamic sharia rules, in order to achieve the best returns for owners of these banks as well as contributors and investors. it has come to face the usurious transactions that are the core of traditional western banks. these banks were originally based on the logic of good interest-free loans and have evolved into their current form. 4. good loan 4.1. definition of good loan the treatment of lending and borrowing is an old issue that has been familiar to man since his first age. and since man is a social being who cannot live alone; people were lending from each other, as they were selling, buying and exchanging goods and benefits. muslims knew the good loan (in arabic: al-qard al-hassan) by the coming of islam; it was every material thing, in cash or other forms, the muslim returns to his muslim brother without interest, seeking the reward of the hereafter. the meaning of the loan in this sense is mentioned in the holy quran six times, including what is stated in surat al-baqarah,: "fight for the sake of allah, and know that allah is hearer of knowledge." who will lend a good loan to allah? you shall return} [al-baqarah: 244-245]4. a loan5, or an advance, is that the owner parts from his money for a period of time lending it to his brother the needy, where a refund is required after a certain maturity without requiring an increase6. this concept has become known as the islamic bank's offering of a fixed amount of money to an individual or to a client, even if it is a company or a government. the lender guarantees the repayment of the good loan without any burdens or claiming for interests or return on the investment of the money or any increase of any kind, but the bank recovers the face value of the loan only (publications of the ministry, 2009)". "the concept of al-hassan loan in algeria has recently been related to the investment of money derived from the zakat of muslims, zakat al-fitr and zakat money, in the form of subsidies in support of needy borrowers. the lender here is the ministry of religious affairs and awqaf in algeria, where it deals with the "al baraka" islamic bank "(mohammed and mohammed, 2006) as the zakat funds agent in the financial (ministry of religious affairs and endowments, 2004) management. the initiative of establishing the zakat fund and initiating the work of the loan can also be credited to: 1. building the desired islamic economic system. 2. to complete the channels of legitimate financing. 3. to encourage the establishment of islamic banks in algeria and to correct the image of islamic banks in general and to close the doors on the prejudiced views. al baraka bank or other islamic banks that will be established in the future will also benefit from the adoption of al hassan loan project: 1. increase the customer base. 2. stabilize the roots of the bank in the community in which it lives and people stand with it and support it in a crisis period, especially in the circumstances of globalization where the competition intensity requires maintaining customers. 3. achieving a legitimate economic precedent. 4. increase the investment portfolios it manages and gains from them financial profits as well as moral profits, through the management of waqf funding portfolios. 4.2. documenting the good loan in order to avoid the risk of non-compliance with the borrowed money, islamic law has made the lender's money some documents in order to reassure the lender about having his money back. the documentation of the debt can be in a written form, as in the verse: (o ye who believe if you ... the martyrs if they call and do not be bored to write him small or large to it) [baqarah: 282]7. it is also possible to document the debt by witness as in the verse:(al-baqarah: 283). it is proven in the sunnah that it is not related to the condition of travelling, because it is narrated by aisha (may allaah be pleased with her)that the prophet (peace and blessings of allah be upon him) purchased food grains from a jew on credit and mortgaged his iron armour to him. and finally to document the debt by guarantee, in which someone should pay the debt of another he does not repay it. 5. the zakat fund in algeria 5.1. the definition and origin of the zakat fund in algeria a rich muslim looks at his money and his wealth as a trust that allah has entrusted to him. he should perform his right and use it in the satisfaction of allah. god urges muslims to spend their money to meet the needs of the poor and the needy. zakat is one of the pillars of islam ("those who believe and do righteous deeds and set up prayer and pay zakaah for them are rewarded by their lord and there is no fear for them nor do they grieve" (baqarah 2-aya 277)8. is the first system known to mankind to achieve care for the needy and social justice among the members of the society through their distribution of part of the wealth of the rich to the poor and the needy. it is a money obligation imposed on rich muslims and is a percentage of the muslim's money to the house of muslim money. the 4quran 5 the loan and advances are two words in tandem; just as the loan is the act of lending money to someone in condition that the borrower refunds the same sum of the money to the lender, the advance is the same. but the debtis general; it is called loan, ba′i al-salam, and ba′i al-ajel. it is ((every transaction in which one of the compensators in cash and the other is nasi′ah)). in the arabic culture, the nasi′ah is what is present while the debt is what is absent. according to the islamic law, the loan is divided into two parts: a good loan and riba loan. 6the increase of the borrower if it is not conditional, it is considered in the sharia as a matter of good judgment.» it is better for you or your best better judgment». 7quran 8quran economy, 2019, 6(2): 56-64 59 © 2019 by the authors; licensee asian online journal publishing group zakat has two types: zakat al-fitr and zakat of money. zakat al-fitr is paid in the month of ramadan and is obligatory on everyone who has his food for the day and his family′s; and its value is fixed each year, .the zakat of money is imposed on the one who owns the nisaab9 and one year has passed since this latter has been reached. zakat includes gold and silver etc. and the zakat of crops is paid when the crops are harvested without waiting for the one year to pass. zakat is the amount of 2.5% of annual savings if a certain value known as nisaab is exceeded. after a long discussion in the laboratories of researchers as well as at the level of universities and among scholars and those interested in the islamic issue, the ministry of religious affairs and awqaf in algeria, has succumbed and adopted the project of establishing the zakat fund which saw the light in 200310. the zakat fund is a religious, social and charitable institution that works to raise zakat funds from the benefactors supervised by bodies operating under the authority of the ministry of religious affairs and awqaf. the zakat fund is organized and distributed to needy muslims in algeria. the ministry of religious affairs and awqaf in algeria also supervises it by guaranteeing the legal coverage according to the law governing the mosque institution. 5.2. work and tasks of the zakat investment fund initially, the funds of the zakat fund were distributed only to the needy and needy families, whose members are unable to work such as divorced women and widows with children, the elderly people and the disabled without income or an official grant. the subsidy is provided annually, half a year or every three months. as the number of unemployed and unemployed university graduates grew and the income of the fund grew, the use of the zakat fund expanded to include the investment process. the zakat investment fund is a fund that is deducted from the zakat fund and is allocated to the lending process for certain groups of society in algeria. it is known in other islamic countries as the al-qard al-hassan fund. the creation of this fund has contributed to the fight against poverty and the absorption of unemployment, especially among the increasing number of young people, educated and uneducated. the new fund aims to exploit part of the zakat funds provided to young unemployed graduates from universities and vocational training centres on the one hand and to artisans and productive families in the labour market and other groups capable of working, such as women and young women who make houses. the establishment of the fund is in line with the principle of "we do not give him to remain poor, but to become a muzaki11(person who pays the zakat funds)". thus, the investment process of zakat funds is a noble and legitimate goal that the fund seeks to achieve. the aim is to employ the unemployed, support the young people integrating them into the professional life to realise their dreams, reduce the number of poor and turn them from recipients of zakat to muzakis. the most important feature of this fund in algeria is its applications, especially those related to supporting projects for employing youth and the other different categories of the unemployed. they complement and even match the work of youth and unemployment support agencies and others in the field funded by banks but with interest rates. 5.3. management of zakat fund the zakat fund has been entrusted to specialized competencies in the administrative and financial fields. the zakat fund is composed of three organizational management committees: the basic committee, the provincial committee and the national committee. as for the basic committee12, it will be at the level of each constituency and consists of mosque committees (the number of mosques across the entire territory of the same constituency). the mosque is the main cell in the process of sensitizing worshipers and solidarity. the committee's work is supervised by a deliberative committee composed of the chairman of the committee, the chairpersons of the mosque committees, the representatives of neighbourhood committees, representatives of the dignitaries, and representatives of the benefactors. its mission is to identify zakat beneficiaries at the level of each constituency. the provincial committee is at the level of each province and is entrusted with the final study of zakat files at the provincial level; and this stage is placed after the initial decision at the level of the basic committee. its deliberative committee consists of the chairman of the provincial commission, two highly ranked imams , the head of the province scientific council, two jurists, an accountant, an economist, a social assistant, the heads of the grassroots bodies. finally, the national committee which is the supreme council of the zakat fund, which consists of the president of the council, the heads of the zakat fund's state committees. it consists of the shariah board members, the supreme islamic council representative, two representatives of the ministries involved in the fund, the senior benefactors. its main tasks are summarized as the organizing body for everything related to the zakat fund in algeria. 5.4. collection of zakat funds and its disbursement in algeria zakat funds can be collected according to different regulations. in fact, the person who pays zakat or the donor can obtain them at the post offices using the postal hawala system across the entire national territory. the full name should be written completely or writing expressions like “zakat funder, charitable”; in addition to that, is added the amount paid written both in numbers and letters and stating the zakat fund account number. he can likewise use the cheque to write the amount paid in both numbers and letters and then pay through the post office, where it referred the zakat fund account number corresponding to each state. furthermore, there is a third method used to collect zakat funds, which is through boxes placed in mosques, and this is to facilitate the payment process forthe citizen who unable pay through post offices. he/ or she then receives from the imam of the mosque 9 the nisaab (quorum) is the amount of money specified by sharia law, which then becomes obligatory for the believer who has to pay zakaat for a sum greater than this sum, which he has had for a year. 10 the zakat fund was established on the basis of the provisions of executive decree no. 91-81 dated 7 th of ramadan 1411h corresponding to 23 march 1991 concerning the building, organization, administration and assignment of the mosque, in particular articles15 and 22 , as well as the provisions of executive decree no. 91-82 of 7 ramadan 1411 h corresponding to march 23, 1991, which includes the establishment of the mosque institution, especially article 3. 11slogan of the zakat fund 12the administrative division in algeria is a group of 48 provinces, headed by the president appointed by the president of the republic. each province consists of a group of constituencies; each headed by a president, and consists of a group of municipalities. the municipality is the basal cell of the republic and is governed by a mayor (elected). economy, 2019, 6(2): 56-64 60 © 2019 by the authors; licensee asian online journal publishing group (the leader of the prayer)a voucher indicating that he paid his zakat through these funding boxes, and he can assist the body responsible of the censorship by sending a copy of it to the local, regional, or national committee. in addition, expatriates abroad can pay their zakat on the basis of transferring the zakat to the national fund of zakat fund by means of international transfer or any other, where it should include name, the national id number of zakat fund (10-4780) and zakat amount in both letters and numbers. the method of its distribution is that the mosque committees enumerate the people who are both in the poor and the needy category (the enumeration process is done on the basis of families and not individuals) in the neighbourhoods surrounding the mosque based on a specific form supported by documents showing the social status of the family. the lists shall be then sent to the local committee at the level of the daïra13to be ordered and approved. finally, the files shall be sent to the state committee of the zakat fund for the disbursement of the funds by means of postal remittances or checks. in regards to zakat funds collected; they are disbursed according to the final deliberations of the state committee. a part of them goes to poor families; and this is according to priority by giving them a sum of money annually, every six or three months. another part is directed towards investing in favour of the poor where a portion of zakat funds is allocated for investment, such as the interest-free loan (al hassan loan) method or the method of purchasing working tools/ materials which young people will benefit from in small and micro enterprises, similarly is the case involving conventional banks. there is a possibility of setting two different cases in relation to the disbursement of zakat funds collected according to certain ratios: case 1: if the state outcome does not exceed five million algerian dinar of zakat funds, what equals 87.5% is disbursed to the poor families and those in need; whereas, the remaining part i.e. (12.5%) is allocated to cover the activities of the zakat funds collection. case 2: if the state revenues exceed 5 million algerian dinar, 50% of the collected zakat funds will be distributed to the poor families and those in need (the amounts are fixed).the 37.5% will be distributed in the form of interest-free loans to individuals who are able to work. the remaining amount (12.5%) will be allocated to cover the activities of the fund, which are distributed as follows:  4.5% to cover the costs of the activities of the state committee.  6% to cover the costs of the activities of the local committees.  2% is waged to the national account to cover the activities of the fund at the national level. 6. zakat fund investment projects the zakat fund has been established in algeria to serve as one of the many other tributaries fighting unemployment and supporting youth employment projects. what is most importantly distinguishing it from others of its kind in algeria is its applications, especially those related to supporting youth employment projects and the unemployed under all their different categories. these applications complement and even match the work of youth and unemployment support agencies and others that have been operating in the field for years and are funded by banks but with interest. this support and funding include almost all state-supported projects supported by the national agency for employment and youth support (ansej) youth and the national unemployment insurance fund (cnac) to support the older category of unemployed young people to acquire equipment and tools or to establish small enterprises and microenterprises. we remark the following projects: 1. youth support and employment projects. 2. projects of the national unemployment insurance fund. 3. micro-projects. 4. projects secured by the loan guarantee fund (associated with the ministry of small and medium enterprises). 5. assisting institutions that are able to recover. 6. establishment of joint ventures between the interest-free loan fund al-qard and the bank (al baraka bank, which was adopted as an agent). here after are the statistics on the zakat development table 1. table-1.the development of the national income of zakat in algeria between 2003 and 2014. year income of zakat log(zakat) year income of zakat log(zakat) 2003 56122571,95 7,75 2009 936683237,40 8,97 2004 239853996,00 8,38 2010 899192808,60 8,95 2005 508656551,80 8,71 2011 1179063794,00 9,07 2006 686440187,50 8,84 2012 1306642512,00 9,12 2007 732514125,30 8,86 2013 1294152265,00 9,11 2008 654451244,60 8,82 2014 1318759818,00 9,12 source: development and growth of zakat fund, ministry of religious affairs and endowments of algeria. https://www.marw.dz/index.php/2015-03-24-13-19-40/39-2010-01-06-09-43-18.html below the graph corresponding to the data of the zakat (in log) figure 1. 13géographocaladministrative division after the wilaya in algeria economy, 2019, 6(2): 56-64 61 © 2019 by the authors; licensee asian online journal publishing group figure-1. evolution of the national income of zakat (in log) between 2003 and 2014. source: from the researcher's creation according to the table 1. the increase in the national income of zakat has led to the growing number of poor families and those in need in which the fund is entitled zakat al-fitr (mrae, 2004) with the financing of an important number of open projects and the establishment of small and micro enterprises. the following statistics are presented in table 2. table-2. evolution of the national outcome of zakat and other parameter between 2003 and 2008 statement / year 2003 2004 2005 2006 2007 8002 amount of fund zakat (million dza) 57,789 200,5 367,187 483,584 566,814 the proceeds of zakat al fitr 50 114,986 257,155 320,611 232,316 number of projects of interest-free loan 242 600 1214 1350 number of families benefiting from zakat 21000 35500 53500 62500 70000 number of families benefiting from zakat al –fitr 30000 46000 102862 128244 116158 number of open projects 652 622 758 4468 788 4688 the corresponding descriptive diagrams are presented as follows: 1. evolution of the national outcome of zakat (zakat money and value of zakat al fitr) between 2003 and 2008 figure 2. figure-2. evolution of the national outcome of zakat and zakat al fitr between 2003 and 2008 source: from the researcher's creation according to the data of table 2. 2. development of the number of families benefiting from the zakat fund (zakat of zakat and zakat al fitr) figure 3. figure-3. evolution of the number of families benefiting from zakat between 2003 and 2008. source: from the researcher's creation according to the table 2. 3. development of the number of open projects funded by the investment fund in the zakat according to the table 1, figure 4. economy, 2019, 6(2): 56-64 62 © 2019 by the authors; licensee asian online journal publishing group figure-4. evolution of the number of open projects funded by the investment fund in the zakat between 2003 and 2008. source: from the researcher's creation according to the table 2. 7. control tools of fund activities every citizen and each body have the right to consult the total income from the zakat collection and how it was distributed. therefore, the administrative apparatus of the zakat fund has established a set of different adopted instruments which enable it to control the inflow and out flow activities of funds.  detailed reports which are published by all media.  setting detailed lists at the disposal of any body or association to consultthe channels of disbursement of zakat.  publication of the figures in detail on the ministry's website.  adopting the zakat fund newsletter as an informative tool that is accessible to all parties and individuals.  the muzaki sends donation or charity voucher to the administrative body of the fund to control the collection of zakat, or sending copies to the committees of various deliberations at all levels. 8. procedures for obtaining financial support from the zakat fund the interest-free loan has become one of the channels providing finances for low-income groups which have limited income due to lack of adequate guarantees. moreover, the importance of the interest-free loan in islam and its reward set by allah, has received a great response and this is because it provides its demanders with possible solutions to issues one has in life; but more than that,it is good for him that the great reward and its multiplication by almighty allah. thus, we find no trace or impact of this on the modest islamic banking culture in algeria today, although it can be classified as a social responsibility, and it is considered one of the tributaries that islam has urged to bridge the gap between rich and poor and transfer surplus wealth to muslims in need and expand them. it also contributes to increased productivity in the society. to obtain an interest-free loan from the zakat investment fund, the ministry of awqaf and religious affairs set a series of administrative procedures. the loan applicant must submit a request for benefit to the zakat fund's local committee for subsequent check according to the following criteria: 1. eligibility of the loan applicant, and this is done at the level of zakat units in mosques in cooperation with the neighbourhood committees. 2. the zakat fund's state committee shall arrange the applications received according to priority in the accrual on the basis of the most affected and the most beneficial (high profitability, greater employment). 3. preparation of the list of eligible applicants, one specific directed to the national agency for youth support and employment and another specific one to the national fund for unemployment insurance to invite the beneficiaries in order to call them to prepare the application file in accordance with the procedures in force. 4. preparation of a single list of eligible beneficiaries with the national agency for the support and employment of youth and beneficiaries with the national unemployment insurance fund approved by the state committee to al baraka bank to determine the final possibility of financing the projects or not according to the criteria that it usually adopted. 5. prepare a list of beneficiaries under the framework of microfinance and garmin and direct them to al baraka bank to call them to form a file to benefit in accordance with the procedures in force. 9. procedures for obtaining the loan with al baraka bank the application of al-qard al-hasan has expanded to the level of the islamic bank "al-baraka" and has highlighted the real role of the islamic bank as a charity, even if the the social aspect takes on a great dimension in its function. helping to minimize the risks to which zakat fund and al baraka islamic bank could be exposed. the initiative to create the zakat fund was taken by the ministry of religious affairs and endowments to start working with good credit to help young people who wish to create their small or micro enterprise to contribute to the establishment of rules integration into the world of business and employment, including job creation, to reduce unemployment and fight poverty. you will find below how to obtain the loan and the procedures to follow to obtain it. the application of al-qard al-hasan has expanded to the level of the islamic bank "al-baraka" and has highlighted the real role of the islamic bank as a charity, even if the the social aspect takes on a great dimension in its function. helping to minimize the risks to which zakat fund and al baraka islamic bank could be exposed. the initiative to create the zakat fund was taken by the ministry of religious affairs and endowments to start working with good credit to help young people who wish to create their small or micro enterprise to contribute to the establishment of rules integration into the world of business and employment, including job creation, to reduce unemployment and fight poverty. you will find below how to obtain the loan and the procedures to follow to obtain it. economy, 2019, 6(2): 56-64 63 © 2019 by the authors; licensee asian online journal publishing group 9.1. procedures for funding the youth employment project for this type of loan, young people can ask for financing from al baraka bank, following the following steps:al baraka bank shall provide a certificate to the young individual proving that it has a balance of its personal contribution in whole or in part and the required insurance premium, the costs of studying the file as the case may be, or the amount required in case of mixed financing (between him and the agency) on the basis of interest-free loan contract.  the young individual shall complete the procedures for obtaining the qualification certificate of the national agency for youth support and employment in his city.  the young individual shall go to al baraka bank to complete the procedures for obtaining the supplementary loan required according to the case, and this after obtaining the qualification certificate from the national agency for youth support and employment. 9.2. procedures for applying for funding with the national unemployment insurance fund this type of loan belongs to a certain group of people in the community and is carried out according to the following procedures:  al baraka bank for youth shall provide a certificate proving that it has a balance in the amount of its personal contribution in whole or in part and the required insurance premium, the costs of studying the file as the case may be, or an obligation to pay the conditional entitlements from the national unemployment insurance fund.  the young person shall complete the procedures for obtaining the qualification certificate with the national unemployment insurance fund in his / her country.  the young person shall submit to al baraka bank to complete the procedures for obtaining the supplementary loan required by the case, after obtaining the qualification certificate from the national unemployment insurance fund.  note: for cases a, b, and in exceptional cases, the beneficiary may be entitled to supplementary subsidy from the zakat fund, in addition to the funds above, on a basis of musharaka, mudarabah, murabaha (genres of commercial activities)if the bank is unable to provide full supplementary funding. 9.3. microcredit financing procedures this type of loan is characterized by the fact that the amount of the borrower is very small compared to the aforementioned loans. the method of obtaining is according to the following steps: the beneficiary in this category is called to al baraka bank to prepare a file in accordance with the procedures followed:  the beneficiary signs the interest-free loan contract.  the bank shall pay the supplier directly without giving the money in cash to the beneficiary.  the bank may provide supplementary financing if the micro-project requires it in accordance with the procedures usually adopted. it should be noted that the beneficiaries of this funding may not be in the two previous categories, where it may include women staying at home and are able to be involved in certain activities, and may include as well the category of disabled people who are able to work. however, the projects funded in this framework do not exceed higher funding determined by the national zakat fund committee. 10. other projects, their support and protection there are other projects different from those mentioned above, which are: i. mutual projects these projects consist of partnership between al baraka bank and zakat investment fund, based on studies conducted by the bank to determine the size and quality of projects to be established in each state, which are usually intended to employ zakat beneficiaries who are able to work. these projects shall be subject to separate agreements between the bank and the ministry whenever necessary, and shall develop as the fund proceeds. ii. support for projects secured by the sme loan guarantee fund it is construed through finding means to support these projects, which are guaranteed by this fund, through subsequent procedures that may be interpreted in the form of an agreement between the ministry and this fund, but currently the cases are handled according to their status and in cooperation with al baraka bank, which is considered a member of this guarantee loan fund for small and medium enterprises (masdour, 2009). 11. risks and guarantees free-interest loan represents a risk that has no guaranteed consequences either in terms of the use of funds without an appropriate outcome or jeopardizing the bank's credibility to the risk of non-payment of some loans as the beneficiaries believe that it is zakat and therefore right, they do not have to return it. to mitigate the risk, we suggest the following: 1. the loan is limited under market securities. 2. the lending policy should be carefully and clearly designed to promote any personal interests or mediation and to adopt this policy on clear and explicit criteria and priorities. 3. the loan should be proceeded with an adequate guarantee that provides a limited ceiling for the size and duration of each type of loan so that the lending activity remains within the limits of generally short-term loan and in amounts that meet the purpose of lending without expansion. economy, 2019, 6(2): 56-64 64 © 2019 by the authors; licensee asian online journal publishing group meanwhile, the guarantee that can be used in securing the recovery of loan funds, it is suggested in particular, that the funds secured by a government agency, whether by litigation or legal proceedings, and that they are treated as state funds which possess quick collection and confinement, as well as taking credible guarantees from borrowers themselves : i. mortgaging the equipment, to cover one of the remaining instalments on the borrower, thereby minimizing the loss to which the fund may be exposed. ii. guarantees: the guarantor is one of the parties that is keen on the success of the project, especially if it has a place in the market, training and qualification; training, training and qualification are essential in the virtuous management of micro projects, which cannot be dispensed with. iii. joint collective insurance; joint insurance with the fund's management against various risks is an effective tool for protecting investment fund loans. iv. there is also the garmin guarantee fund; the zakat incubators, etc. 12. conclusion and recommendations zakat is a religious pillar and a financial resource that is very important in exploiting its resources and investing them socially and economically. therefore, reminding the believers of this particular pillar and urging the rich and affluent of them at every opportunity to pay and collect them through the media and all other available means will be very important. and on the other hand, to enhance the trust of the public and the benefactors in the neighbourhood committees and charities in order to achieve the purposes of islamic law as well as enhance the financial development role of charities. zakat funds will thus double, with opportunities for recreation for the poor families and thosein need. the zakat fund will also be a source of interest-free loans and support for youth and unemployed to achieve their programs. these loans, which are considered from a moral and ethical types of loans, which are a form of cooperation and sympathy originated from human instinct. it is from the material or economical perspective expected to have a tangible role in a society that attempts to apply the islamic economy despite the dominance of the physical pattern in life and the idea of riba on financial transactions. in the islamic economy, one of the main objectives of monetary policy will be to maintain the purchasing power of money. the expansion of interest-free loans will contribute to achieving this goal because the investor will be able to postpone the use of its money in the future without fear of its low value. an interest-free loan -with the stability of the purchasing power of money can additionally be the preferred means of saving for a saver who does not wish to bear the risk of investing. as with tight investment opportunities, el hassan (interest-free) loan is a key area for channelling savings involved in correcting the recession and creating more effective demand. in the islamic economy, one of the main objectives of monetary policy will be to maintain the purchasing power of money. the expansion of good loans will contribute to achieving this goal therefore (masdour, 2009): 1. encouraging the people who pay zakat (investors) to deal with islamic banks. 2. encouraging investors in islamic banking in algeria. 3. expanding the applications of the interestfree (el hassan) loan at the level of islamic banks and highlight the real function of the islamic bank that it is not a charity, even if the social aspect has a broader perspective in its application. 4. reducing the risk that the islamic bank might come through. references masdour, f., 2009. al-qard al-hassan risk from the zakat fund and ways of covering it; dar houma. ministry of religious affairs and endowments, 2004. cooperation agreement in the field of investment of zakat funds between al baraka bank of algeria and ministry of religious affairs and endowments. mohammed, a.h. and f. mohammed, 2006. suggestions on the loan hassan available from http://www.kamalhattab.info. publications of the ministry, 2009. publications of the ministry of zakaf and religious affairs. algeria: zakat fund. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. 98 © 2020 by the authors; licensee asian online journal publishing group economy vol. 7, no. 2, 98-103, 2020 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2020.72.98.103 © 2020 by the authors; licensee asian online journal publishing group inflow and outflow of foreign direct investments in brics countries an analysis l. krishna veni siva sivani institute of management secunderabad, telangana, india. abstract foreign direct investment broadly includes any long-term investments by an entity that is not a resident of the host country. it may be in the form of inflow of fdis from other countries into the domestic economy or outflow of fdis from the domestic economy to other countries. against this backdrop, this study mainly aimed to examine the macroeconomic scenario of all brics nations in. it also intends to estimate the growth of the inflow of fdi into brics, the outflow of fdi from brics during the study period 1998-2018 using simple linear regression and to forecast the inflow and outflow of fdi in immediate future. the results reveal some interesting facts with significant variations in the key macroeconomic variables of brics like annual growth of gdp, current account deficit, rate of inflation, unemployment etc. results reveal that except india, rest of the brics countries are deriving more than 50% of the gdp from the service sector only in 2018.the findings of the study conclude that china has recorded the highest growth in terms of the inflow of fdi among the brics during the study period. but. russian federation and brazil have recorded the highest growth rates in terms of the outflow of fdis from brics during the study period .based on the regression coefficient values, projection of inflow and outflow of fdis are made, however, the projections will be accurate only when the other things remaining the same. keywords: brics, inflow of fdi, outflow of fdi, emerging economies, macroeconomic variables, descriptive statistics, simple linear equation, projections. jel classification: e27, e29, f20, f21 & f29. citation | l. krishna veni (2020). inflow and outflow of foreign direct investments in brics countries an analysis. economy, 7(2): 98-103. history: received: 19 may 2020 revised: 22 june 2020 accepted: 27 july 2020 published: 10 august 2020 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. competing interests: the author declares that there are no conflicts of interests regarding the publication of this paper. transparency: the author confirms that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ...................................................................................................................................................................................... 99 2. review of literature........................................................................................................................................................................ 99 3. research methodology ................................................................................................................................................................. 100 4. data analysis ................................................................................................................................................................................. 100 5. summary conclusions .............................................................................................................................................. 102 references.................................................................................................................................................................... 103 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2020.72.98.103&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ https://www.asianonlinejournals.com/index.php/economy/article/view/1993 https://www.asianonlinejournals.com/index.php/economy/article/view/1993 economy, 2020, 7(2): 98-103 99 © 2020 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study is important in the following lines. firstly, the research provides a broad view on recent macroeconomic scenario of brics nations to understand the comparative situation. further, the study attempts to analyse the inflow of fdis into brics and outflow of fdis from brics during a long period of 21 years, hence it will serve as literature for other individuals who are interested to analyse the fdi in both directions of fdi in the immediate future. finally, the projections made in this study help to the companies and countries to take their business decisions to some extent in immediate future, however the projections are always subjected to economic stability of the brics nations. 1. introduction foreign direct investments (fdi) are investments made by one company into another company located in another country. foreign direct investments(fdis) can be classified as inward/inflow of fdi and outward /outflow of fdi, depending on the direction of the flow of money. the inflow of fdi occurs when foreign capital is invested in local resources. the factors driving the growth of inflow of fdi include availability of inputs or factors of production at a cheaper rate, low tax rates, low interest rates and grants concessions and relaxations from the government of the host countries . other benefits of inflow of fdis include access to superior international technologies, exposure to better management and accounting practices, and improved corporate governance outward fdi, also known as direct investment abroad, it means firms in the home country expand its business to other countries in the form of investments in multinational corporations, mergers or acquisition, etc. generally, foreign investors are motivated by profits and access to natural resources available in the host country. therefore, large and growing domestic markets are likely to receive more fdi. countries with abundant natural resources such as mines, oil reserves and manpower attract the foreign investors to invest in that country. in 2001, brics countries were originally projected to be the fastest growing market economies by jim o'neill of goldman sachs. the emerging nations of brazil, russia, india, and china (brics) believed to be the future leading suppliers of manufactured goods, services, and raw materials by 2050. china and india will become the world's main suppliers of manufactured goods and services, respectively, while brazil and russia will also develop like dominant suppliers of raw materials. south africa joined the group in the year 2010, which is now referred to as brics. 2. review of literature sutirtho (2012) in her study exposes that the responsibility of ushering in a new wave of economic growth has fallen on the shoulders of the bric countries. the inward and outward fdis in any country depends upon many factors. against this backdrop, this study attempts to compare the fdi trends in bric countries over the last 10 years, to analyze the effect of government policies on foreign trade, to establish an understanding of the effect of the economic crisis on the existing fdi patterns of developing countries. further it attempts to explore the scope for changes in fdi policies of these countries in the future and predicting their possible effects. the authors believe that the analysis of this paper will serve to understand the economic growth paradigms in the bric nations and their potentially cascading effects on the future economic sustainability of the planet. vinay (2014) in his study analyzed the trend of fdi flow into the country and to find the relation between fdi, foreign institutional investment (fii) and gdp of the country. however, the analysis shows that the country is still far behind compared to countries like china. the continuous increase in fdi, allowed across the industries and sectors, has proven that foreign investors have faith in the resilience of indian markets. furthermore, the results indicate that the flow of fdi and gdp are positively correlated with each other and the country's gdp is showing a positive movement with the flow of foreign direct investment in india. the flow of fii and fdi also shows a positive correlation with each other. panigrahi and panda (2012) in their study attempt to find out the factors which are significantly related and influence the fdi inflow into china, india, and malaysia during the study period 1991 to 2010. correlation has been used to study the factors influencing fdi inflow. the study revealed that india and china are very similar, whereas in malaysia the same factors do not influence the inflow of foreign investment to the country. gdp of the country, gross capital formation, capital infrastructure, external debt, export, and import volume are the major factors that significantly influence foreign capital inflow into the two highly populated, fast growing asian countries, that is, china and india. in the case of malaysia, only domestic investment or gross domestic capital formation is significantly related to its fdi inflow anupam (2014) in his study depicts that over the past few years india’s outward foreign direct investment (ofdi) flows and stocks have increased intensely though the immense flow of ofdi from developing countries at an international level is fairly a new phenomenon. this paper analyses the impact of fdi outflows on the gdp of brics countries. the authors have applied the regression model that explains that overseas fdi does not show a significant impact on gdp. these countries are trying to make efforts to increase their gdp and fdi but due to some constraints, they are not achieving their targets. nandita (2014) attempts to empirically explore the evidence of the macroeconomic relationship between outward foreign direct investment (ofdi) and levels of domestic capital formation in the bric economies. the findings of the study reveal that ofdi has both short run and long run positive causality with domestic investment and thus figures out to be a significant factor affecting domestic investment in the bric nations. it becomes imperative, thus, that the bric countries make a special effort to encourage their ofdi through the designing of proper ofdi policies that would help stimulate heir domestic investment and economic grow throw and in the future. wladimir (2016) attempts to compare the study of outward foreign direct investment from bric countries and strategies conducted by multinational corporations (mncs) whose parent companies are based in the brics. the focus is on brazilian and indian mncs and their ofdi using as a benchmark major outcomes derived from the study of chinese and russian multinationals. to the contrary the intent is to check, against a benchmark of economy, 2020, 7(2): 98-103 100 © 2020 by the authors; licensee asian online journal publishing group mncs emerging from former centrally planned economies with a single (communist) party regime, how much the differences in brazilian and indian market economies with a democratic political regime over the past decades countervail (or not) the assumed similarities across all the brics. ramar, prabakaran, rajendran, and muthu kumaran (2019) in their study, elucidate that the fdi plays a predominant role in the improvement of the nation's growth and the global business. this paper gathers evidence through a panel exercise that actual fdi to india during the year 2017-18 fell short of its potential level. an attempt is made in this paper to know the fdi equity inflows from various countries to india. an attempt has been made by the researcher through this paper to examine the economic growth through fdi. for the analysis the statistical tools like one-way anova, k-s test has been used and the suggestions and the recommendations are based on the approach. vijayalakshmi, palanisingh, lingavel, and gurumoorthy (2019) in their study explained that fdi has become an integral part of national development strategies for almost all the nations globally. fdi in india has contributed effectively to the overall growth of the economy in recent times. the main objective of the study is to identify the factors determining in foreign direct investment in india. the data mainly based on secondary data. the collected data were analysed by using trend analysis and growth rate of the top ten sectors in india. this study also found that fdi in india has contributed effectively to the overall growth of the economy in the recent times. thus, india can grow without fdi and in fact developed without or with very little fdi. developing countries like india need substantial foreign inflows to achieve the required investment to accelerate economic growth and development. from the above review it is clear that most of the studies have confined to a short period (10 – 15 years) only and focussed either on the inflow of fdis in brics countries or outflow of fdis from fdis. however, this study tries to analyse the inflow and outflow of fdis of brics nations with the following objectives: 1. to examine the macroeconomic scenario of all brics nations. 2. to estimate the growth of the inflow of fdi into brics countries during the study period and to forecast the inflow of fdi in immediate future. 3. to estimate the growth of the outflow of fdi from brics countries during the study period and to forecast the inflow of fdi in immediate future. 3. research methodology the sample selected for this study are five emerging economies viz., brazil, russia federation, india, china, and south africa, which are popularly known as brics. the present study is exclusively based on secondary data and mainly it is carried out to examine the inflow of fdis into brics nations and outflow of fdis from brics nations. the data on inflow and outflow of fdis required for this study has been drawn from www.unctad.org and the data on macroeconomic variables of brics has been collected from https://globaledge.msu.edu/globalinsights/by/country. the inflow of fdi and outflow of fdi are considered in terms of us $ at current prices in millions for 21 years i.e., from 1998-2018. descriptive statistics, simple linear regression (y= a+bx), and forecasting technique based on regression coefficient(b) have been applied to analyse the data with the help of spss. the forecasts generated by simple linear regression method show a constant trend either increasing or decreasing indefinitely into the future. 4. data analysis initially the macro economic variables of brics in 2018 are compared across the brics nations to understand the comparative scenario in table1a. table-1a. rank in gdp out of 196 countries & among brics in 2018. country rank in gdp out of 196 countries in 2018 rank among brics brazil 7 4 russian federation 6 3 india 3 2 china 2 1 south africa 29 5 gdp is the most important macroeconomic indicator to understand the economic growth of any economy. table1a explains the ranks of gdp relating to the brics nations out of 156 countries considered in 2018 by globaledge.msu.edu. china(2nd), india(3rd), russian federation(6th), brazil(7th), and south africa(29th) ranks in the world (196 countries). however, in the same order, these countries have occupied the rank between ist to 5th positions among brics in 2018. the macroeconomic variables of brics in 2018 are represented in table1b. it reveals some interesting facts with significant variations in some of the macroeconomic variables of brics. all countries of brics are known as developing economies only except soviet russia, which is the only high income country which is in transition. being a lower middle income country among brics, india recorded significant annual growth of gdp with 6.81% in the year 2018. 2nd place has been occupied by the upper middle income country china(6.57%),whereas south africa(0.79%) remained in the bottom position, though it is a upper middle income country. in terms of per capita income(ppp) russia and china occupied the 1st and 2nd places. china has the highest external debt stock among the brics countries. india, brazil, and south africa have shown a deficit in their current account balance, whereas the remaining countries of brics like soviet russia and china have shown surplus. the rate of inflation is more than 4% in india and south africa but in china, it is 2.01% only in the year 2018. labour force has shown high figures in both highly populous countries like china and india. it is disappointing to note that the rate of unemployment is very high in south africa(28.18%) and brazil (12.07) among the brics in 2019. in value of goods and services of imports and exports also china maintained its supremacy among the brics. economy, 2020, 7(2): 98-103 101 © 2020 by the authors; licensee asian online journal publishing group table-1b. macroeconomic variables of brics in 2018. factor brazil russia india china south africa income level (by per capita gni) umi hi lmi umi umi level of development: developing in transition developing developing developing gdp, ppp(current international$) $3,371.80b $4,050.79b $10,500.21b $25,398.68b $790.82b gdp growth (annual %) 1.12% 2.25% 6.81% 6.57% 0.79% gdp per capita, ppp (current international $ $16,096.40 $27,143.33 $7,762.88 $18,236.61 $13,686.88 external debt stocks, total (dod, current us$) $557,822, 647,211.20 $453,938, 114,126.20 $521,390, 564,017.40 $1,962,304, 426,779.10 $179,306, 413,801.80 current account balance (bop, current us$) *-$41.54b $113.45b *-$65.60b $49.0b *-$13.38b inflation, consumer prices (annual %) 3.66% 2.88% 4.86% 2.07% 4.50% labor force, total (2019) 10,63,28, 664 7,27,36, 316 51,94,69, 299 78,31,94,000 2,30,72,331 unemployment, total (% of total labour force)ilo estimate) (2019) 12.08% 4.58% 5.35% 4.32% 28.18% imports of goods and services (current us$) $266.78b $344.26b $642.70b $2,548.99b $108.88b exports of goods and services (current us$) $276.66b $509.55b $536.62b $2,655.61b $110.14b note: *represents deficit, bbillions, umi-upper middle income, hi-high income& lmi-lower middle income. table-2.composition of gdp in brics nations –(%) in 2018. country agriculture services industry manufacturing brazil 4.42 63.02 18.13 9.78 russian federation 3.15 54.12 32.07 13.31 india 14.6 45.13 26.75 14.82 china 7.19 52.16 40.65 29.41 south africa 2.18 64.04 25.85 11.76 the composition of gdp (%) may exceed 100 also. manufacturing is included in the industry figures and in also reported separately since it plays a vital role in many of the countries in the world including brics. table 2 reveals that except india, rest of the brics countries are deriving more than 50% of the gdp from the service sector only in 2018. however, south africa and brazil occupied the first and second places with more than 60% contribution from service sector to gdp. china (40.65%) and russian federation(32.15%) have contributed significant share from the industrial sector. in the manufacturing sector, china is the only country that contributed 29.41% to gdp in 2018. in the agriculture sector india is the only country that contributes more to gdp with a double digit figure (14.6%). table-3. descriptive statistics of inflow of fdis in brics-1998-2018(21 years). country n minimum maximum mean std. deviation brazil 21 10143.525 97421.786 43247.856 25016.532 russian federation 21 2651.06 75855.697 24622.303 20079.378 india 21 2168 47102.417 23188.095 16412.998 china 21 40318.71 139043.492 91754.362 36722.953 south africa 21 311.4501 9209.172 3850.3717 2867.605 from the descriptive statistics as shown in table 3, it is clear that china recorded a maximum inflow of fdi during the study period. brazil, russia, india, and south africa have occupied the 2nd, 3rd,4th, and 5th places during the same period of 21years. china is recorded huge inflows of fdi when compared with other brics nations in all the countries. a similar picture can be noticed from the mean values during the study period. table-4. inflow of fdis in brics-simple linear regression equations. country regression equation (y= a + bx) brazil y= 12334.099+2810.342x russian federation y= 8659.280+1454.820x india y= -2673.937+2351.094x china y= 28279.790+5770.416x south africa y= 2334.059+137.847x from table 4 it is clear that the coefficient value of china has shown the highest value (5770.416), which reflects the high growth of fdi among the brics countries during the study period. brazil (2810.342), india (2351.094), russian federation (1454.820), and south africa(137.847) have recorded the values of the coefficients (growth rates) in the ascending order. economy, 2020, 7(2): 98-103 102 © 2020 by the authors; licensee asian online journal publishing group table-5. projections of inflow of fdi in brics (2019-2023). country 2019 2020 2021 2022 2023 brazil 74161.6 76971.96 79782.31 82592.649 85402.99 russian federation 40665.3 42120.14 43574.96 45029.78 46484.6 india 49050.1 51401.22 53752.32 56103.413 58454.507 china 155229 160999.36 166769.77 172540.19 178310.61 south africa 5366.69 5504.54 5642.39 5780.23 5918.08 based on the regression equations from table 4, the inflow of fdi has been forecasted for the estimated 5 years that is from 2019 to 2023. it can be inferred that estimated projections as shown in table 5 that the inflow of fdi has shown the highest figure in china in all five years. the second place has been occupied by brazil. india soviet russia remained in the 3rd and the 4th positions in all projected years.. but south africa remained in the bottom position since it has entered brics in the year 2010 only as the emerging economy. table-6. descriptive statistics of outflow of fdis from brics -1998-2018. country n minimum maximum mean std. deviation brazil 21 13036 28202.5 3630.71 11072.30 russian federation 21 915.77 196149 61147 61433.51 india, 21 47 21142.5 7840.29 6668.55 china 21 1209.75 70684.8 28337 21078.52 south africa 21 -3177.9 7669.46 2336.05 3171.11 table 6 reveals that the descriptive statistics relating to outflow of fdis from brics countries during the study period. russian federation (61147), china(28337), india(7840.29), brazil(3630.71), and south africa(2336.05) have shown the mean values in the ascending order during the study period. table-7. outflow of fdis from bricssimple linear regression equations. country regression equation (y= a + bx) brazil y= 7095.84 +315.01 x russian federation y= 2946.63 + 2390.03x india y= 535 + 43x china y= 9235 + 42x south africa y= 1156 +31 x from the regression equations, as shown in table 7, it is clear that russian federation(2390.03) and brazil(315.01) have shown highest coefficient values (growth rates) relating to the outflow of fdis from brics during the study period, whereas the other countries of brics like india (43), china(42) and south africa(31) have recorded lesser growth rates. table-8. projections of outflow of fdi from brics (2019-2023). country 2019 2020 2021 2022 2023 brazil 14026.1 14341.1 14656.1 14971.1 15286.1 russian federation 55527.3 57917.3 60307.4 62697.4 65087.4 india 1481 1524 1567 1610 1653 china 10159 10201 10243 10285 10327 south africa 1838 1869 1900 1931 1962 based on the regression equations from table 7 the outflow of fdi from brics has been forecasted for the estimated 5 years that is from 2019 to 2023. from table 8, it can be inferred that estimated projections relating to the outflow of fdi have shown highest amount from russian federation. second place has been occupied by brazil. china remained in third place and south africa maintained fourth position for all years from 2019 to 2023 as per the projections. but india remained in the least position since it has focused only on inflow of fdis and boosting the domestic investments. 5. summary conclusions the results of this study reveal some interesting facts with important distinctions in some of the macroeconomic variables of brics.gdp as the most important macroeconomic indicator of economic growth, china, india russian federation , brazil, and south africa have occupied the rank between ist to 5th positions among brics in 2018. india being a lower middle-income country recorded significant annual growth of gdp with 6.81% in the year 2018. 2nd place has been occupied by the upper middle-income country china (6.57%) among brics. india, brazil, and south africa have shown current account deficit, whereas the remaining countries of brics have shown surplus. the rate of inflation is more than 4% in india and south africa but rest of the countries, it is around 2% only. in both highly populous countries like china and india, the labor force has shown high figures. the rate of unemployment is very high in south africa (28.18%) and brazil (12.07) among the brics countries in 2019. china maintained its supremacy among the brics in terms of the value of goods and services of imports and exports also. it is clear that except india, the rest of the brics countries are deriving more than 50% of the gdp from the service sector only in 2018, however, south africa and brazil occupied the first and second places with more than 60% contribution to gdp. china (40.65%) and russian federation (32.15%) have contributed economy, 2020, 7(2): 98-103 103 © 2020 by the authors; licensee asian online journal publishing group significant share from the industrial sector. in the manufacturing sector, china is the only country that contributed 29.41% to gdp in 2018. compared to other countries of brics. india is the only country that contributes more to gdp with 14.6% in the agriculture sector. the findings of the study conclude that china has recorded the highest growth in terms of the inflow of fdi among the brics during the study period. brazil , india , russian federation, and south africa have recorded the values of the coefficients (growth rates) in the ascending order during the study period. but. russian federation and brazil have recorded the highest growth rates in terms of the outflow of fdis from brics during the study period. brazil. china remained in second and third places whereas south africa maintained the fourth position for all years from 2019 to 2023 as per the projections. india remained in the least position since it has focussed only on the inflow of fdis and boosting the domestic investments. based on the regression coefficient values, projection of inflow and outflow of fdis are also made in this study, however, the projections will be accurate only when the other things remaining the same. references anupam. (2014). impact of fdi outflows on gdp of brics countries. indian journal of applied research, 4(10), 115-116. nandita, d. (2014). home country effect of fdi outflows from the bric countries: study of domestic investment. university of maryland, baltimore country. 1-33. retrieved from: https://economics.umbc.edu/files/2014/2009/wp_2015_2001.pdf. panigrahi, t., & panda, b. (2012). factors influencing fdi inflow to india, china and malaysia: an empirical analysis. asia-pacific journal of management research and innovation, 8(2), 89-100. available at: https://doi.org/10.1177/2319510x1200800202. ramar, n., prabakaran, v., rajendran, s., & muthu kumaran, c. k. (2019). fdi in india: leading to economic growth. international journal of recent technology and engineering, 8(2s10), 182-186. available at: https://doi.org/10.35940/ijrte.b1031.0982s1019. sutirtho, n. (2012). international conference on emerging economies – prospects and challenges comparative analysis of foreign direct investment trends in emerging economies. procedia ,social and behavioural sciences, 7, 230 – 240. vijayalakshmi, r., palanisingh, v., lingavel, g., & gurumoorthy, t. r. (2019). factors determining in foreign direct investment in india. international journal of recent technology and engineering, 8(2s10), 722-729. available at: https://doi.org/10.35940/ijrte.b1129.0982s1019. vinay, k. (2014). trend of fdi in india and its impact on economic growth. international journal of science and research, 3(10), 639-642. wladimir, a. (2016). outward foreign direct investment by brazilian and indian multinational companies: comparison with russian-chinese multinationals. hindustan aeronautics limited. 1-45. retrieved from: https://halshs.archives-ouvertes.fr/halshs01279896/document. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. economy issn(e) : 2313-8181 issn(p) : 2518-0118 vol. 3, no. 2, 94-101, 2016 www.asianonlinejournals.com/index.php/economy 94 analysis of empirical relationship among agricultural lending, agricultural growth and non-performing loans in nigerian banking system umoren, a. a1 akpan, s. b.2 udoh, e. j.1 1,3 department of agricultural economics and extension, university of uyo, nigeria 2 department of agricultural economics and extension, akwa ibom state university ( corresponding author) abstract increasing levels in non-performing loans (npls) which has remained an area of great concern contributed to issue of declining agribusiness activities in nigeria in the 1990s and thereafter. the study examined non-performing loans relationship with agricultural lending and agricultural productivity from 1980 to 2015 in nigeria. time series data obtained from cbn were analyzed using, granger causality test, pearson correlation, and co-integration as well as error correction models. the empirical analyses revealed that, bilateral granger causality existed between loans and advances granted to agricultural sector and non-performing loans in nigeria. also, growth in gdp has a positive and significant correlation with npl in nigeria. in the long run, npl is positively related to agricultural productivity, growth in the gdp and value of loans and advances offered to agricultural sector. whereas, in the short run, npl reacted significantly to the negative influence of interest rate and positive impact of gdp growth rate. the adjustment coefficient of 52% was discovered for the npl long run equation in nigeria. it is recommended that short and longterm banking reform policies be adopted to reduce fluctuations in npls in the banking system and efforts should be geared towards increased participation of specialized financial institutions as to accelerate investments in agriculture sector. keywords: non-performing loans, agricultural lending, agricultural output, banking system contents 1. introduction ......................................................................................................................................................................... 95 2. literature review ................................................................................................................................................................ 96 3. research methodology ........................................................................................................................................................ 97 4. results and discussion ......................................................................................................................................................... 98 5. conclusion and recommendations ................................................................................................................................... 100 references .............................................................................................................................................................................. 100 citation | umoren, a. a; akpan, s. b.; udoh, e. j. (2016). analysis of empirical relationship among agricultural lending, agricultural growth and nonperforming loans in nigerian banking system. economy, 3(2): 94-101. doi: 10.20448/journal.502/2016.3.2/502.2.94.101 issn(e) : 2313-8181 issn(p) : 2518-0118 licensed: contribution/acknowledgement: this work is licensed under a creative commons attribution 3.0 license all authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. history: received: 16 august 2016/ revised: 30 september 2016/ accepted: 8 october 2016/ published: 27 october 2016 ethical: this study follows all ethical practices during writing. publisher: asian online journal publishing group http://creativecommons.org/licenses/by/3.0/ http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.2/502.2.94.101 https://orcid.org/orcid-search/quick-search?searchquery=umoren, a. a https://orcid.org/orcid-search/quick-search?searchquery=akpan, s. b. https://orcid.org/orcid-search/quick-search?searchquery=udoh, e. j. http://search.crossref.org/?q=10.20448/journal.502/2016.3.2/502.2.94.101 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.2/502.2.94.101 https://orcid.org/orcid-search/quick-search?searchquery=umoren, a. a https://orcid.org/orcid-search/quick-search?searchquery=akpan, s. b. https://orcid.org/orcid-search/quick-search?searchquery=udoh, e. j. http://search.crossref.org/?q=10.20448/journal.502/2016.3.2/502.2.94.101 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.2/502.2.94.101 https://orcid.org/orcid-search/quick-search?searchquery=umoren, a. a https://orcid.org/orcid-search/quick-search?searchquery=akpan, s. b. https://orcid.org/orcid-search/quick-search?searchquery=udoh, e. j. http://search.crossref.org/?q=10.20448/journal.502/2016.3.2/502.2.94.101 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.2/502.2.94.101 https://orcid.org/orcid-search/quick-search?searchquery=umoren, a. a https://orcid.org/orcid-search/quick-search?searchquery=akpan, s. b. https://orcid.org/orcid-search/quick-search?searchquery=udoh, e. j. http://search.crossref.org/?q=10.20448/journal.502/2016.3.2/502.2.94.101 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.2/502.2.94.101 https://orcid.org/orcid-search/quick-search?searchquery=umoren, a. a https://orcid.org/orcid-search/quick-search?searchquery=akpan, s. b. https://orcid.org/orcid-search/quick-search?searchquery=udoh, e. j. http://search.crossref.org/?q=10.20448/journal.502/2016.3.2/502.2.94.101 economy, 2016, 3(2): 94-101 95 1. introduction globally, there have been more banking crises in the last two decades than ever before 1980s. the main cause seemed to be associated with increased growth rate of non-performing loans (npls) trend whose consequences have been far reaching (ahmed and bashir, 2013; umoren, 2015). the central bank of nigeria (cbn), the major supervisor and regulator of the banking system and the financial system is also facing the challenges of maintaining price and financial stability in the economy due to the increasing financial instability associated with increasing growth in npls. the decrease in profitability of banks caused by high npls problem seems to have led to significant decline in productivity of various sectors of the economy notably agriculture which is a pivot of many developing economies such as nigeria . in nigeria, agriculture is a dominant sector and a major source of livelihood among a vast number of the population. it is one of the prioritized sectors in the national economy. agricultural sector dominates the nigerian economic landscape. currently, the sector accounts for about 38.22 per cent of the total gross domestic product (gdp) and 40 per cent of total employment in the country (umoren, 2008; nbs (national bureau of statistics), 2012). other important roles ascribed to this sector include: provision of food for the teeming population of about 172 million people; provision of raw materials to the industrial sector; earning of foreign exchange through export of commodities; and provision of markets that facilitate the sales of the industrial products. in fact, in the early years of the nation, agriculture was traditionally described as a mainstay of the economy because of its largest contribution to the country’s gdp. paradoxically, it has drastically declined. agriculture is not only a prioritized sector for the realization of national goal of increased productivity and income but a sector that enhances improvement in welfare of the citizens. however, food import bills in the country tended to be astronomically high while the production of these commodities seemed abysmally low. various studies in agricultural sector are of the views that increased productivity and improvement in income were greatly influenced by the injection of improved factors of production needed for intensive cum extensive land and infrastructural development (akpan et al., 2012). among these major factors of production, loans and advance from the banking system were regarded as panacea for increased production or productivity in the sector. bank loan constituted a major source of business capital and its availability increased efficiency of production whiles its inadequacy or non -availability might hamper productivity. the productivity in agricultural sector was crucial to the growth and development process of the economy and seemed to have been influenced by the availability of loans and advances from the banking system. the dismal performances of the sector might be linked with poor health of the banking system as evidenced by prevalent huge npls (elegbe, 2013). bank loan constitutes a major source of capital investment in agricultural sector, and its availability might be one of the factors which could increase efficiency of production in the sector. though the banking system had attained prominence in its role in granting loan facilities for production and consumption purposes yet its biggest challenge was increasing accumulation of npls which emanated from loans and advances granted to various beneficiaries in agriculture, and other sectors of the economy. the problems of high level of accumulated npls in the banking system were experienced in both developed and developing economies. these were reported in prints and electronic media as the basic cause of crises in the banking system. fofack (2005) argued that the collapse of over 60 banks in indonesia during the 1997 east asian financial and banking crisis affected a large population of sub-shoran african nations in the 1990s . these were followed by a rapid accumulation of npls. in nigerian, these huge npls have significantly contributed to financial crises in the economy (elegbe, 2013). 1.1. statement of problem the prevalent high aggregate npls trends coupled with unstable macroeconomic and banks specific factors seem to be responsible for the decline in agricultural lending. this might have militated against accelerated agricultural lending because of decrease in availability of loanable funds to the sector. the key questions in the study were as stated thus: did the high aggregate npls rate in the banking system adversely influence growth in agricultural lending from 1980 to 2015? did the high level of npls affects the level of agricultural activities? these form the cardinal focus of the study. the shutting down of many large farms and agro-related enterprises might be associated with low loan supply for agriculture activities which tended to strangulate the expansion of agribusinesses in nigeria. 1.2. objective of the study the study sought to determine the relationships among aggregate npls in the banking system, agricultural lending and agricultural productivity in nigeria during the study period 1.3. conceptual framework nonperforming loans are loans made by banks or finance companies on which repayment of principal amount and interests were not made on time. loan is an asset to a bank because interest payments create a stream of cash flows in addition to the payments of the principals. it is from the interest payments that banks make their profits. banks treat loans as npls if they are not serviced for over 90 day’s period of time. if payments were late for some time, a loan might be classified as past due. as payments became really late usually from 90 days, the loan might be classified as non-performing loan (npls) or impaired loan. high level of npls in an economy might be a sign of problem of poor health in banks as could be a sudden or prolong increase in level of npls which might point to poor performance of the banking system. a loan becomes non-performing (npls) when it cannot be recovered within a specified period of time as covenant by the loan contract. this definition of npls is from the lending institution point of view. a loan may be npls if it is used for different purposes other than the initial purpose for which it was granted. this is the users’ economy, 2016, 3(2): 94-101 96 point of view. however, our perspective is mainly on the banking system point of view. in the banking system, loans become npls when the principal and interests are not paid after 180 days and beyond hence they are classified as bad, doubtful and lost for which the macroprudential guidelines stipulate 100% provisioning by the banks (cbn, 2010). literature on npls definition is so varied, resulting to changes in npls levels within individual countries rather than a group. a loan facility is said to be npls when a borrower is 30, 60, 90 days delinquent in making payment. another consideration of npls can happen when a loan granted by banks in a specific sector such as agriculture is re-negotiated or restructured. in all these instances, the loan is not making interest for the banks; such a loan may said to be npls. hence, npls are indicative of quality of or performance of financial assets granted to customers that have become risky, and could become lost. npls can also be described as inability of loan beneficiaries to meet contractual terms of the loans. the loan beneficiaries being delinquent were placed in non-accrual basis. though there seemed to be no global standard definitions of the concept of npls at practical stage yet. saba et al. (2012) attempted to define npls as sum of borrowed money upon which debtors had not made their scheduled payments for at least ninety (90) days. npls were either in default or near default. as observed by saba et al. (2012) in a situation of npls, the odds that they would be repaid in full were deemed to be significantly minimal. however, should the defaulters (debtors) commence repayments; the npls become re-performing loans even if the debtors had not caught up with all the missed portions of the agreed payments. they documented in their study that npls consisted of loans in three categories namely standard, bad and doubtful; and lost. these were segmented based on the degree of collectability difficulty. 2. literature review there are numerous literature on non-performing loans especially in developed countries. a study by beck et al. (2013) showed that loan performance was closely linked to economic cycle. they maintained that standard determinants of npls were economic activity and lending interest rates. interest rate affected loan performance because it is a channel which connect rise of debt service cost to loan beneficiaries especially with variable rates of loan contracts. the study concluded that real gdp growth was the major driver of npls and that a drop in economic activity remained the most important risk for bank loan quality. studies on the relationship between npls and banks failures include dash and kabra (2010); saba et al. (2012); elegbe (2013); adebola et al. (2011); nanita et al. (2011). these studies maintained that the prevalent high npls were a major threat to the banking system. these literature argued that npls in loan portfolio affect the operational efficiency of banks which in turn affected the profitability, liquidity, and solvency positions of the banking system. this also affects bank disposition to credit creation and expansion (hou and dickson, 2007). npls generate vicious effects on the survival and growth of the banking system and if not adequately managed could lead to bank failures and the consequence spill-over effects on the economy. in nigeria, the existence of high aggregate npls in the banking system seemed to be one of the factors behind the gradual decline in agricultural gross domestic products. various opinions seem to, point out that the impacts of high aggregate npls in banks on the economy also include decline in economic activities epitomized by massive job losses in most sectors of the economy; declining capital inflows into agriculture and manufacturing and other sectors , de-accumulation of foreign reserves and mounting pressure on exchange rates; and limited foreign trade financing for banks while credit lines dried up for some banks and corporate businesses engaged in agricultural sector of the economy. they conclude that high level of aggregate npls in the economy may be responsible for the reduction in credit supply to the agriculture sector (fofack, 2005). some of these studies have reported inverse association between growth in gdp and npls of banks (ahmed et al., 1999; salas and saurina, 2002; rajan and dahl, 2003; fofack, 2005; hou and dickson, 2007; louzis et al., 2010). as gdp increases, the income of loan beneficiaries also improves indicating enhanced loan repayment capacity. this may lead to low level of aggregate npls in the banking system and vice versa. the importance of loans to agricultural sector is very vital to the growth of the economy. umoren et al. (2014) posits that it reactivates, expands and modernizes all kinds of agricultural activities considered economically viable and desirable to the realization of the stated goal of increased productivity in agriculture. however, prevalent increases in loan defaults (impaired loans or problem loans) which tend to enhance banking system losses as result of increase in level of npls might be associated with decline in banks investment in agricultural sector of the economy. espinoza and prasad (2010) reported that higher interest rates increased npls while higher non -oil export growth reduced npls. they concluded that the effects of interest rates and non -oil export growth were significant. increase in interest rates caused a reduction in nonoil export growth with a significant feedback effects. attempts to expand knowledge on npls have sprung up many empirical researches; for instance, ahmed and bashir (2013); saba et al. (2012) carried out an empirical study on the determinants of npls in us banking sector. they found negative relation of lending rate and npl while inflation and real gdp per capital had positive and significant relationships. in another study, louzis et al. (2010) examined the determinants of npls in the greek financial sector using dynamic panel data model. they discovered that, the real gdp growth rate had negative association with npl whereas lending rate exhibited positive significant relationship. also, loan to deposit ratio and capital adequacy ratio had insignificant effect on npls. the study of skarica (2013) on the determinants of npls in central and eastern european countries through fixed effect model reported significant negative relationship between npl and gdp growth rate, unemployment rate and inflation. in their study, badar and javıd (2013) assessed long and short run dynamics between nonperforming loans and macroeconomic variables (inflation, exchange rate, interest rate, gross domestic product and money supply) covering the period from january 2002 till december 2011 of commercial banks in pakistan. employing johansen and juselius multivariate co-integration test, a long run relationship was found among variables in the study. using granger causality test it was found that economy, 2016, 3(2): 94-101 97 inflation and exchange rate were the causes of non-performing loans however, vector error correction model provided that there was weak short run relationship between nonperforming loans with inflation and exchange rate. the major issues associated with the increased accumulation of high aggregate npls in nigeria, seemed to have continued to remain elusive despite concerted efforts by the monetary authority in reforming the banking system. the relationship between npls and the impacts on agricultural sector in nigeria has significantly been ignored. however, few existing empirical studies focused on banking system reforms (balogun, 2007) the financial structure and economic growth, olofin and afangide (2008). however, not much intensive studies had been conducted linking npls in banking system, agricultural lending and growth in agricultural economy in nigeria. in fact, no previous empirical studies had considered the possibility of developing a model that can capture the relationship among npls, agricultural loan/advances and their impacts on the level of the agricultural economy. therefore, minimization of high aggregate npls may be a necessary condition in order to improve the agricultural activities conducive for accelerated agricultural growth. this paper contributes to inadequate literature on the relationship among aggregate npls; agricultural lending and agricultural activities in nigeria by utilizing time series data collected from the central bank of nigeria (cbn). exploiting banking system npls; agricultural lending and agricultural activities trends is likely to yield more robust results than analysis of individual banks as well as unit agricultural enterprise (beck et al., 2013). 3. research methodology 3.1. study area the study was conducted in nigeria. the country is located on the gulf of guinea in the sub-saharan region of africa. it lies between 4 0 and 14 0 north of the equator and between longitude 3 0 and 15 0 east of greenwich meridian. nigeria had a total land area of 923,768.622km 2 which was approximately 98.3 million hectares (akpan et al., 2012). it had a population of over 140 million. the agricultural sector dominated the nigerian economic landscape accounting for 38.22 of the total gdp and more than 60 per cent of employment (nbs, 2012). 3.2. sources of data time series data from 1980-2015 were used in the study. the data were collected from central bank of nigeria (cbn), security and exchange commission (sec), national bureau of statistics (nbs), nigeria deposit insurance corporation (ndic), international monetary fund (imf), world bank, food and agriculture organization (fao). the study used specific information on aggregate npls in the nigerian banking system. standard macroeconomic variables used in the study included gross domestic product, lending interest rates, loans and advances to agriculture and agricultural output. the data spanned from 1980-2015. 3.3. analytical techniques multiple regression model was used to determine the relationship among npls in the nigerian banking system, agricultural lending and agricultural output in nigeria. in addition, the study employed pearson correlation and granger causality test analyses. 3.4. long run model of npls in nigeria based on the result of unit root, a long run model for npl was specified at the level of variables. the primary model in explicit and implicit forms is shown in equation 1 and 2 respectively: ( ) ( ) ( ) where; nplst = non performing loan (%) intrt = commercial bank lending interest rate (%) ladat = loan and advances to agricultural sector (loan and advances to agricultural sector/total loan and advances to the economy) expressed in (%) atopt = agricultural sector’s total productivity (agric. gdp/total gdp) expressed in (%) ltdrt = liquidity ratio (total loan and advances per total bank deposit (%) agdt = growth rate in total gdp (%) to validate the existence of the long run stable relationship in npls equation in nigeria, the study applied the engle and granger two-step technique (engle and granger, 1987) and johansen co-integration test. following the granger representation theorem, the error correction model (ecm) for the co-integrating series in the study was specified. the error correction model specified for npls in nigeria is implicitly shown below: ……………… (3) where variables are as described previously in equation 2 and ecmt is the error correction term. economy, 2016, 3(2): 94-101 98 3.5. bivariate granger causality test between npls and other variables in this study, the bilateral granger causality tests were conducted on npls and selected macroeconomic variables in nigeria. the primary model in vector autoregressive regression forms are represented as thus: { ∑ ∑ ( ) ∑ ∑ ( ) } this was specified for all variables used in the equation 2. 4. results and discussion emerging developments in economic literature has shown that most time series are non-stationary, and this has invalidated the application of most estimation methods to time series at level. this is essential in order to prevent spurious or nonsense regression. it becomes imperative to determine the stationarity of variables used in the study since existence of unit root is a common feature in time series data. the standard augmented dickey–fuller (adf) test for unit root was conducted on specified variables (dickey and fuller, 1981). table 1 presents the results of adf test statistic for each variable conducted at level and also at the first difference involving two sets of adf equations. table-1. result of the unit root test for variables used in the analysis with constant with constant and trend level 1 st diff. ot level 1 st diff. ot npls -0.9871 -6.3743** 1(1) -2.6231 -6.5377** 1(1) atp -0.4115 -6.7761** 1(1) -1.9467 -6.9767** 1(1) lada -1.1413 -6.0713** 1(1) -1.6579 -6.0424** 1(1) ltdr -0.2438 -5.6223** 1(1) -3.2250 -5.3752** 1(1) intr 0.4758 -7.5778** 1(1) -2.5493 -7.6818** 1(1) agdp -3.3250** 1(0) 5.34099** 1(0) error -3.1080* 1(0) -3.7260* 1(0) note: ot means order of integration. critical values (cv) are defined at 1% and 5% significant levels and asterisks * and ** represent 5% and 1% significance levels respectively. variables are as defined in equations 3and 4. the above results indicate that at level for both adf equations, the series were non-stationary with the exception of agdp. the results imply that, most specified variables have unit root issue. following the unit root results, it indicates that, equations involving the specified variables cannot be specified at level to avoid the incidence of having spurious regression estimates. the implication of this result is that equation 2 should be subjected to cointegration and error correction model. 4.1. pearson correlation matrix of npls and some macroeconomic variables the estimation of the pearson correlation coefficient became relevant in order to establish the linear and symmetric association between nonperforming loans (npls), lending interest rate (intr), loan and advances granted to agricultural sector (lada), agricultural sector’s total productivity (atop), liquidity ratio (ltdr) as well as growth rate in gross domestic product (gdp) in nigeria. table 2 shows the correlation matrix for the specified variables in the study. table-2. correlation matrix for variables used in the analysis variable npls atop lada ltdr intr gdp npls 1.0000 0.314 (0.063) 0.272 (0.108) 0.390 (0.019) -0.210 (0.220) 0.402 (0.015)* atop 1.0000 -0.162 (0.344) 0.096 (0.577) 0.326 (0.052) 0.273 (0.107) lada 1.0000 -0.020 (0.906) 0.056 (0.746) 0.157 (0.361) ltdr 1.0000 -0.558 (0.000)** -0.007 (0.969) intr 1.0000 0.181 (0.292) agdp 1.0000 note: variables are as expressed in equations 2. values in bracket are probability value and others are correlation coefficient. asterisks * and ** represent significant levels at 5% and 1% respectively. the above results revealed that, npls has significant positive relationship with the growth rate of agdp. this means that, the accumulation of npls grows with the positive growth rate in the country’s gdp. this implies that there is a strong linear relationship between npls and gdp growth rate in nigeria. this finding satisfies the priori expectation as increase in gdp will entails increase in capital investment, loanable funds and other form of money transfer/exchange within the economy. with increase in economic activities, credit to all sectors of economy is likely to increase with the corresponding default. however, npls exhibited positive but weak and insignificant correlation with agricultural productivity, loan and advances granted to agribusinesses, and liquidity ratio in the banking system. the relationship was negative and weak with the banking system lending rate in the country. the result also indicates that, npl might not have a strong linear association with these variables, but there could be significant relationships which are not expressed in linear forms. economy, 2016, 3(2): 94-101 99 4.2. granger causality test between npls and other specified variables the long run causality relationship between npls and lending interest rate (intr), loan and advances granted to agricultural sector (lada), agricultural sector’s total productivity (atop), liquidity ratio (ltdr) as well as growth rate in gross domestic product (gdp) in nigeria is presented in table 3. the result of the bilateral ganger causality suggests that there is an evidence of bi-directional granger causality between non-performing loan (npls) and loan and advances to agricultural sector (lada) in nigeria. this implies that, there is a reciprocal relationship between index of non-performing loans (npls) and value of loan and advances (lada) directed to the agricultural sector in nigeria. the value of f-test is significant at the conventional probability level. table-3. results of granger causality test between npl and other specified variables null hypotheses (ho) lag length observation fstatistic probability decision npls does not granger cause atop atop does not granger cause npls 2 34 2.0417 0.6214 0.1481 0.5442 accept accept npls does not granger cause lada lada does not granger cause npls 2 34 3.0987 4.1578 0.0603* 0.0258** reject reject npls does not granger cause ltdr ltdr does not granger cause npls 2 34 0.0798 1.8447 0.9235 0.1761 accept accept npls does not granger cause intr intr does not granger cause npls 2 34 0.1798 1.4647 0.8363 0.2477 accept accept npls does not granger cause gdp gdp does not granger cause npls 2 34 1.1.334 0.0462 0.3358 0.9550 accept accept note: asterisk, *, and ** represent 10% and 5% significant levels respectively. variables are as defined in equation 2 and are expressed as logarithm. this shows that the previous values of loan/advances granted to economic agents in agriculture significantly determined the current value of npls in the banking system and vice versa. alternatively, npls affects lada in one direction; while lada affects npls in the opposite direction. the presence of the bi-directional granger causality between the npls and lada suggests that both npls and lada exhibited significant level of comovement within the period considered in the study. the result also suggests that npls is strongly endogenous to lada and vice versa in nigeria. however, there were no significant bilateral relationships between npls and other variables specified; hence the direction of causality could not be ascertained. 4.3. long-run relationship between npls and other specified variables the results of johansen’s co-integration test which aim at ascertaining the existence of potential equilibrium long-run relationship among specified variables considered in the study are presented in table 4. the englegranger two –step technique johansen techniques were used to confirm the presence of co-integration in the npls equation. table-4. johansen co-integration test for the specified model rank eigenvalue trace test p-value lmax. test p-value 0 0.9539 211.04 0.0000*** 98.457 0.0000*** 1 0.7663 112.58 0.0000*** 46.514 0.0004*** 2 0.6863 66.068 0.0003*** 37.094 0.0013*** 3 0.4304 28.975 0.0626* 18.009 0.1330 4 0.2793 10.966 0.2171 10.480 0.1854 5 0.0151 0.4858 0.4858 0.4858 0.4858 note: asterisks, * and *** denotes 10% and 1% levels of significance respectively. the above results showed that the trace statistics and maximum eigen value were significant at various levels of conventional probabilities. also, the error term generated from the long run equation was stationary at level as shown in table 1. these indicated that, there is a stable long run relationship in npls equation specified when shocked or disturbed by changes in macroeconomic fluctuations in nigeria. based on the above test results, there was obvious need to generate the shortrun relationship among npls in order to ascertain the speed of adjustment to equilibrium state in the long run. table-5. estimates of the long and short run model for non-performing loan in nigeria long run model (a) short run model (b) variable coefficient t-value variable coefficient t-value constant −2.3916 −0.7142 constant −0.0162 −0.2270 atopt 1.4077 2.1683** nplt-1 0.1277 0.7242 ladat 0.2459 2.1279** atopt 0.3763 0.7746 ltdrt 0.7525 1.1980 ladat −0.1037 −0.9067 intrt −0.6753 −1.5109 ltdrt −0.1336 −0.3487 gdpt 0.0809 2.1754** intrt −0.7669 −1.9746* gdpt 0.0489 2.5944** ecmt-1 −0.5161 −3.2320*** r 2 0.4565 r 2 0.4016 fcal 5.0398*** fcal 2.4928** note: variables are as expressed in equations 3. asterisks *,** and *** represent significant levels at 10%, 5% and 1% respectively. the above results show the long and short-run relationships in npls equation specified in the study. the diagnostic statistic revealed that, the r 2 is 45.65% and 40.16% for long and short –run model respectively. this means that, about 45.65% and 40.16% variation in npl in the long and short run model respectively is attributed to economy, 2016, 3(2): 94-101 100 the specified explanatory variables. this indicates that, many variables affect npls in banking system in addition to these variables used in the study. the f-calculated for both long and short run models is statistically significant at 1% and 5% probability level respectively. this indicates that both r-squared are statistically significant and the two equations have goodness of fit. furthermore, the coefficient of ecm in the short run model is statistically significant, exhibits appropriate sign and lies within the theoretical range. this justifies the fact that, npl equation specified in this study has a stable long run relationship when shocked in the short run. this suggests that the disequilibrium in the previous period in npl is corrected in the current period. the speed of adjustment from disequilibrium state is about 52% annually. this indicates about 52% of short-run deviations made in previous years are corrected in the current year. the result of the long run model of npls in nigeria revealed that, agricultural productivity has a positive significant relationship with npls. this implies that, npl increases as total productivity in the agricultural sector increase. this result suggests that, as total investment in agricultural sector accumulate, it impacted positively on the npl. many instances could explain this result, firstly: total investment increase in agricultural sector will equally increase with loanable fund and advances as well as likelihood to default. by implication, the more investment opportunities in the sector, the more loans and advances and the more the likelihood of default among agents in the sector. secondly; in nigeria, farming activities are in the hands of poor resource farmers with little or no collateral and hence low probability for loan repayment. as agricultural production is in the mercy of nature, and output price not guaranteed as well as the mounting inflation in the country; an increase in farm output could result to a glut characterized by lower price and increase cost of production but less revenue to farmers. given this scenario, default will accumulate in the face of increase farm productivity. similarly, loans and advances granted to agribusiness have positive significant association with npls in nigeria. the result satisfies priori expectation as increase in volume of loanable fund in the economy will increase the likelihood of default. other macroeconomic factors and political environment will work with increase loanable fund in the economy to affect npls. for instance, increase in inflation and political instability could negate the objective of increase loanable fund in the economy. in nigeria, issue of macroeconomic volatility was so pronounce in recent years and could be responsible for this result. furthermore, growth rate in total gdp impacted positively on the npls and was significant at the conventional level of probability. this means that, as gross investment increases in the country, the likelihood of loan default by economic agent who borrowed fund increase too. this result is in consonance with the previous results; because as gross domestic investment increases, loanable funds and advances will be stimulated hence increase likelihood of default. on the other hand, the short run model revealed that, interest rate has a negative significant relationship with npls in the economy. this means that, in the short run, as interest rate increases, the npls will decline and vice versa. the result again satisfies priori expectation as increase in interest rate in the short run will likely retard large number of credit beneficiaries in the economy. this will reduce the default rate and hence npls accumulation in the economy. increase in interest rate will also induce financial discipline in the part of bankers; and will equally filter unintended beneficiaries or those with extreme lower value of collateral. the growth rate in the country’s gdp had positive and significant impact on npls in the short run in nigeria. the impact of gdp growth on npls is similar in the long and short run periods. however, the magnitude of effect is greater in the long run compared to the short run period. 5. conclusion and recommendations the empirical findings have revealed that, non-performing loans in the banking system is actually affected by series of macroeconomic factors in the long and short run periods in nigeria. the result of analysis has showed that, npls is positively related to agricultural productivity, loans and advances to the agricultural sector and growth rate in total gross domestic product (gdp) in nigeria. however, in the short-run, npls showed negative association with interest rate and positive correlation with gdp growth rate in nigeria. the study also discovered adjustment rate of 52% in npl for a shock induces by the specified macroeconomic variables in nigeria. invariably, it implies that, it will take npls about 6.5 months to adjust back to equilibrium or stable state in the current year resulting from previous shock(s) induce by the banking system or macroeconomic variables in the economy. based on findings, it is recommended that short and longterm banking reform policies be adopted to reduce fluctuations in npls in banking system in nigeria. however, the relationship between npls and agricultural productivity needs be interpreted with care. this is because the proportions of farmers that have access to loans and advances in nigeria seem not significant hence their contributions to npls may not be significant. it is also recommended that interest rates should be minimized by the central bank through series of financial interventions to ease credit creation in the economy thereby encouraging enhance agricultural lending. policy on increased participation of specialized financial institutions as to accelerate investments in agriculture sector is recommended. references adebola, s.s., s.w. yusoff and j. dahalan, 2011. an ardl approach to the determinants of nonperforming loans in islamic banking system in malaysia. arabian journal of business and management review, 1(2): 20-30. ahmed, a.s., c. thakeda and s. thomas, 1999. bank loans loss provisions. a reexamination of capital management, earning; management and signaling effects. journal of accounting and economics, 26(1): 1-25. ahmed, f. and t. bashir, 2013. explanatory power of macroeconomic variables as determinants of nonperforming loans: evidence from pakistan. world applied science journal, 22(2): 243-253. akpan, s.b., a.d. obot and u.a. essien, 2012. government agricultural credit policy and macroeconomic fundamentals: a case study of agricultural credit guarantee scheme fund in nigeria. public policy and administration research, 2(2): 61-75. badar, m. and y.a. javıd, 2013. impact of macroeconomic forces on nonperforming loans: an 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a.a., 2008. analysis of agricultural credit guarantee scheme loans default among beneficiaries in akwaibom state from 1990-2005. unpublished m.sc.thesis. department of agricultural economics and extension, university of uyo, uyo. nigeria. umoren, a.a., 2015. npls in nigerian banking system: effects on agriculture and manufacturing. unpublished ph.d.thesis, university of uyo, uyo. nigeria. umoren, a.a., s.b. akpan and e.j. udoh, 2014. analysis of agricultural credit gurantee scheme loans default among beneficiaries in akwa ibom state from 1990-2005. african journal of agricultural economics and rural development, 2(2): 121-128. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. 82 © 2019 by the authors; licensee asian online journal publishing group economy vol. 6, no. 2, 82-91, 2019 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2019.62.82.91 © 2019 by the authors; licensee asian online journal publishing group managerial optimism level, board of directors efficiency and debt decision in tunisian companies mohamed ali azouzi doctor, hdr and assistant professor in finance and accounting methods, faculty of management, university of monastir sidi messaoud, mahdia, tunisia. abstract this article deals with the relationship existing between the emotional aspect and decisionmaking processes. more specifically, it examines the links between managerial optimism level, debt decision and board of director’s efficiency. this stream of research argues that the ceo optimism level is affected by the board of directors efficiency. in this regard, an empirical study was conducted using a questionnaire as a data collection method adapted to a sample of 75 tunisian firms. regarding, the optimism level they have been measured by means of a questionnaire comprising several items. our analyzes revealed the importance of ceo optimism in the debt decision. it has been found that an optimistic leader prefers more debt even in companies ruled by independent boards. on the other hand, the results’ analyzing the hypotheses 2 and 3 regarding the size of the board and the combination of ceo and board chair does not confirm our theoretical analysis. keywords: ceo optimism, ceo education, board of directors, duality, financial policy, debt level, behavioral corporate finance. jel classification: d2, g3, l2, l5, m1. citation | mohamed ali azouzi (2019). managerial optimism level, board of directors efficiency and debt decision in tunisian companies. economy, 6(2): 82-91. history: received: 2 october 2019 revised: 5 november 2019 accepted: 9 december 2019 published: 17 january 2020 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. competing interests: the author declares that there are no conflicts of interests regarding the publication of this paper. transparency: the author confirms that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ................................................................................................................................................................... 83 2. hypothesis development ............................................................................................................................................ 83 3. research method .......................................................................................................................................................... 85 4. empirical results ......................................................................................................................................................... 88 5. conclusion ...................................................................................................................................................................... 89 references .......................................................................................................................................................................... 90 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2019.62.82.91&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ https://www.asianonlinejournals.com/index.php/economy/article/view/1236 https://orcid.org/0000-0002-1255-2131 https://www.asianonlinejournals.com/index.php/economy/article/view/1236 https://orcid.org/0000-0002-1255-2131 https://www.asianonlinejournals.com/index.php/economy/article/view/1236 https://orcid.org/0000-0002-1255-2131 economy, 2019, 6(2): 82-91 83 © 2019 by the authors; licensee asian online journal publishing group contribution of this paper to the literature in fact, to improve the explanatory power of the legal-financial approach to governance, the behavioral dimension has been integrated for a more in-depth analysis of the role of the board of directors. this study aims to highlight the role played by manager optimism on board effectiveness in controlling the company's debt level. 1. introduction since the works of modigliani and miller (1958) which prove the irrelevance of financing decisions of companies under the conditions of the perfect market. a large number of theoretical and empirical analyzes have been developed to study the determinants of business financing decisions caused by various market imperfections in the real world. earlier researchers in this field generally follow two competing theories, 'static trade off theory' and 'pecking order theory' which assumes a wide rationality. the study by frank and goyal (2003) concludes that there is no universal theory that can fully explain business financing decisions while traditional explanations for capital structure are largely based on the assumption of rationality of the managers. theorists integrated the behavioral dimension into the analysis of the choice of the capital structure; they explain his choice on the ceo emotional biases. this integration has enriched theories of capital structure: the static trade off and peking order theory (azouzi and jarboui, 2012; azouzi and jarboui, 2018). some studies address the issue from the point of view that rational managers interact with rational outside investors too. only recently a more small number of analyses emerging by focusing on cognitive biases (optimism, excess of trust and loss aversion) managers themselves and trying to understand how they can interact with the different statuses of the company and primarily with the control system. schrand and zechman (2010) show that overly confident managers make optimistic forecasts and in order to meet these expectations, they show higher levels of future earnings. in a series of studies, malmendier and tate (2005); malmendier and tate (2008); malmendier and tate (2015) and malmendier et al. (2010) formalize the notion of leadership behavior and provide empirical evidence to analyze the effects of managerial optimism level on funding preferences and capital structure choice. the implications of optimism for the company's funding decisions have recently begun to be explored by behavioral finance researchers. in the psychological and behavioral literature, optimism is generally associated with an exaggerated positive perception about the probability that the favorable events will occur and simultaneously with the underestimation of the probability that the adverse events will occur. similarly, heaton (2002) argues that managers tend to overstate not only their investment opportunities but also the value of their companies. this principle gives a total convergence of the interests of direct with the interests of the shareholders. gervais and odean (2001); chang et al. (2009) show the existence of a positive relationship between optimism and uncertainty. this uncertainty implies the risk aversion and precisely the risk of the loss of the stability of position of ceo. so the leader will defend his interests and seeks to take a better position in society and refuses any decision that could change its current state. in this sense, the entry of new shareholders will increase the level of control exercised over the ceo which represents one of the dangers for this leader. this reflects the negative relationship between the ceo optimism level and the equity choice. debt carried out under the conditions described above can constitute a rooting strategy for the ceo. the strategy is for agents who wish to take root, to increase the cost of their replacement for their principal. by doing so, they can benefit from better job security, higher remuneration or even more freedom in their actions. faced with the many questions raised by research on the link between the optimism of leaders and the modes applied to control this cognitive bias, we will analyze the impact of certain governance mechanisms on the decisionmaking of financing by the biased agent. this analysis will focus on the internal mechanism of governance, the board of directors. the board of directors is the central mechanism of the internal governance of the company. the relationship between executive optimism and the choice of board feature, as a key determinant of corporate governance, was founded by several previous researchers and particularly by malmendier and tate (2005). implicitly, they suggest that corporate governance can be a solution for limited irrational management and especially those that derives from managerial optimism. the board effectiveness is a few standards about its characteristics (jensen, 1993) in what follows we develop the possible effect of the board mechanisms on leadership optimism and funding decision. in this article, we try to develop some testable predictions in order to give some logical answers, even partial answer for the following question: can manager optimism affect board efficiency and debt decision? this study aims to explore three main hypotheses that explain the effect of optimism on the board of directors characteristics (independence of members, duality and size) and the decision of indebtedness. 2. hypothesis development since the works of modigliani and miller (1958) who proved the irrelevance of financing decisions of companies under the conditions of the perfect market. a large number of theoretical and empirical analyzes have been developed to study the determinants of corporate finance decisions against real-world market imperfections. earlier researchers in the field are generally two competing theories, the "static trade off theory" and the "pecking order theory" which assume a great rationality. the study concludes that there is not a universal theory of capital structure choice while traditional explanations for capital structure largely repent on the rationality assumption of managers. some theorists have incorporated the behavioral dimension into the analysis of the choice of capital structure. they explain his choices by the emotions of the leaders. malmendier and tate (2005); malmendier and tate (2008) and malmendier et al. (2010) formalize the notion of leadership behavior and provide empirical evidence to analyze the effects of biased ceos on the preferences of financing and the choice of capital structure. in the tunisian context, azouzi and jarboui (2012) analyze data from 100 firm and find a significantly positive correlation between optimism and the choice to apply internal financing (internally generated resources choice) while a negative economy, 2019, 6(2): 82-91 84 © 2019 by the authors; licensee asian online journal publishing group relationship between optimism and the decision to increase capital. parallel to the evolution of the capital structure theory new governance literature highlights ceo behavior and its impacts on different business decisions. adam and li (2012) state that the board is a moderator of behavioral biases among leaders. they add that the presence of the directors is justified by the forecasts of the valuations errors of the optimistic leaders. in other words, board independence is recommended to control the decisions of optimistic leaders. in this section, we examined the effect of the board's characteristics on the choice of debt by optimistic leaders. 2.1. managerial optimism, board of director’s independency and debt choice theorists point out that independent directors are an effective way of controlling the management team. fama and jensen (1983) suggest that the board is the best internal control mechanism to monitor management's behavior. baker et al. (2007) consider that the company's policies are appropriate for overvaluation and undervaluation of firms by market. external directors are aware that the market has undervalued their firms. they are reluctant to a new recourse to external funding mode. these directors help the optimistic manager (overstates the ability of his company) to make rational decisions. this implies a negative relationship between board independence and debt financing. the presence of asymmetric information implies the increase in the cost of external financing methods (debt and equity choice). this encourages external director’s members to minimize the use of its leader in external financing mode. this uninformed director aware of the bias of its leader seeks to limit the risk of the company by refusing the external financing mode (debt). this implies a negative correlation between the external directors and the firm debt ratio. schwizer (2013) shows that companies with the best economic performance in the list have independent members on the board. the author adds that the high level of performance is justified by the moderating effect of the board's independence on the behavioral biases of the manager at the evaluation of investment opportunities and risk decision. the presence of independent members reduces the manager's level of optimism and encourages him to make less risky decisions, including limiting the use of debt. chang et al. (2012); fauzi and locke (2012) affirms this finding. the authors found that the level of indebtedness decreases in the presence of good governance signaled by a high level of independence. malmendier and tate (2005); malmendier and tate (2008); malmendier and tate (2015) find that the optimistic manager will give priority to self-financing, then debt and ultimately to the issuance of shares. this preference for self-financing is justified by the presence of effective control. in fact, the presence of independent auditors obliges the manager to minimize the financial risk of his company by a weak recourse to the external modes of financing (debt choice and equity). this implies a negative correlation between the external directors and the firm debt ratio. ben-david et al. (2010) add that optimistic managers will tend to underestimate the volatility of their company's future cash flows or overweight their private signals relative to public information. this underestimation of risk prompts optimistic leaders to make a risky decision (the choice of debt). it is for this reason that shareholders require a high level of independence in the board of directors. thus, the presence of a highly qualified director to assess the real risk of the company limits the biased decision (debt choice). this implies a negative correlation between the external directors and the firm debt ratio. it is in this context that the current work can be done, with an attempt to test the following hypothesis: h1: board of director’s independency (low level of managerial optimism) is negatively correlated with firm debt ratios. 2.2. managerial optimism, board of director’s size and debt choice size is one of the most important features that can affect board efficiency. according to jensen (1993) and lipton and lorsch (1992) a small board can perform its task properly. thus, a small board limits the sub optimal decisions of an optimistic leaders whose rising debt level. the board size has a significant impact in determining debt ratio. they concluded that the large board of directors, making firm more inclined to take risks and seek external financing resources. this is explained by the fact that the presence of a significant number of administrators implies the increase of the cognitive conflicts and reduces board effectiveness in the control of the leader. this optimistic leader of his company's capabilities is aware of weak control uses more risky decisions whose preference for debt. gervais et al. (2011) have shown that the capital part is the leader is a means of convergence of interests with these shareholders. the goal of a leader is to counter the control mechanisms, including the board of directors. in other words, an optimistic leader increases his share of capital to limit the effectiveness of small board and make risky decisions including the debt choice. jiraporn et al. (2012) find that firms whose managers are more entrenched (with large board of directors) are significantly more leveraged. these authors then argue that debt and governance play the same role and may substitute for each other.this is also known by the optimism of the leader. thus, an optimistic leader prefers indebtedness to signal his good management. debt has a decisive role and becomes a perfect substitute of weak control of the board of director’s. so a high level of debt is used by the optimistic ceo and the presence of a large board. azouzi and jarboui (2014) show that optimistic leaders overestimate the expected return on their projects. they use internal financing methods for the payment of dividends. they seek to make their shareholders more loyal and limit their control (small board). consequently, they use the external mode of financing the least risky (debt) to concretize all the possible opportunities of the company. this asserts that even in the presence of an effective control (small board) the leader opts for the debt choice. the increase in the number of board members to increase in the debt ratio.in other words, in large board there are problems of coordination, communication and decision-making. in this context the leader becomes freer in the management of the company. this optimistic and less controlled leader opts for risky decisions, including the debt economy, 2019, 6(2): 82-91 85 © 2019 by the authors; licensee asian online journal publishing group choice. this implies a positive correlation between the board size and the firm debt ratio.it is in this context that the current work can be done, with an attempt to test the following hypothesis: h2: an optimistic leader in a large board prefers more debt than a rational leader. 2.3. managerial optimism, ceo duality and debt choice ceo duality is defined as the occupation of the post of the executive manager and the chairman of the board of directors at the same time (jensen, 1993). the association between the supervisory and management functions increases the leader optimism level. this optimistic leader will tend to invest in new projects. they are forced to choose debts because the presence of a strong asymmetry of information implies a higher premium demanded by the investors in case of an issue of new securities. the choice of debt is also intended to reduce the agency conflict between the optimistic leader and these shareholders. fairchild (2005) adds that the optimistic leader who believes he controls the risk of his business uses risky debt. the author shows that this leader makes arbitration between the probability of success of a project and its costs of funding. this arbitrage is affected by the ability to evaluate alternatives, including the optimism bias. in other words, the a dual function favor (ceo duality) increases the level of leader optimism. this bias impels him to take risky decisions including the preference for indebtedness. petra and dorata (2008) study the link between the level of incentives and corporate governance structures. the authors conclude that the presence of duality ceo reduces the level of incentives. in other words, duality increases the leader's level of involvement and optimism. this optimistic leader has more motivation to work in the interests of these shareholders. they are aware that the sub market evaluates the value of their business. he has urged to issue debt securities to report the solvency of his business. he seeks to benefit from reports debt. abor (2007); vakilifard et al. (2011) and mokarami et al. (2012) argue that duality increases the manager's preferences for debt choice. thus, duality reduces communication conflicts and favors the centralization of the decision. this decisional centralization facilitates the function of the leader. this context favors the emergence of optimistic leaders. these optimistic leaders seek to realize all the possible investment opportunities of their companies. they choose debt as a method of financing to avoid hostile public offers. their objectives are to guarantee their places in the company. dufour and molay (2010) postulate that the level of indebtedness of companies limits the risks of taking control. an optimistic (ceo duality) leader about the growth opportunities of the company with its interest to limit the risks of hostile acquisition. he uses a dual function to find a limited debt threshold, the risk of hostile acquisition and the good health of his business. it is in this context that the current work can be done, with an attempt to test the following hypothesis: h3: ceo duality (high level of optimism) is positively correlated with firm debt ratios. 3. research method 3.1. data to note, the empirical tests are based on 75 non-financial tunisian firms during the 2016 fiscal year (34 are listed companies and 41 are non-listed companies, see table 1. all financial firms (including banks) outing to the fact that this business sector is regulated and likely to have fundamentally different cash flows and characteristics. firms with insufficient data regarding about emotional characteristics and the board of director’s composition are also excluded. the board’s compositions, as well as financial characteristics data, are gathered from the bvmt annual report. emotional and psychological characteristics are collected by means of an administered questionnaire. table-1.visited compagnie. initial bvmt sample for 2016 81 financial firms (25) other non-financial firms 49 insufficient data to ceo emotional characteristics’ (18) insufficient data to board of directors compositions (12) final sample 75 3.2. variables’ measurement the objective of this section is to determine the variables’ measurement. 3.2.1. debt level we observe several authors (hovakimian et al., 2004) have selected a variety of variables that measure the level of debt in the company. measures such as total debt service ratio. other shave used the debt ratio in the medium and long term (myers, 2001). the debt ratio in the short term was also used by titman (1984). as part of our analysis we propose to use the debt ratio as a measure of this variable. it should be noted that this ratio is calculated by: leverage ratios (lev) = (total debt / total assets). this measure is also used by koh (2003); demaria and dufour (2007); jarboui and olivero (2008); ben-david et al. (2010) and sahut and gharbi (2008); azouzi and jarboui (2012). to show that the manager uses debt or not, we can use the change in debt ratio. a positive change indicates the use of debt. leverage ratios variation = levn–levn-1/ levn-1 3.2.2. managerial optimism economy, 2019, 6(2): 82-91 86 © 2019 by the authors; licensee asian online journal publishing group the questionnaire focuses on evaluating and scoring of the ceo optimism level the questions have been inspired from the questionnaires formulated by the fern hill and industrial alliance companies table 2. the emotional bias takes two follows:  1 if the individual has a high level for optimism.  0 if not. table-2. items used in the optimism scale (10 items). items factor 1 : estimate of future returns 25.17% factor 2 : estimate of growth opportunities 18.18% factor 3 : ability to solve problems 13.75% factor 4 : overestimation of the personal situation 10.40% 1. which of the following best describes your financial goals? 0.832514 2.you are very comfortable with investments that have the potential for high returns even though they will periodically drop in value 0.773015 3.my previous investments are always successful thanks to my specific skills 0.713358 4.how do you see the next twelve months? the general situation of your company's 0.696078 5.i intend to increase my investments in the next 12 months 0.808931 6.in times of uncertainty, i usually expect the best 0.761058 7. how do you see your profit forecasts? 0.637175 8. when something has pissed me off, i can calm down quite quickly 0.705453 9. your future seems more interesting than your passing 0.636784 10. in my daily life, my emotions often annoy me 0.815148 3.2.3. board of directors according to fama and jensen (1983) the board of directors must meet certain characteristics of independence, size and structure in order to fulfill its control role effectively. 3.2.3.1. board size noteworthy, the board’s effectiveness highly depends on the number of directors and its size. relevant literature provides no consensus about the direct relationship between the board size and effectiveness. on the one hand, a larger board is less likely to operate effectively and is easier for the ceo to control (jensen, 1993). on the other hand, yermack (1996) considers that the board size is a factor among a range of variables that might influence executive compensation and company performance. in this study the directors’ board size (bsize) has simply been measured by the number of its members (dechow et al., 1996; yermack, 1996; pigé, 1998; coulton et al., 2001). 3.2.3.2. board independence the different characteristics pertaining to the board’s independence are measured by the following variable: bind is defined as the percentage of the board members who are simultaneously independent and non-executives which is equal to the number of outside directors divided by the total board members (forker, 1992; wright, 1996; haniffa and cooke, 2000; coulton et al., 2001). bind = number of outside directors /total board members 3.2.3.3. ceo duality board chairs role consists in monitoring the ceo (jensen, 1993). the latter supposes that ceos who also hold the position of board chair (duality) exert an undue influence on the board, compromising the strength of the board’s governance. the board chairs characteristics are defined by dual = 1 if the ceo also owns a board chair and 0 otherwise table 3 presents the characteristics of boards of directors of the 75 tunisian companies included in our study. tunisian companies are run by independent boards, medium (seven directors) and not dominated by ceos. table-3.board of directors’ characteristics. variable mean std. min max n entire board 9.50 3.20 4 12 75 outside directors 3.27 1.38 1 4 75 affiliated directors 2.47 1 1 3 75 inside directors 4.20 1.67 1 5 75 ceo duality 0.32 0.55 0 1 75 economy, 2019, 6(2): 82-91 87 © 2019 by the authors; licensee asian online journal publishing group 3.2.4. control variable 3.2.4.1. ownership concentration in our study, we will adopt the measure chosen shabou (2000) adapted to tunisian context. this variable is dichotomous; it is set to 1 (value 0) when the percentage held by the block holder is greater (less) than 50%. the companies where the shareholders hold at least 50% of the capital were qualified as heavily concentrated. 3.2.4.2. firm age in this study companies are divided into two groups, a business young and a mature company. this variable is dichotomous where a young firm refers to a company that operates less than five years old takes the value 0 and a mature firm is greater than five years which takes the value 1. 3.2.4.3. firm size as noted by ball and foster (1982) size was used to represent the competitive advantage of a firm and the ability of the management team. so we can implicate size as a signal about the effectiveness of governance mechanisms. this is why we introduce size as a control variable for this research. this variable can be measured in different ways. the size of the business can be measured in several ways, such as total assets, capital invested, turnover, number of employees, market value of business and equity. we will retain the criterion of capital invested whose tai variable is an ordered multinomial variable from which it takes 1 if the capital invested is less than 100 million dinars (md), 2 if the capital invested is between 100 million dinars and 500 million dinars and 3 if the capital invested is more than 500 million dinars. 3.2.4.4. ceo seniority seniority reflects the executive's experience expressed in years spent in the company. this variable may reflect the leader's experience, skills and relationship network. the leader's past can have a positive or negative effect on the degree of his optimism. this variable is dichotomous (pigé, 1998) it takes the value 0 for a new officer with a seniority of less than 5 years, and the value 1 for a ceo with seniority of more than 5 years. table-4.variables descriptions. class : phenomena : mesure : variables : predictions : endogens variables : debt level debt choice leverage ratios (lev)= (total debt/ totalassets)leverage ratios variation = levn-levn-1/levn-1 lev exogenous variables : lev optimism directors overestimate capacity of their firms the questionnaire obtained score op + board of directors board implication in the decision number of its members bsize + the presence of independent members in the board number of outside directors /total board members. bind ceo also owns the board’s chair 1 if the ceo also owns the board’s chair and 0 otherwise dual + controls variables: ownership concentration shareholder involvement 1 when the percentage held by the block holder is greater than 50% and 0 otherwise. oc + firm age firms signaled reputation 1 if firm is greater than five years old and 0 otherwise. fiage + firm size firms signaled performance 1 if the capital invested is less than 100 million dinars (md), 2 if the capital invested is between 100 million dinars and 500 million dinars and 3 if the capital invested is more than 500 million dinars. fisize + ceo seniority ceo signaled experience 1 if the ceo is at the company more than 5 years and 0 otherwise. seni + ceo financial education assessment of financial decisions 1 if the ceo to a financial education and 0 otherwise. fiedu economy, 2019, 6(2): 82-91 88 © 2019 by the authors; licensee asian online journal publishing group 3.2.4.5. ceo financial education this variable is dichotomous where a leader who has a financial education takes the value 1 and a manager who has gone through an education other than financial takes the value 0. for the purpose of simplification, we summarize the measurement of each of the model's variables, its name and its expected influence on the debt decision in the table 4. 4. empirical results we will check the relationship between managerial optimism, the board of directors and the debt decision using our model. in this costume, we describe in detail the different tests that are performed. 4.1. empirical model y= α + α1 op + α2 bsize + α3 bind + α4 dual + α5 oc + α6 fiage + α7 fsize+α8 seni+α9 fiedu +ξ. where:  y: the firm debt choice (lev).  op: the score of optimism.  bsize: the board of director’s size.  bsize: the board of director’s independence.  dual: ceo duality.  oc: the ownership concentration.  fiage: the firm age.  fisize: the firm size.  seni: ceo seniority.  fiedu: ceo financial education. 4.2. empirical tests we opted for the binary logistic regression on the various variables: this is to explain the effect of managerial optimism level on the involvement of the board of directors in the control of debt choice by appealing to the different variables selected. 4.3. results table-5. debt choice results. variables bêta significance expected relationship reached relationship constant 10.378 0.013278 optimism future returns estimate 1,233 0,022** + growth opportunities estimate 1,588 0,006*** + + ability to solve problems 1,276 0,020** + + personal situation overestimation 0,294 0,512 + + board of directors bsize -5,099 0,008*** + bind 5,867 0,003 *** + + dual -0,227 0,825 + fisize -0,246 0,764 + fiage -23,619 0,999 + oc 3,255 0,007*** + + seni 26,332 0,998 + + fiedu -3,445 0,003*** cox and snell ratios r2 0,476 model χ2 48,506 p=0,000003 *** -2 logs of likelihood 45,524 n 75 note: **, *** respectively significance at 5% and1%. the results appearing on table 5 show that managerial optimism and board characteristics explain 47.6% of the debt decisions of the companies in our sample, (r² = 47.6%). the examination of the results concerning the variables related to managerial optimism shows a negative and significant relationship between the criterion of the estimation of future returns and the debt decision (β= -1.233, p = 0.022).this can be explained by the fact that an optimistic executive who overestimates future returns applies less debt to minimize the financial cost and loyalty to these major shareholders. overestimation of future returns implies a rise in the expected dividend level. the expected dividend increase leads to a valuation of the shares and favors the equity choice relative to the debt. the results show the existence of a positive and significant relationship between the criterion of the estimation of growth opportunities and the decision of indebtedness (β = 1.588, p = 0.006).this implies that a optimistic ceo who is accustomed to overstating the investment opportunities of his company in times of uncertainty will increase his commitment to risky decisions (including the choice of debt). they are planning their ability to repay their debt. on the other hand, he believes that his company is undervalued by the market and avoids the equity choice. they therefore prefer debt. economy, 2019, 6(2): 82-91 89 © 2019 by the authors; licensee asian online journal publishing group a positive and significant relationship in the range of 5% is between problem solving ability and debt level (β = 1.276, p = 0.020).this relationship is explained by the fact that an optimistic leader overestimates his skills to reduce risks. this led him to choose riskier decisions, including the preference for additional debt choice. the results also show a positive and insignificant relationship between the overestimation of the personal situation and the debt ratio. the non-significance of this criterion of optimism is justified by the vigilance of the agents. this is one of the rooting means is to ignore the personal situation in the work setting and in the strategic decisions making. the results show a positive and significant relationship between the percentage of independent external directors on the board and the firms debt level (β = 5.867, p = 0.003).the presence of independent directors gives the company the benefit of technical expertise and privileged environmental information in order to converge the interests of the principal with that of ceo. this convergence gives more freedom for the optimistic leader to increase the frequency of achievements of new projects. to finance these projects, optimistic leaders prefer debts to ignore the sharing of profits incurred on new shareholders in case of equity choice. this implies the increase in the debt level of the company. in other words, the existence of independent members on the board of directors gives a good signal on the leading part of the company. the latter seems to have a favorable and easier access to debt. we also note that the debt level is in negative relation and not significant with the ceo duality (β = -0.227, p = 0.825).this is justified by two factors, debt and the nature of tunisian firm. in fact, if a company is in debt, it is subject to the power of an external auditor who does not accept the presence of a ceo as chairman of the board.on the other hand, there is a large percentage of family businesses in tunisian companies. this negatively affects the significance and robustness of responses (72% of companies are family businesses). the regression also shows a negative and significant relationship between board size and debt ratio (β = 5.099, p = 0.008).a plausible justification for this result is that an optimistic manager who seeks to increase the value of the company prefers to have greater discretion over his future investments. indeed a small board of directors can keep this discretion. his asymmetry leads to undervaluation of the new securities issued. as a result, the choice of financing through equity choice will be more expensive. so a little advice will encourage debt choice. there is a positive and significant relationship between indebtedness and ownership structure of the firm (β = 3.255, p = 0.007).the presence of block holders is considered a disciplinary governance mechanism associated with a high level of control over the leader. thus, the strict control and discipline exercised by the block holders helps to align the manager's behavior with the company's objectives and limit his discretionary attitude. an optimistic leader is aware of the risk of losing his job and reputation on the market. he seeks to signal his good management by a preference for debt. there is evidence of a negative and insignificant relationship between firm size and debt level (β = -0.246 p = 0.674).due to better investor knowledge, large companies can issue securities more easily without being undervalued than small businesses. another interesting result is that the age of the company can increase the debt ratio (β=-23,619, p=0.999).this is justified by the fact that mature firms have more experience with the adverse effects of debt. they are therefore more attentive in their preferences for debt. the correlation between the debt ratio and ceo seniority is positive and not significant (β = 26.332, p = 0.998).the seniority of the leader leads him to maintain relations with the market. these contacts lead to strong links with the lenders so the use of debt as a means of financing will be easier. finally our results indicate a negative and significant correlation between the ceo financial education and firm debt level (-3,445, 0.003).the financial education of the leader leads him to make rational financial decisions including the choice of a low level of debt.this manager is more aware of the risk of bankruptcy of the company in the case of a high level of debt. financial education therefore reduces the negative effects of optimism and psychological bias on managerial decisions. 5. conclusion in this article, we have advanced an original essay that aims to discuss the effect of managerial optimism and board characteristics on the on funding preferences and capital structure choice.starting from the role of the introduction of the behavioral dimension in the enrichment of the analyzes of corporate governance and capital structure, we aim to note the effects of optimism bias on the decisions of senior managers in tunisia companies, this work has attempted to achieve the following objectives:  present the notion of managerial optimism and its integration into the theory of corporate governance and the theory of capital structure.  studying the impact that executive optimism would have, directly or indirectly, on board control effectiveness and consequently on the debt decision.  verify the presence of a relationship between the optimism bias of the leader, the board of directors and the debt level. the theoretical analysis presented argues in favor of the direct impact of ceo optimism on the effectiveness of control exercised by the board of directors and subsequently on the debt decision. even more we have presented other actors who can affect the bias of optimism and the decision of indebtedness. these actors are the characteristics of the company (size and age) and the characteristics of the leader (seniority and education). the empirical part attempted to fill a deficit in research in behavioral finance, by presenting a survey on the executives of large private companies in tunisia. the analyzes of the data collected revealed the importance of leadership optimism in the debt decision. the empirical analysis of the relationship of managerial optimism with the board of directors (size of board, presence of external and cumulative functions) and the decision of financing by debt shows different results. in general, there is a positive impact of managerial optimism on the level of debt of tunisian companies. our analyzes revealed the importance of ceo optimism in the debt decision.it has been found that an optimistic leader prefers more debt even in companies ruled by independent boards.on the other hand, the results analyzing the hypotheses 2 and 3 regarding the size of the board and the combination of ceo and board economy, 2019, 6(2): 82-91 90 © 2019 by the authors; licensee asian online 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school of business administration. research support); -no. 9601-18. handle. available from http://hdl.handle.net/2027.42/36268. yermack, d., 1996. higher market valuation of companies with a small board of directors. journal of financial economics, 40(2): 185211.available at: https://doi.org/10.1016/0304-405x(95)00844-5. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. economy issn(e) : 2313-8181 issn(p) : 2518-0118 vol. 3, no. 2, 51-73, 2016 www.asianonlinejournals.com/index.php/economy 51 a measurement of annual gdp performance of the 162 wto members between 1989-2001 and 2002-2014 alan bayham1 1 uofp phoenix, arizona usa abstract the annual gdp performance mean between all 162 world trade organization countries was measured between two time periods: 1989-2001 and 2002 and 2014. the 10 best and worst performing nations were measured and analyzed against each other for each time period. the 10 nations with the largest positive and negative annual gdp mean performance shift was compiled and discussed. discussion regarding the data, wto membership, and external trade networks is included, and the article incorporates an analysis effective austerity measures, lack of diversification, and membership in trade and political organizations, which have led to both positive and negative outcomes in relation to annual gdp mean economic performance for wto member nations over the two time periods measured. analysis regarding the annual gdp mean performance concludes that the wto has promoted world trade throughout the world, and this has directly resulted in an increase of annual gdp mean performance by 29% over the two time periods studied for wto member nations. keywords: world, trade, organization, gross, domestic, product, economics contents 1. introduction ......................................................................................................................................................................... 52 2. purpose, rationale, and hypothesis .................................................................................................................................... 54 3. methods ................................................................................................................................................................................ 54 4. results .................................................................................................................................................................................. 54 5. discussion ............................................................................................................................................................................. 65 6. conclusion ............................................................................................................................................................................ 70 references ................................................................................................................................................................................ 73 citation | alan bayham (2016). a measurement of annual gdp performance of the 162 wto members between 1989-2001 and 2002-2014. economy, 3(2): 51-73. doi: 10.20448/journal.502/2016.3.2/502.2.51.73 issn(e) : 2313-8181 issn(p) : 2518-0118 licensed: this work is licensed under a creative commons attribution 3.0 license funding: this study received no specific financial support. competing interests: the author declares that there are no conflicts of interests regarding the publication of this paper. transparency: the author confirms that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: history: this study follows all ethical practices during writing. received: 17 may 2016/ revised: 16 june 2016/ accepted: 20 june 2016/ published: 24 june 2016 publisher: asian online journal publishing group http://creativecommons.org/licenses/by/3.0/ http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.2/502.2.51.73 https://orcid.org/orcid-search/quick-search?searchquery=alan bayham http://search.crossref.org/?q=10.20448/journal.502/2016.3.2/502.2.51.73 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.2/502.2.51.73 https://orcid.org/orcid-search/quick-search?searchquery=alan bayham http://search.crossref.org/?q=10.20448/journal.502/2016.3.2/502.2.51.73 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.2/502.2.51.73 https://orcid.org/orcid-search/quick-search?searchquery=alan bayham http://search.crossref.org/?q=10.20448/journal.502/2016.3.2/502.2.51.73 economy, 2016, 3(2): 51-73 52 1. introduction 1.1. gross domestic product the gross domestic product of a nation is used by economists as one of the primary economic indicators to measure the strength and health of countries economies (investopedia, 2016). the gdp represents the total monetary value of all goods and services produced by a nation over a period of time, and it should be thought of as a representation of the size of a country's economy. economists arrive at the figure of a country's gsp in one of two ways: by adding up the annual income of a nation or by adding up the money spent within a nation. the income approach is calculated by adding up employees' salaries, gross profits of companies within a nation, and taxes minus subsidies. the expenditure method, which is considered to be more common, is calculated by adding a nation's total consumption, investments, government spending, and net exports. a country's gdp figures, which show a nation's economic production and growth, impacts everyone within an economy because it reflects a country's economic health. significant changes in a nation's gdp has a large impact on its unemployment rate, wage increases, and stock markets. thus, poor gdp figures results weakened economic growth for a nation, which results in fewer jobs, fewer profits, and lower stock prices. negative gdp growth is what investors use to determine the strength of a nation's economy and whether or not it has entered an economic recession. 1.2. the world trade organization the world trade organization was developed in 1995 from the general agreement on tariffs and trade in 1947 (heakal, 2016). the goal of gatt was to reduce tariffs and facilitate the global trade of goods following wwii, and it was based on the most favored nation clause that allowed selected countries privileged trading rights within specific national economies. the goal of gatt was to increase competition between nations by permitting them to have equal trading rights, so individual nations would not have trading advantages over others. from 1947 to 1994, the trading regulations established through gatt governed multilateral trading between participating nations, and it worked to address agricultural issues and anti-dumping regulations between its members as well. the uruguay round is of particular importance in the history of gatt because it laid the framework for a general agreement on trade for services, and it established regulations to protect intellectual property rights within nations. neither gatt nor the wto have made public a list of definitive governing rules between member nations, but there is a consensus among most economists that the organization should be rules-based (baldwin, 2016). the five governing principles agreed upon by most economists that should be interpreted as constitutional are as follows: nondiscrimination, transparency, reciprocity, flexibility, and consensus in decision-making. nondiscrimination refers to the lack of favoritism that can be displayed toward member nations, transparency refers to the reduction of conflicts regarding trade when policies are made public, reciprocity refers to what nations can expect from other nations when they remove national trade barriers, flexibility refers to permission of nations to use tariffs against member nations in order to maintain domestically significant industries, and consensus refers to decision-making processes in which agreements are made regarding regulations by member nations. the goal of the wto is to ensure that global trade functions in free and predictable manner, and, as a result of establishing ground rules for global trade within member nations, it has laid the legal framework for a system of international commerce between the majority of nations embodying the planet (heakal, 2016). the stated purpose of the organization is "economic peace and stability in the world through a multilateral system based on consenting member states", and the organization currently has 162 member nations who have consented to the regulations and upheld ordinances from the organization at the national level (heakal, 2016). this means that the wto's regulations are adopted and become part of a national framework of legislation that is wholly adopted by a member nation's domestic legal system. the regulations outlined in the agreement of member nations are applied at the national level to local and national companies when conducting international business, and these regulations extend to national companies that set up organizations in other countries throughout the world. decisions regarding the regulations imposed by the wto are generally made by a consensus, but a majority vote is periodically used (heakal, 2016). the ministerial committee is based in geneva, switzerland, and it holds meetings to make top decisions at least every two years. there are also a number of councils and committees working to ensure freer trade within the organization. the wto resolves disputes between nations in regards to trade barriers placed on particular goods, and, if a resolution does not occur following negotiations, the organization can issue trade sanctions against nations in violation of their regulations. 1.3. criticisms of the wto the wto has been the target of protests around the world because individuals within member nations feel that the multilateral trading systems have led to policies that are undemocratic and result in a lack of transparency during negotiations of the ministerial committee (heakal, 2016). critics also believe that nations who are members of the wto compromise national sovereignty because the organization functions as a global authority on trade and constantly has the right to review a member nation's domestic trade policies. member countries often have to sacrifice national interests to maintain membership in the wto and not to violate agreements, which limits a nation's choices and ability to protect key industries within its domestic market. opponents also note that democratic countries may continue to do business with totalitarian regimes in the name of free trade as a result of the wto, and they feel that these instances, specifically when democratic governments continue to conduct trade with nondemocratic governments, that big business is favored over human rights and individuals' right to freedom. other instances that have alarmed critics of the wto's regulations are in relation to intellectual property, and it has sparked debate surrounding human rights (heakal, 2016). a well-known instance is in regards to the patenting of medicines in which national governments in both sub-saharan africa and south america forbid the manufacture of generic drugs that are needed by the poor to save lives because they do not want to violate ordinances set forth by the wto and comprise their nation's membership. the reality is that individuals in many of these nations are in need of these drugs, but they simply cannot afford the non-generic versions of them. they, however, are left to die by the economy, 2016, 3(2): 51-73 53 wto and their governments to avoid possible trade sanctions resulting from violations of intellectual property imposed through the organization's regulations. membership in the wto typically benefits member nations and can facilitate investment in nations, which can assist in boosting national economies and increase the standard of living for all participating nations (heakal, 2016). investors from developed economies have historically been at an advantage over nations with less wealth, and this results in a cycle in which investors developed economies end up having great influence over poorer nations. these regulations, however, are in investors' interest and can help facilitate an investment process that would not exist on such a large scale without the wto, but it is clear that controversy surrounding free trade and freedom will continue to persist well into the future as the wto continues to grow in conjunction with the continued evolution of the global economic system it has helped to create. 1.4. benefits of the wto to member nations theoretically, members of the wto should have equal access to each other's markets, and no nation should have superiority over other members of the organization in relation to trade (beattie, 2016). this, however, does not happen in practice in consideration of the system of tariff brokering in which nations are permitted to protect vital national industries if the removal of tariffs would lead to the loss of crucial national industries. presently, wto members nations are permitted to add most industries considered to be of national importance, and developed nations are attempting to presently add the effects of lost labor and lack of production to this list to justify an increase in tariffs. in general, tariffs are taxes imposed on purchases of specific products in most nations, and they result in increasing government revenue and, potentially, have negative side effects for consumers (beattie, 2016). when tariffs are imposed on a product, foreign products cost more at the domestic level, and national manufacturers often raise their prices as well to increase profits. this unfortunately results in higher prices being paid by consumers and less competition in domestics markets, and the result is often national governments use public money from tariffs to produce and support inferior products. ultimately, wto-sanctioned tariffs, anti-dumping measures, and restrictive quotas used to protect national industries end up hurting national industries because they do not expose them to international competition, which results in the removal of necessary competition needed to invest in new technologies, control costs, and improve production. this essentially results in international competitors becoming more innovative and stronger, which makes national core industries increasingly vulnerable to true free trade and forces consumers to pay premium prices for domestic goods. domestic consumers are typically unaware of these taxes because they take the form of stealth tariffs, and this results in increasing governments revenue at the expense of the consumer to make foreign products less competitive in comparison to lower quality national products through hidden and smaller taxes than most citizens are used to. 1.5. wto transparency one of the main criticisms of the wto is the lack of transparency it has during its meetings, which contradicts one of the main objectives that it set for itself when the organization was gatt (beattie, 2016). in settling disputes or developing new regulations, it has regularly been unclear which nations were involved in the decision making process. liberals view this lack of transparency as the result of committees made up of economically stronger nations within the wto conspiring to exploit less developed and economically weaker nations. this view appears to be true because historically the most economically powerful nations set the wto's agenda, and they were the first to endorse anti-dumping acts to protect domestically vital industries. free market supporters have attacked the wto policymaking process on the grounds that the organization has increasingly made free trade heavily politicized and complicated. they argue that if free trade were to exist between nations that the organization would be completely unneeded and that to properly encourage trade governments would permit private companies to trade on a deal-bydeal basis with no international oversight. 1.6. the evolution of the wto the wto started with 23 member nations in 1947, but it has grown to 162 members nations today that have universally accepted and follow the regulations set forth by the organization (baldwin, 2016).for most imports among these nations, tariffs imposed are below 5%, but there are no tariffs for a large share of the imports among member nations. since 2001, there have been 20 nations that have joined the wto, which includes both china and russia. over the last 15 years, the majority of wto members have substantially lowered trade barriers among member nations, but, depending on how it is viewed, these tariffs, fortunately or unfortunately, have been made bilaterally, regionally, and unilaterally, which has effectively diminished the power of the wto and the trade agreements through it between nations. as a result of the weakening of the wto through alternative trade negotiations between nations and regions, there has been little progress on the liberalization of trade for over the last two decades, and, in some ways, the implications of both multilateral and regional trade talks has minimized the effectiveness and power of gatt as the wto (baldwin, 2016). the wto has dramatically shifted power since its inception from the quad to the emerging economies who have taken up membership. this has been a significant development and reflects a dramatic shift in power from the quad, which are developed economies, to the emerging markets throughout the world. the quad used to account for 75% of the world's imports, but, over the last two decades, this has changed to 50% of the world's imports. the result is a weakening of negotiation power during trade talks for developed nations because of the power adjustment and the subsequent wealth transfer to the developing economies throughout the world. this power shift has resulted from coalitions between developing nations, and it has resulted in increased economic and blocking-power by them in negotiations with the quad, which has permitted them to effectively block efforts by developed economies to enter into politically sensitive domestic markets. thus, it has undermined in many ways the original principals set forth in gatt and adopted by the wto because the addition of more member nations to the economy, 2016, 3(2): 51-73 54 organization has not lead to increased demand and better access to markets for all member nations, especially developed nations. the wto stands as a pillar of multilateral economic governance today, similar to gatt, despite superlative trade agreements made bilaterally, regionally, and unilaterally (baldwin, 2016). the wto still oversees universal norms of rule-based trade for all 162 participating nations, and it still settles trade disputes between member nations and issues regulations that are followed by nearly all its members. it, however, has not updated its rules since 1994, and it has failed to adopt to the growth of businesses and the adoption of the internet for business by most business worldwide in the twenty-first century. although no new regulations have been set by the wto for over 20 years, there have been substantial regional trade agreements between advanced and developing economies and continued tariff cutting, and there has been over 3,000 bilateral international investment treaties signed to date. thus, global trade and rule writing have continued over the last two decades, but they have circumvented both the regulations and regulatory processes set forth by the wto. the regional agreements, tariff cutting, and bilateral investment treaties conducted outside of the wto has kept the level of free trade high (baldwin, 2016). trade diversion, resulting from bilateral and regional trade agreements, has shown little economic evidence that has impacted the world economy a great deal, and, in instances were tariffs remain high, these trade deals have a tendency to exclude sensitive items as a result of these regional trade agreements, which has resulted in few preferences created that negatively impacting the wto's outdated rules. although there has been little impact on the wto's antiquated regulations to date, most economists feel that the future of megaregional agreements, like the trans-pacific partnership and the trans-atlantic trade and investment partnership, present a threat to the present status quo of international trade regulations governed by the wto. they feel that this will result in an international trading system that is fragmented, and it will ultimately exclude nations that are not partners, like china and india. it will most likely end up weakening the wto, and it will result in a second pillar of systems that circumvent the wto and weaken its power over free trade on goods and services, investment and intellectual property regulation, and the movement of personnel by multinational organizations. this will most likely have a domino effect throughout regions and indirectly impact all 162 nations that are currently part of the wto who will follow the larger economies trade models that are looking to adopt regional protectionism for national interests against fast growing developing economies, like china and india. 2. purpose, rationale, and hypothesis the purpose of this study was to investigate wto member nations over two periods: 1989 to 2001 and 2002 to 2014. the rationale for choosing to measure wto member nations gdps is based in economic theory because it is used by economists worldwide in measuring the strength and performance of economies. therefore, to measure the strength and performance of wto member nations, the annual gdp mean performance was used for the two aforementioned periods of time and measured against each other. the periods selected represent the annual gdp mean performance of the present 162 members previous to china's entrance to the wto and thereafter. this is substantial because china is presently the one of the world's largest, the most populated country in the world, and, in many ways, represents a shift in power from the united states, the european union, japan, and canada or the quad to developing economies throughout the world. this is an investigation on whether or not the effects of joining the wto has been beneficial for both developed and developing economies, and it will analyze and compare the best and worst annual gdp mean performance by all member nations over the two periods of time mentioned above. it will also investigate the effect of increased free trade on the newer member nations of the wto in comparison to longtime members of the organization. it is hypothesized that the increased free trade and membership in the wto have been beneficial for the developing economies and has negatively impacted the developed economies throughout the world who are members of the wto. 3. methods the study was conducted by retrieving annual growth from all countries who were members of wto in 2014 for two periods of time: 1989 to 2001 and 2002 to 2014. member nations' annual gdp mean performance data was recovered from both comparative periods from the world bank's website, and current membership information was recovered and verified from the wto's website (world trade organization, 2016). because of the political situation and size of the market, nations that are members of the european union and the eu are considered separately by both the world bank and the wto, so they are done so as well in this study. data from annual gdp mean performance was categorically compiled for each year and separated into the two periods being studied, and the mean for each period was calculated as well as the mean for all nations per time period. the raw data includes gdp performance for all present members of the wto, but the data compiled did not distinguish between gdp performance in accordance with the date of membership. this was done intentionally for comparative purposes. member nations that failed to report gdp data for any given year of the time periods were excluded from the performance data to maintain the integrity of the statistical data and the investigation. finally, the 10 best and worst performing nations were extracted from each time period tested. there performance was then measured against the opposing time period tested, and a percentage of performance increase or loss was factored individually as well as the mean performance gain or loss for each group. also, the 10 nations with the largest positive and negative annual gdp mean performance shift was compiled, investigated, and discussed. 4. results the gross domestic product annual mean for all countries who were world trade organization members by 2016 was calculated individually from 1989 to 2001 and, then, averaged. an average for all member nation was also calculated to derive a base mean for wto's members performance for this period, and member nations that failed to report annual gdp data for each established time frame analyzed were not included in this research. all nations economy, 2016, 3(2): 51-73 55 included in this analysis reported national annual gdp data to the world bank in 12 out of the 12 years studied. the average gdp mean for all member nations from the years 1989 to 2001 was 3.10. country name gdp mean 1989-2001 albania 2.311617942 angola 1.352123317 antigua and barbuda 3.134286381 argentina 2.501374337 armenia not enough data australia 3.272611315 austria 2.756691749 bahrain 4.873541092 bangladesh 4.641561628 barbados 0.798559926 belgium 2.300586939 belize 6.836949903 benin 4.44300709 bolivia 3.685936611 botswana 5.328176416 brazil 2.139919138 brunei darussalam 1.949438381 bulgaria -1.329080131 burkina faso 4.755378365 burundi -0.906530597 cabo verde 9.504301006 cambodia not enough data cameroon 0.869067276 canada 2.539873857 central african republic 1.297202206 chad 2.909345526 chile 6.320067352 china 9.311780299 colombia 2.932544795 congo, dem. rep. -4.997698797 congo, rep. 1.716874318 costa rica 4.824672024 cote d'ivoire 1.958998992 croatia not enough data cuba -0.782850534 cyprus 4.711197845 czech republic not enough data denmark 2.296494483 djibouti not enough data dominica 1.799723482 dominican republic 4.750037102 ecuador 2.251503827 egypt, arab rep. 4.402023761 el salvador 4.133946872 estonia not enough data fiji 3.028358746 finland 2.456558114 france 2.32631411 gabon 2.58107361 gambia, the 3.716320604 georgia -6.980494665 germany 2.362603226 ghana 4.264427823 greece 2.497079815 grenada 3.155316376 guatemala 3.888851239 guinea 3.930348983 guinea-bissau 2.057034761 guyana 3.369386179 haiti not enough data honduras 3.104705697 hong kong sar, china 3.604751076 hungary not enough data iceland 2.44131016 india 5.561437644 indonesia 5.076590863 ireland 7.216977262 continue economy, 2016, 3(2): 51-73 56 israel 5.194818351 italy 1.824300893 jamaica 2.384664038 japan 1.744543148 jordan 3.469609584 kazakhstan not enough data kenya 2.423876636 korea, rep. 6.683490592 kuwait not enough data kyrgyz republic -1.591536826 lao pdr 6.806081578 latvia not enough data lesotho 4.13611013 liechtenstein 4.924449166 lithuania not enough data luxembourg 5.230377011 macao sar, china 3.361538458 madagascar 2.387265703 malawi 3.020189257 malaysia 6.993458832 maldives not enough data mali 3.985437368 malta 5.076343387 mauritania 2.549565422 mauritius 5.20483739 mexico 3.465007677 moldova -6.251362832 mongolia 0.38666376 montenegro not enough data morocco 3.348326072 mozambique 7.392397747 myanmar 6.921814059 namibia 3.234835794 nepal 4.906089847 netherlands 3.376149948 new zealand 2.641633436 nicaragua 2.721804863 niger 1.955267849 nigeria 3.265903504 norway 3.225039703 oman 4.808520207 pakistan 3.919808467 panama 4.704571173 papua new guinea 3.007368954 paraguay 2.668900972 peru 1.772207721 philippines not enough data poland not enough data portugal 3.183605039 qatar not enough data romania not enough data russian federation not enough data rwanda 2.908670222 sao tome and principe not enough data saudi arabia 2.806968676 senegal 2.993064976 seychelles 4.545094885 sierra leone -1.996820231 singapore 7.010095099 slovak republic not enough data slovenia not enough data solomon islands not enough data south africa 1.781180022 spain 3.126010187 sri lanka 4.566023751 st. kitts and nevis 4.325982174 st. lucia 5.02420705 st. martin (french part) not enough data st. vincent and the grenadines 2.982979936 suriname 1.722153991 swaziland 4.97430539 sweden 2.048091705 continue economy, 2016, 3(2): 51-73 57 switzerland 1.658807186 chinese taipei data unavailable tajikistan -6.215384727 tanzania 3.643031864 thailand 5.54652273 togo 2.142562201 tonga 2.374305096 trinidad and tobago 3.875578525 tunisia 4.696782165 turkey 3.165451222 uganda 6.424508048 ukraine -5.380148215 united arab emirates 6.08853304 united kingdom 2.5129679 united states 3.159219881 uruguay 2.484168802 vanuatu 3.392430272 venezuela, rb 1.780294958 vietnam 7.271912916 yemen, rep. not enough data zambia 1.639158487 zimbabwe 2.510640155 european union 2.461259566 3.101241111 (the world bank group, 2016) the countries that had the best annual gdp mean performance from 1989 to 2001 are shown below. country name gdp mean 1989-2001 cabo verde 9.504301006 china 9.311780299 mozambique 7.392397747 vietnam 7.271912916 ireland 7.216977262 singapore 7.010095099 malaysia 6.993458832 myanmar 6.921814059 belize 6.836949903 lao pdr 6.806081578 (twbg, 2016) the countries that had the worst annual gdp mean performance from 1989 to 2001 are shown below. country name gdp mean 1989-2001 georgia -6.980494665 moldova -6.251362832 tajikistan -6.215384727 ukraine -5.380148215 congo, dem. rep. -4.997698797 russian federation -2.830654114 sierra leone -1.996820231 kyrgyz republic -1.591536826 burundi -0.906530597 cuba -0.782850534 (twbg, 2016) the annual gdp mean performance for all countries who were world trade organization members by 2016 was calculated individually from 2002 to 2014 and, then, averaged. an average for all member nations was also calculated to derive a base mean for wto's members' performance for this period, and member nations that failed to report annual gdp data for each established time frame analyzed were not included in this research. all nations included in this analysis reported national annual gdp data to the world bank in 12 out of the 12 years studied. the average gdp mean for all member nations from the years 2002 to 2014 was 3.98. country name gdp mean 2002-2014 albania 4.200480835 angola not enough data antigua and barbuda 2.359754509 argentina 4.434059798 armenia 7.08906658 australia 3.04005939 continue economy, 2016, 3(2): 51-73 58 austria 1.395975154 bahrain 5.142389819 bangladesh 5.828453736 barbados 1.048899107 belgium 1.434693085 belize 3.512692585 benin 4.193767524 bolivia 4.566784375 botswana 5.106034757 brazil 3.433064673 brunei darussalam 0.877008274 bulgaria 3.495996432 burkina faso 5.886659662 burundi 3.761180688 cabo verde 5.033380159 cambodia 7.799371353 cameroon 3.755457047 canada 2.063321989 central african republic -0.572636895 chad 9.298498454 chile 4.055133657 china 9.930601164 colombia 4.565567226 congo, dem. rep. 6.208615572 congo, rep. 4.655027718 costa rica 4.57405269 cote d'ivoire 2.700226996 croatia 1.389341888 cuba not enough data cyprus 1.29963754 czech republic 2.440374652 denmark 0.574761357 djibouti 4.411079064 dominica 2.165657905 dominican republic 5.015845612 ecuador 4.546396546 egypt, arab rep. 4.106219635 el salvador 1.939147044 estonia 3.595392752 fiji 1.898764843 finland 1.12946317 france 1.029704438 gabon 2.81893769 gambia, the 3.106488387 georgia 6.151998314 germany 1.048742318 ghana 6.806071989 greece -0.368343853 grenada 2.240793191 guatemala 3.557639732 guinea 2.550064665 guinea-bissau 2.518479482 guyana not enough data haiti 1.370275065 honduras 4.05477804 hong kong sar, china 4.06333125 hungary 1.731024652 iceland 2.552136508 india 7.421030206 indonesia 5.501492594 ireland 2.641640315 israel 3.546962581 italy -0.217399168 jamaica 0.610085685 japan 0.801266029 jordan 5.318082928 kazakhstan 7.130769231 kenya 4.72591074 korea, rep. 4.003284039 kuwait 4.883735767 kyrgyz republic 4.362538586 lao pdr 7.505378426 continue economy, 2016, 3(2): 51-73 59 latvia 3.870219485 lesotho 4.106580651 liechtenstein not enough data lithuania 4.306282144 luxembourg 2.749488361 macao sar, china 12.2342128 madagascar 2.436397205 malawi 5.191249487 malaysia 5.1843119 maldives 7.090048773 mali 4.367571967 malta 1.950765629 mauritania 5.40827235 mauritius 3.78015728 mexico 2.343983753 moldova 5.057245246 mongolia 8.576687919 montenegro 3.214146029 morocco 4.404602601 mozambique 7.515159205 myanmar not enough data namibia 5.285416702 nepal 4.013067579 netherlands 0.942477985 new zealand 2.454916352 nicaragua 3.551506321 niger 4.976720612 nigeria 8.328758113 norway 1.561398087 oman 3.211493986 pakistan 4.278290935 panama 7.40712873 papua new guinea 5.674796951 paraguay 4.466728524 peru 5.851971998 philippines 5.26274734 poland 3.7311988 portugal -0.038584171 qatar 12.13820867 romania 3.596786253 russian federation 4.143228731 rwanda 7.592289805 sao tome and principe 5.154614654 saudi arabia 5.5797297 senegal 3.921816934 seychelles 3.682721307 sierra leone 9.175773867 singapore 5.928084078 slovak republic 4.190457732 slovenia 1.868699401 solomon islands 4.589176484 south africa 3.177893418 spain 1.117273419 sri lanka 6.074210713 st. kitts and nevis 2.335321549 st. lucia 1.689560422 st. martin (french part) not enough data st. vincent and the grenadines 2.399540815 suriname 4.494141226 swaziland 2.404029962 sweden 1.991507546 switzerland 1.839724552 chinese taipei data unavailable tajikistan 7.753788504 tanzania 6.750608354 thailand 4.19569941 togo 3.46375423 tonga 0.924841511 trinidad and tobago 4.410427926 tunisia 3.558410736 turkey 4.904028897 uganda 6.98796523 continue economy, 2016, 3(2): 51-73 60 ukraine 2.684614815 united arab emirates 4.558053334 united kingdom 1.66894009 united states 1.858759643 uruguay 4.037286915 vanuatu 3.134639431 venezuela, rb 2.950117993 vietnam 6.36823974 yemen, rep. not enough data zambia 7.311541048 zimbabwe -1.079090737 european union 1.144316488 3.988777743 (twbg, 2016) the countries that had the best annual gdp mean performance from 2002 to 2014 are shown below. country name gdp mean 2002-2014 macao sar, china 12.2342128 qatar 12.13820867 china 9.930601164 chad 9.298498454 sierra leone 9.175773867 mongolia 8.576687919 nigeria 8.328758113 cambodia 7.799371353 tajikistan 7.753788504 rwanda 7.592289805 9.282819065 (twbg, 2016) the countries that had the worst gdp performance from 2002 to 2014 are shown below. country name gdp mean 2002-2014 greece -1.239518088 central african republic -0.519661276 italy -0.287251327 portugal -0.031230692 jamaica 0.239799255 brunei darussalam 0.458505288 denmark 0.599189118 tonga 0.614594398 croatia 0.720533739 japan 0.770255353 0.132521577 the data from the countries with the best gdp performance from 1989 to 2001 was then compared to their gdp performance from 2002 to 2014 as well as the statistical mean for each data set. country name gdp mean 1989-2001 gdp mean 2002-2014 cabo verde 9.504301006 5.033380159 china 9.311780299 9.930601164 mozambique 7.392397747 7.515159205 vietnam 7.271912916 6.36823974 ireland 7.216977262 2.641640315 singapore 7.010095099 5.928084078 malaysia 6.993458832 5.1843119 myanmar 6.921814059 not enough data belize 6.836949903 3.512692585 lao pdr 6.806081578 7.505378426 7.52657687 5.957720841 (twbg, 2016) the data from the 10 countries with the worst gdp performance from 1989 to 2001 was then compared to their gdp performance from 2002 to 2014 as well as the statistical mean for each data set. country name gdp mean 1989-2001 gdp mean 2002-2014 georgia -6.980494665 6.151998314 moldova -6.251362832 5.057245246 tajikistan -6.215384727 7.753788504 continue economy, 2016, 3(2): 51-73 61 ukraine -5.380148215 2.684614815 congo, dem. rep. -4.997698797 6.208615572 russian federation -2.830654114 4.143228731 sierra leone -1.996820231 9.175773867 kyrgyz republic -1.591536826 4.362538586 burundi -0.906530597 3.761180688 cuba -0.782850534 4.831512942 -3.793348154 5.413049727 (twbg, 2016) the data from the countries that had the best gdp performance from 2002 to 2014 was then compared to their gdp performance from 1989 to 2001 as well as the statistical mean for each data set. country name gdp mean 1989-2001 gdp mean 2002-2014 macao sar, china 3.36 12.23 qatar not enough data 12.14 china 9.31 9.93 chad 2.91 9.30 sierra leone -2.00 9.18 mongolia 0.39 8.58 nigeria 3.27 8.33 cambodia not enough data 7.80 tajikistan -6.22 7.75 rwanda 2.91 7.59 1.741462101 9.282819065 (twbg, 2016) the data from the countries that had the worst gdp performance from 2002 to 2014 was then compared to their gdp performance from 1989 to 2001 as well as the statistical mean for each data set. country name gdp mean 1989-2001 gdp mean 2002-2014 greece 2.497079815 -1.239518088 central african republic 1.297202206 -0.519661276 italy 1.824300893 -0.287251327 portugal 3.183605039 -0.031230692 jamaica 2.384664038 0.239799255 brunei darussalam 1.949438381 0.458505288 denmark 2.296494483 0.599189118 tonga 2.374305096 0.614594398 croatia not enough data 0.720533739 japan 1.744543148 0.770255353 2.172403678 0.132521577 (twbg, 2016) the percentage of change for the annual gdp mean performance for all countries who were world trade organization members by 2016 was then calculated individually from the time period of 1989 to 2001 against the time period of 2002 to 2014. country name gdp mean 1989-2001 gdp mean 2002-2014 % of change albania 2.311617942 4.200480835 0.817117249 angola 1.352123317 not enough data not enough data antigua and barbuda 3.134286381 2.359754509 -0.247115859 argentina 2.501374337 4.434059798 0.772649432 armenia not enough data 7.08906658 not enough data australia 3.272611315 3.04005939 -0.07106005 austria 2.756691749 1.395975154 -0.493604914 bahrain 4.873541092 5.142389819 0.055164966 bangladesh 4.641561628 5.828453736 0.255709652 barbados 0.798559926 1.048899107 0.313488284 belgium 2.300586939 1.434693085 -0.37637954 belize 6.836949903 3.512692585 -0.486219347 benin 4.44300709 4.193767524 -0.056097044 bolivia 3.685936611 4.566784375 0.238975288 botswana 5.328176416 5.106034757 -0.041691874 brazil 2.139919138 3.433064673 0.604296448 brunei darussalam 1.949438381 0.877008274 -0.550122598 bulgaria -1.329080131 3.495996432 -3.630388003 burkina faso 4.755378365 5.886659662 0.237895118 burundi -0.906530597 3.761180688 -5.148983719 cabo verde 9.504301006 5.033380159 -0.470410275 cambodia not enough data 7.799371353 not enough data continue economy, 2016, 3(2): 51-73 62 cameroon 0.869067276 3.755457047 3.321250093 canada 2.539873857 2.063321989 -0.187628164 central african republic 1.297202206 -0.572636895 -1.441439964 chad 2.909345526 9.298498454 2.196079108 chile 6.320067352 4.055133657 -0.358371765 china 9.311780299 9.930601164 0.066455699 colombia 2.932544795 4.565567226 0.556861888 congo, dem. rep. -4.997698797 6.208615572 -2.242294869 congo, rep. 1.716874318 4.655027718 1.711338663 costa rica 4.824672024 4.57405269 -0.051945362 cote d'ivoire 1.958998992 2.700226996 0.378370794 croatia not enough data 1.389341888 not enough data cuba -0.782850534 not enough data not enough data cyprus 4.711197845 1.29963754 -0.72413862 czech republic not enough data 2.440374652 not enough data denmark 2.296494483 0.574761357 -0.7497223 djibouti not enough data 4.411079064 not enough data dominica 1.799723482 2.165657905 0.203328137 dominican republic 4.750037102 5.015845612 0.055959249 ecuador 2.251503827 4.546396546 1.019271072 egypt, arab rep. 4.402023761 4.106219635 -0.067197303 el salvador 4.133946872 1.939147044 -0.53092115 estonia not enough data 3.595392752 not enough data fiji 3.028358746 1.898764843 -0.373005313 finland 2.456558114 1.12946317 -0.540225341 france 2.32631411 1.029704438 -0.557366551 gabon 2.58107361 2.81893769 0.092157031 gambia, the 3.716320604 3.106488387 -0.164095696 georgia -6.980494665 6.151998314 -1.881312659 germany 2.362603226 1.048742318 -0.556107303 ghana 4.264427823 6.806071989 0.596010595 greece 2.497079815 -0.368343853 -1.147509844 grenada 3.155316376 2.240793191 -0.289835654 guatemala 3.888851239 3.557639732 -0.085169498 guinea 3.930348983 2.550064665 -0.351186198 guinea-bissau 2.057034761 2.518479482 0.224325194 guyana 3.369386179 not enough data not enough data haiti not enough data 1.370275065 not enough data honduras 3.104705697 4.05477804 0.306010436 hong kong sar, china 3.604751076 4.06333125 0.12721549 hungary not enough data 1.731024652 not enough data iceland 2.44131016 2.552136508 0.045396259 india 5.561437644 7.421030206 0.334372635 indonesia 5.076590863 5.501492594 0.083698242 ireland 7.216977262 2.641640315 -0.633968597 israel 5.194818351 3.546962581 -0.317211432 italy 1.824300893 -0.217399168 -1.119168482 jamaica 2.384664038 0.610085685 -0.744162836 japan 1.744543148 0.801266029 -0.540701513 jordan 3.469609584 5.318082928 0.532761194 kazakhstan not enough data 7.130769231 not enough data kenya 2.423876636 4.72591074 0.949732371 korea, rep. 6.683490592 4.003284039 -0.401018976 kuwait not enough data 4.883735767 not enough data kyrgyz republic -1.591536826 4.362538586 -3.741085544 lao pdr 6.806081578 7.505378426 0.102745881 latvia not enough data 3.870219485 not enough data lesotho 4.13611013 4.106580651 -0.007139432 liechtenstein 4.924449166 not enough data not enough data lithuania not enough data 4.306282144 not enough data luxembourg 5.230377011 2.749488361 -0.474323102 macao sar, china 3.361538458 12.2342128 2.639468343 madagascar 2.387265703 2.436397205 0.020580659 malawi 3.020189257 5.191249487 0.718849067 malaysia 6.993458832 5.1843119 -0.258691296 maldives not enough data 7.090048773 not enough data mali 3.985437368 4.367571967 0.095882726 malta 5.076343387 1.950765629 -0.615714407 mauritania 2.549565422 5.40827235 1.121252627 mauritius 5.20483739 3.78015728 -0.273722309 mexico 3.465007677 2.343983753 -0.323527111 moldova -6.251362832 5.057245246 -1.808982838 continue economy, 2016, 3(2): 51-73 63 mongolia 0.38666376 8.576687919 21.18125619 montenegro not enough data 3.214146029 not enough data morocco 3.348326072 4.404602601 0.315464058 mozambique 7.392397747 7.515159205 0.016606447 myanmar 6.921814059 not enough data not enough data namibia 3.234835794 5.285416702 0.633905718 nepal 4.906089847 4.013067579 -0.182023219 netherlands 3.376149948 0.942477985 -0.72084238 new zealand 2.641633436 2.454916352 -0.070682435 nicaragua 2.721804863 3.551506321 0.304835027 niger 1.955267849 4.976720612 1.545288419 nigeria 3.265903504 8.328758113 1.550215615 norway 3.225039703 1.561398087 -0.515851515 oman 4.808520207 3.211493986 -0.332124261 pakistan 3.919808467 4.278290935 0.091454078 panama 4.704571173 7.40712873 0.574453538 papua new guinea 3.007368954 5.674796951 0.886964 paraguay 2.668900972 4.466728524 0.673620929 peru 1.772207721 5.851971998 2.302080184 philippines not enough data 5.26274734 not enough data poland not enough data 3.7311988 not enough data portugal 3.183605039 -0.038584171 -1.012119648 qatar not enough data 12.13820867 not enough data romania not enough data 3.596786253 not enough data russian federation not enough data 4.143228731 not enough data rwanda 2.908670222 7.592289805 1.610227089 sao tome and principe not enough data 5.154614654 not enough data saudi arabia 2.806968676 5.5797297 0.987813312 senegal 2.993064976 3.921816934 0.310301302 seychelles 4.545094885 3.682721307 -0.1897372 sierra leone -1.996820231 9.175773867 -5.595192759 singapore 7.010095099 5.928084078 -0.154350405 slovak republic not enough data 4.190457732 not enough data slovenia not enough data 1.868699401 not enough data solomon islands not enough data 4.589176484 not enough data south africa 1.781180022 3.177893418 0.784150607 spain 3.126010187 1.117273419 -0.642588043 sri lanka 4.566023751 6.074210713 0.330306421 st. kitts and nevis 4.325982174 2.335321549 -0.460163853 st. lucia 5.02420705 1.689560422 -0.663716004 st. martin (french part) not enough data not enough data not enough data st. vincent and the grenadines 2.982979936 2.399540815 -0.195589355 suriname 1.722153991 4.494141226 1.609604745 swaziland 4.97430539 2.404029962 -0.51671042 sweden 2.048091705 1.991507546 -0.027627747 switzerland 1.658807186 1.839724552 0.109064735 chinese taipei data unavailable data unavailable data unavailable tajikistan -6.215384727 7.753788504 -2.247515455 tanzania 3.643031864 6.750608354 0.8530193 thailand 5.54652273 4.19569941 -0.243544178 togo 2.142562201 3.46375423 0.616641154 tonga 2.374305096 0.924841511 -0.610479078 trinidad and tobago 3.875578525 4.410427926 0.138005048 tunisia 4.696782165 3.558410736 -0.242372626 turkey 3.165451222 4.904028897 0.549235339 uganda 6.424508048 6.98796523 0.087704331 ukraine -5.380148215 2.684614815 -1.49898529 united arab emirates 6.08853304 4.558053334 -0.251370847 united kingdom 2.5129679 1.66894009 -0.335868918 united states 3.159219881 1.858759643 -0.411639673 uruguay 2.484168802 4.037286915 0.625206351 vanuatu 3.392430272 3.134639431 -0.075990019 venezuela, rb 1.780294958 2.950117993 0.657095067 vietnam 7.271912916 6.36823974 -0.124268977 yemen, rep. not enough data not enough data not enough data zambia 1.639158487 7.311541048 3.460545521 zimbabwe 2.510640155 -1.079090737 -1.42980701 european union 2.461259566 1.144316488 -0.535068749 3.101241111 3.988777743 0.286187562 (twbg, 2016) the percentage of change of the annual gdp mean performance for the 10 countries with the best gdp performance from 1989 to 2001 was measured against their performance from 2002 to 2014. economy, 2016, 3(2): 51-73 64 country name gdp mean 1989-2001 gdp mean 2002-2014 % of change cabo verde 9.504301006 5.033380159 -0.470410275 china 9.311780299 9.930601164 0.066455699 mozambique 7.392397747 7.515159205 0.016606447 vietnam 7.271912916 6.36823974 -0.124268977 ireland 7.216977262 2.641640315 -0.633968597 singapore 7.010095099 5.928084078 -0.154350405 malaysia 6.993458832 5.1843119 -0.258691296 myanmar 6.921814059 not enough data not enough data belize 6.836949903 3.512692585 -0.486219347 lao pdr 6.806081578 7.505378426 0.102745881 7.52657687 5.957720841 -0.208442172 (twbg, 2016) the percentage of change of the annual gdp mean performance for the 10 countries with the worst gdp performance from 1989 to 2001 was measured against their performance from 2002 to 2014. country name gdp mean 1989-2001 gdp mean 2002-2014 % of change georgia -6.980494665 6.151998314 -1.881312659 moldova -6.251362832 5.057245246 -1.808982838 tajikistan -6.215384727 7.753788504 -2.247515455 ukraine -5.380148215 2.684614815 -1.49898529 congo, dem. rep. -4.997698797 6.208615572 -2.242294869 russian federation -2.830654114 4.143228731 -2.463700108 sierra leone -1.996820231 9.175773867 -5.595192759 kyrgyz republic -1.591536826 4.362538586 -3.741085544 burundi -0.906530597 3.761180688 -5.148983719 cuba -0.782850534 4.831512942 -7.171692721 -3.793348154 5.413049727 -2.426984687 (twbg, 2016) the percentage of change of the annual gdp mean performance for the 10 countries with the best gdp performance from 2002 to 2014 was measured against their performance from 1989 to 2001. country name gdp mean 1989-2001 gdp mean 2002-2014 % of change macao sar, china 3.361538458 12.2342128 2.639468343 qatar not enough data 12.13820867 not enough data china 9.311780299 9.930601164 0.066455699 chad 2.909345526 9.298498454 2.196079108 sierra leone -1.996820231 9.175773867 -5.595192759 mongolia 0.38666376 8.576687919 21.1812562 nigeria 3.265903504 8.328758113 1.550215614 cambodia not enough data 7.799371353 not enough data tajikistan -6.215384727 7.753788504 -2.247515455 rwanda 2.908670222 7.592289805 1.610227089 1.741462101 9.282819065 4.330474351 (twbg, 2016) the percentage of change of the annual gdp mean performance for the 10 countries with the worst gdp performance from 2002 to 2014 was measured against their performance from 1989 to 2001. country name gdp mean 1989-2001 gdp mean 2002-2014 % of change greece 2.497079815 -1.239518088 -1.496387052 central african republic 1.297202206 -0.519661276 -1.400601597 italy 1.824300893 -0.287251327 -1.157458305 portugal 3.183605039 -0.031230692 -1.009809851 jamaica 2.384664038 0.239799255 -0.899441074 brunei darussalam 1.949438381 0.458505288 -0.764801344 denmark 2.296494483 0.599189118 -0.739085322 tonga 2.374305096 0.614594398 -0.741147673 croatia not enough data 0.720533739 not enough data japan 1.744543148 0.770255353 -0.558477327 2.172403678 0.132521577 -0.93899772 (twbg, 2016) the top 10 countries with the largest positive annual gdp mean performance gain between 1989 to 2001 and 2002 to 2014 was calculated. economy, 2016, 3(2): 51-73 65 country name positive gdp of gains between 1989-2001 and 2002-2014 tajikistan 13.97 georgia 13.13 moldova 11.31 congo, dem. rep. 11.21 sierra leone 11.17 macao sar, china 8.87 mongolia 8.19 ukraine 8.06 chad 6.39 kyrgyz republic 5.95 (twbg, 2016) the top 10 countries with the largest negative annual gdp mean performance loss between 1989 to 2001 and 2002 to 2014 was calculated. country name negative gdp of losses between 1989-2001 and 2002-2014 ireland -4.58 cabo verde -4.47 zimbabwe -3.59 cyprus -3.41 st. lucia -3.33 belize -3.32 portugal -3.22 malta -3.13 greece -2.87 korea, rep. -2.68 (twbg, 2016) 5. discussion the annual gdp mean performance between all member nations from 1989 to 2001 was compared to the annual gdp mean performance between all member nations from 2002 to 2012. the gdp mean for all member nations rose by .29 when comparing the two time periods, 1989 to 2001 and 2002 to 2012. as can be seen in the chart above, the annual gdp mean performance of all member countries for the two given periods difference is 0.29, which means the average annual gdp mean performance increase of all member countries from the first data set to the second data set was 29%. this is a substantial increase, and it is clear there were a number of factors that contributed to this growth. it is clear that the wto has made the world a more prosperous place, and it has assisted governments in resisting national pressure to return to protectionists policies embraced prior to the formation of the organization (porter, 2015). the wto has resulted in strengthening developing economies and weakening developed ones in many ways, but it is clear from the data in this study that it has made the world economy and free trade grow as can be seen in the percentage of growth between the two time periods above. the result of bilateral, regional, and unilateral trade agreements has weakened the wto organization, and, in many ways, it sits on the sidelines in today's global economy. this has resulted from many factors, but it is due to frustration over the current policies and national pressure to maintain strong annual gdp growth within nations. the nations with the best annual gdp mean performance from 1989 to 2001 were then extracted from the 162 nations measured, and there performance was then compared to their annual gdp mean performance from 2002 to 2014. a comparison 10 countries with the best annual gdp mean performance from 1989 to 2001 was compared to their annual gdp mean performance from 2002 to 2014. economy, 2016, 3(2): 51-73 66 in the above chart, series 1 represents the annual gdp mean performance from 1989 to 2001 of the top performing countries from this time period, and series 2 represents the annual gdp mean performance of the same nations from 2002 to 2014. myanmar was not included in this analysis because it failed to report all of its annual gdp performance data to the world bank from 2002 to 2014. there is clearly a dramatic shift with an average decline of the entire group's annual gdp mean performance between the two time periods has declined 21%. the most important changes of annual gdp mean performance from the two time periods of note in the chart shown above are ireland, cabo verde, and belize. ireland joined the wto in 1995 and became a gatt member in 1967, and it is clear that their economy has suffered dramatically between the two periods analyzed. ireland's annual gdp mean performance shifted 63% between the two periods, which represents a decrease in annual gdp mean performance by 4.58. this suggests that membership in the wto may no longer be benefitting the nation as it has in the past, and that they have not established significant bilateral, regional, and unilateral trade agreements necessary to maintain economic competitiveness in the twenty-first century despite their membership in the wto. cabo verde joined the wto organization in 2008, and cabo verde's annual gdp mean performance shifted 47% between the two periods, which represents a decrease in annual gdp mean performance by 4.47. the decline in cabo verde's annual gdp mean performance over the two periods suggests that in fact joining the wto has not helped the nation's economic growth. belize joined the wto in 1995, and it became a gatt member in 1983. belize's annual gdp mean performance shifted 49% between the two periods, which represents a decrease in annual gdp mean performance by 3.32. its economy is clearly suffering from similar economic woes that ireland has faced, and the data suggests that, despite being a member of the wto, they have not developed the necessary bilateral, regional, and unilateral trade agreements to maintain economic strength in the twenty-first century. also, the data suggests that there may be little benefit to the nation in maintaining wto membership in the future in relation to its annual gdp mean performance. the nations with the worst performing annual gdp mean performance from 1989 to 2001 were then extracted from the 162 nations measured, and there performance was then compared to their annual gdp mean performance from 2002 to 2014. a comparison 10 countries with the worst annual gdp mean performance from 1989 to 2001 was compared to their annual gdp performance from 2002 to 2014. the nations with the worst annual gdp mean performance from 1989 to 2001 is compared to their annual gdp mean performance from 2002 to 2014. important annual gdp mean performance shift were seen from tajikistan, georgia, and moldova. the group's annual gdp mean performance positively shifted 243% overall from 1989 to 2001 in comparison to 2002 to 2014. this is a remarkable gain, and it shows that membership in the wto has benefitted nations that were once suffering. all members of this group show large shifts in their annual gdp mean performance from 1989 to 2001 in comparison to 2002 to 2014. tajikistan who joined the wto in 2013 has shown the largest reversal in gdp performance, but it is not clear if this is a result of membership in the wto or bilateral, regional, and unilateral trade agreements because they have only reported 2 years of annual gdp performance as a member nation of the wto to the world bank. tajikistan's annual gdp mean performance shifted between the two time periods measured 224%, and its annual gdp mean performance increased by 13.96. there is a clear correlation between annual gdp mean performance and membership in the wto for both georgia and moldova. georgia joined the wto in 2000, and moldova joined in 2001. georgia's annual gdp mean performance grew from 1989 to economy, 2016, 3(2): 51-73 67 2001 in comparison to 2002 to 2014 by 188%, and its annual gdp mean performance increased by 13.13. moldova's annual mean gdp growth grew from 1989 to 2001 in comparison to 2002 to 2014 by 181%, and its annual gdp mean performance increased by 11.31. these statistics and the level of growth are tremendous in comparison to past annual mean gdp performance, and it is clear that membership in the wto has benefitted these nations' economies. for new member nations, wto benefits create favorable business environments for other members to conduct business, and it has resulted in positive investment climates for new members (lee and kolesnikova, 2008). this has been especially true for member nations that have substantial natural resources and developed industries within them. there is a negative effect initially on regional trading partners, but the ultimate effect can be seen in the economic growth resulting in increased annual gdp mean performance and secondary effects like improved legal systems within nations and increased competition in specific sectors. the nations with the best performing annual gdp mean performance from 2002 to 2014 were then extracted from the 162 nations measured, and there performance was then compared to their annual gdp mean performance from 1989 to 2001. a comparison 10 countries with the best annual gdp mean performance from 2002 to 2014 was compared to their annual gdp mean performance from 1989 to 2001. in the above chart, series 1 represents the annual gdp mean performance from 1989 to 2001 of the top performing countries from this time period, and series 2 represents the annual gdp mean performance of the same nations from 2002 to 2014. the 3 nations with the largest percentage change from 2002 to 2014 in comparison to 1989 to 2001 were mongolia, sierra leone, and macao, sar, china. the entire group of nations showed strong annual gdp mean performance gains when comparing the annual gdp mean performance data from 2002 to 2014 against the annual gdp mean performance data from 1989 to 2001. the entire group's annual gdp mean performance increased 433% from 1989 to 2001 to the 2002 to 2014 time period. it is clear from the growth of the above nations in the comparative time periods that the trade facilitation agreement facility that was launched in 2013 and other previous measures have positively impacted the growth of developing economies (akhtar, 2014). the wto's support and increased multilateral trading opportunities for developing nations will continue to benefit free trade and boost the gdps of developing economies throughout the world. these countries will most likely continue to face challenges at the national level in the future in relation to legislation, but the benefits of free trade will continue to increase standard of living within these nations and increase access to markets throughout the world. this will ultimately continue to raise economic standards within these nations, and force countries to remove bureaucratic administrative burdens in relation to trade to increase global access to markets. mongolia, sierra leone, and macao, sar, china showed the largest percentage increase of annual gdp mean performance between 1989 to 2001 and 2002 to 2014. mongolia's annual gdp mean performance increased 2,118%, and its annual gdp mean performance increased by 8.19. sierra leone's annual gdp mean performance increased by 560%,and its annual gdp mean performance increased by 11.17. macao, sar, china's annual gdp mean performance increased by 264%, and its annual gdp mean performance increased by 8.87.qatar and cambodia were not considered in this analysis because they failed to report the necessary annual data from 1989 to 2001 required for this study. mongolia joined the wto in 1997, and it is clear that the nation's economy has benefitted from its wto membership and other trade partnerships. sierra leone has been a wto member since 1995, and it became a gatt member in 1961. it is clear that some of the initiatives put forth by the wto, like the trade facilitation agreement facility that began in 2013, in conjunction with bilateral, regional, and unilateral trades agreements have had a remarkable impact and reversed the poor economic performance of the nation from 1989 to 2001 in comparison to 2002 to 2014. macao, sar, china has been a wto member since 1995, and it became a gatt member in 1991. macao, sar, china's astonishing annual gdp mean performance growth over the period is not surprising in consideration of china's gdp data reported to the world bank over the same period and geographic location. the performance of nations like mongolia, sierra leone, and macao, sar, china are a great example of how wto membership can benefit nations and regions, and it shows wto's policies and other international trade agreements are directly improving economic performance in member nations. the nations with the worst performing annual gdp mean performance from 2002 to 2014 were then extracted from the 162 nations measured, and there performance was then compared to their annual gdp mean performance from 1989 to 2001. a comparison 10 countries with the worst annual gdp mean performance from 2002 to 2014 was compared to their annual gdp mean performance from 1989 to 2001. economy, 2016, 3(2): 51-73 68 in the above chart, series 1 represents the annual gdp mean performance from 1989 to 2001 of the worst performing countries from this time period, and series 2 represents the annual gdp mean performance of the same nations from 2002 to 2014. the 3 nations with the largest percentage change from 2002 to 2014 in comparison to 1989 to 2001 were greece, the central african republic, and italy. the entire group of nations showed low annual gdp mean performance gains when compared to their annual gdp mean performance data from 1989 to 2001. croatia was not considered in this analysis as a result of not reporting an adequate amount of data from 1989 to 2001 to meet the criteria set forth in this study. often, countries suffering from economic downturns will implement austerity measures in an attempt to reduce national debt and boost national economics (jadhav et al., 2013). this typically results in the elimination of social services, government programs, and the reduction of grants to private sector projects considered to be dispensable by policymakers currently holding office. economic downturns for national economies result in increased unemployment rates and poor gdp growth, which essentially forces governments to adopt austerity measures to survive among economic crises. there has been significant research out of the eurozone supporting the adoption of austerity measures to quickly remedy economic downturns, which was seen specifically seen in greece and spain when both nations reported unemployment rates higher than 25% in the first half of 2013. unfortunately, there is a great deal of evidence that suggests that austerity programs are incorrectly implemented by policymakers and that the effect of austerity measures taken in economic crises takes a great deal longer than a single political cycle. many economists also believe that the current austerity measures that are accepted by most governments lead to future recessions and typically lead to an increased debt-to-gdp ratio higher than nations previously experienced prior to austerity measures being implemented. nations suffering from economic problems should focus on long-term solutions for long-term economic growth that are driven by qualityimproving innovations that highlight the importance of technological integration. the downside to this approach is that it has the potential for income inequality because it rewards people with education at the cost of the less educated, especially in developed economies. the performance of greece, the central african republic, and italy show a large decrease in economic growth and failing austerity measures implemented by policymakers within the nations. the entire group showed an annual gdp mean performance loss of .94 or 94% from the 1989 to 2001 period in comparison to the 2002 to 2014 period. greece showed an annual gdp mean performance loss of 150%, and its annual gdp mean performance decreased by 3.73. the central african republic showed an annual gdp mean performance loss of 140%, and its annual gdp mean performance decreased by 1.81. italy showed an annual showed an annual gdp mean performance loss 116%, and its annual gdp mean performance decreased by 2.11. it is clear that wto membership is not benefiting these nations, and they have not properly diversified their economies and adopted policies that support innovation within their nations. all of these nations' debt-to-gdp ratios will most likely continue to increase and the inevitability of forthcoming recessions and, possibly, depression is likely. to improve their economic growth, nations showing poor annual gdp mean performance from the 2002 to 2014 in comparison to their annual gdp mean performance from 1989 to 2002 should adopt responsible austerity measures and analyze their current bilateral, regional, and unilateral trade agreements. greece joined the wto in 1995, and it has been a gatt member since 1950 (european union, 2016). it is clear that the measures taken by the wto to boost developing economies has negatively impacted greece in conjunction with its national policymaking, and it should be reanalyzing its membership in the wto and the european union, which was formed in 1993, because the economic benefits seen as being a member nation to both organizations are clearly not beneficial to its economy. the central african republic became a member nation of the wto in 1995, and it joined gatt in 1963. the central african republic is one of the world's least developed nations, and it is clear that wto membership and gatt membership can be said to have had little impact on the nation's economic development. the nation is clearly suffering from poor policymaking, infrastructure, and trade partnerships leading to sustainable economic growth and investment. italy became a wto member in 1995, and a gatt member in 1950. its economic problems are similar to greece's, and it should be reviewing its decision to being a member to the wto and the european union. it should also be reviewing it bilateral, regional, and unilateral trade agreements. the top 10 countries with the largest positive annual gdp mean performance shift between 1989 to 2001 and 2002 to 2014 are shown in the graph below. economy, 2016, 3(2): 51-73 69 in the above chart, series 1 represents the annual gdp mean performance from 1989 to 2001 of the wto member nations who had the largest positive annual gdp mean performance shift in comparison to the annual gdp mean performance reported in series 2, which represents the annual gdp mean performance of the same nations from 2002 to 2014. the information from this data is extremely positive for the economic growth and citizens of the nations listed. tajikistan joined the wto in 2013, georgia joined the wto in 2000, the republic of moldova joined the wto in 2001, the democratic republic of the congo joined the wto in 1997, sierra leone joined the wto in 1995 and was a gatt member since 1961, macao sar, china joined in 1995 and was a gatt member since 1991, mongolia joined the wto in 1997, the ukraine joined the wto in 2008, chad joined the wto in 1996 and was a gatt member since 1963, and the kyrgyz republic joined the wto in 1998. between the two periods, tajikistan's annual gdp mean performance increased by 13.97, georgia's annual gdp mean performance increased by 13.13, moldova's annual gdp mean performance increased by 11.31, the democratic republic of the congo's annual gdp mean performance increased by 11.21, sierra leone's annual gdp mean performance increased by 11.17, macao sar, china's annual gdp mean performance increased by 8.87, mongolia's annual gdp mean performance increased by 8.19, ukraine's annual gdp mean performance increased by 8.06, chad's annual gdp mean performance increased by 6.39, and kyrgyz republic's annual gdp mean performance increased by 5.95. the commonality among all of these nations is serious economic improvement between the two time periods measured. it is clear that wto membership can be said to be working for most of these nations in conjunction with national policymaking in relation to their bilateral, regional, and unilateral trade agreements. tajikistan and the ukraine are the newest members of the above group, and it is not clear from this data which has benefitted them more, their wto membership or their former bilateral, regional, and unilateral trade agreements, because they have reported less economic data as wto members in comparison to other members who have shown drastic economic performance changes within this group. it is clear that the wto's focus on assisting developing nations has clearly benefitted the other members of the group and that macao sar, china has clearly increased its annual gdp mean performance over the two time periods measured because of east asian regional success over the same time period, specifically the people's republic of china. many economists continue question the effectiveness of wto membership, and they claim the wto fails in promoting trade (subramanian and wei, 2007). this, however, is untrue, and the wto has been shown by many economic studies to have increased trade throughout the world by over 120%. studies have also shown that wto membership helps nations develop bilateral, regional, and unilateral trade networks through its trade promotion, but this has come at a cost, specifically to developed countries, who have not seen as much economic in comparison wto members who are considered developing nations. the top 10 countries with the largest negative annual gdp mean performance loss between 1989 to 2001 and 2002 to 2014 are shown in the graph below. in the above chart, series 1 represents the annual gdp mean performance from 1989 to 2001 of the wto member nations who have had the largest negative annual gdp mean performance shift in comparison to the annual gdp mean performance reported in series 2, which represents the annual gdp mean performance of the same nations from 2002 to 2014. the information from this data is extremely negative for the economic growth and economy, 2016, 3(2): 51-73 70 citizens of the nations listed, and it should act as a signal to the policymakers who have implemented austerity measures in some of these countries and economists within these countries who advise policymakers regarding economic policy and trade memberships. ireland joined the wto in 1995 and has been a gatt member since 1967, cabo verde joined the wto in 2008, and zimbabwe joined the wto in 1995 and has been a gatt member since 1947, cyprus joined the wto in 1995 and has been a gatt member since 1963, saint lucia has been a wto member since 1995 and has been a gatt since 1993, belize has been a wto member since 1995 and has been a gatt member since 1983, portugal joined the wto in 1995 and has been a gatt member since 1962, malta joined the wto in 1995 and has been a gatt member since 1964, greece joined the wto in 1995 and has been a gatt member since 1950, and the republic of korea joined the wto in 1995 and has been a gatt member since 1967 (european union, 2016). between the two periods, ireland's annual gdp mean performance decreased by 4.58, cabo verde's annual gdp mean performance decreased by 4.47, zimbabwe's annual gdp performance decreased by 3.59, cyprus's annual gdp performance decreased by 3.41, saint lucia's annual gdp performance decreased by 3.41, belize's annual gdp performance decreased by 3.42, portugal's annual gdp performance decreased by 3.22, malta's annual gdp performance decreased by 3.12, greece's annual gdp performance decreased by 2.87, and the republic of korea's annual gdp performance decreased by 2.68. with the exception of cabo verde in this group, there is an alarming trend that shows long time members of the wto, who were formerly gatt members, economies are currently suffering. this is clearly the result of many world economic factors, but policymakers and economists advising them within these nations should be extremely cautious in continuing their current membership in trade organizations and continuing trade partnerships. for these nations, it can be said that the economic benefits previously brought to them as members of gatt, the wto, and, for some, the european union are no longer being seen. some economists have shown that both gatt and the wto have not had a dramatic effect on trade, and that bilateral trading partnerships and generalized system of preferences in trade have a more measurable effect on national economies (rose, 2004). although it is difficult to say whether wto has had an effect on world trade, it is commonly accepted that it has had a positive effect on trade relations and encouraged world trade that may not have existed without the organization. it is clear that the wto has had little effected on forcing developing countries to alter trade significantly, and its focus on assisting to promote developing economies throughout has left many long-time members to the organization economies behind, which has caused some of the european union members nations, who are also wto member nations, economies to contract and resulted in the adoption of austerity measures. 6. conclusion the comparative analysis of the two time periods annual gdp mean performance for all 162 member nations of the wto from the time period 1989 to 2001 against the time period 2002-2014 shows a radical change in annual gdp mean performance for many countries. it can be said with certainty that many wto member nations are benefitting from current wto promotion of free trade and the bilateral, unilateral, and regional trade networks their governments have negotiated. it can also be said with certitude that many long-time wto and gatt members are not currently benefitting economically as they once had from the historically beneficial trade networks. it is clear that many developed nations economies have suffered under wto's trade policies and promotion of developed nations over the last 20 years has led to some substantial positive annual gdp mean performance by newer members to the wto. it can be definitively concluded the annual gdp mean performance for all member nations increased by 29% between the two time periods measured. this measurement shows that the wto's policies regarding free trade and the addition of new members over the two time periods has benefitted world trade as a whole, specifically for the 162 member nations of the wto. the second measurement analyzing the top annual gdp mean performance from the 1989 to 2001 time period against their annual gdp mean performance from 2002 to 2014 shows a decrease of 21% or a decrease in annual gdp mean performance by 1.57 by the wto nations in the group. out of the entire group, we see a trend of longtime wto members economically suffering. country name year of acceptance gdp mean 1989-2001 gdp mean 2002-2014 gdp shift cabo verde 2008 9.504301006 5.033380159 -4.470920847 china 2001 9.311780299 9.930601164 0.618820865 mozambique 1992 7.392397747 7.515159205 0.122761458 vietnam 2007 7.271912916 6.36823974 -0.903673176 ireland 1967 7.216977262 2.641640315 -4.575336947 singapore 1973 7.010095099 5.928084078 -1.082011021 malaysia 1957 6.993458832 5.1843119 -1.809146932 myanmar 1948 6.921814059 not enough data not enough data belize 1983 6.836949903 3.512692585 -3.324257318 lao pdr 2013 6.806081578 7.505378426 0.699296848 1984.9 7.52657687 5.957720841 -1.568856029 (twbg, 2016) this data shows that these nations are not benefitting from trade partnerships created through the wto, and they have failed to adequately create innovation within their economies necessary to be competitive in the global marketplace when adopting austerity measures. it also shows that these economies have not properly diversified themselves, and they are suffering from cyclical changes in the global economy, which is negatively impacting their annual gdp mean performance. finally, it shows that these nations have not set up the necessary bilateral, regional, and unilateral trade networks to be economically successful as a nation in today's global trade network. for ireland, it is clear that being a member of the european union may be having negative effects on its economic growth as a economy, 2016, 3(2): 51-73 71 nation. this is beyond the scope of this analysis, but the data does show that the present trading partnerships the nation has are not benefitting it economically in the same manner as it once did. the third measurement analyzing the worst annual gdp mean performance from the 1989 to 2001 time period against the their annual gdp mean performance from the 2002 to 2014, which shows an increase of 243% or an increase in annual gdp mean performance by 9.21 by the wto nations in the group. country name year of acceptance gdp mean 1989-2001 gdp mean 2002-2014 gdp shift georgia 2000 -6.980494665 6.151998314 13.13249298 moldova 2001 -6.251362832 5.057245246 11.30860808 tajikistan 2013 -6.215384727 7.753788504 13.96917323 ukraine 2008 -5.380148215 2.684614815 8.06476303 congo, dem. rep. 1997 -4.997698797 6.208615572 11.20631437 russian federation 2012 -2.830654114 4.143228731 6.973882845 sierra leone 1961 -1.996820231 9.175773867 11.1725941 kyrgyz republic 1998 -1.591536826 4.362538586 5.954075412 burundi 1965 -0.906530597 3.761180688 4.667711285 cuba 1948 -0.782850534 4.831512942 5.614363476 1990.3 -3.793348154 5.413049727 9.20639788 (twbg, 2016) this annual gdp mean performance shift is for some members of this group is clearly the result of the wto's focusing on opening up developing economies to the world markets to increase trade, and this has resulted in a positive shift in annual gdp mean performance of these nations between the 1989 to 2001 time period in comparison to the 2002 to the 2014 time period. it is also clear that the austerity measures implemented at a national level during the economic contractions experienced by these nations during the 1989 to 2001 time period where effective in boosting national economies between the 2002 to 2014 time period. these nations have also clearly established the necessary bilateral, regional, and unilateral trade networks necessary to increase access to global markets in the twenty-first century in conjunction with their membership in the wto. for the nations among the group that recently joined the wto, tajikistan, the russian federation, and ukraine, it is difficult to say with certainty if the annual gdp mean performance success that they experienced between 2002 to 2014 time was a result of wto membership. acceptance to the wto in conjunction with establishing bilateral, regional, and unilateral trade partnerships is the most likely factor in increasing annual gdp mean performance of these nations, so the result of the positive shift of annual gdp mean performance is most likely a combination of the simultaneous effect of both trade partnerships and wto memberships. an examination of each country's economic reforms implemented during the 1989 to 2001 time period in comparison to their annual gdp mean performance in the 2002 to 2014 time period would have to be analyzed to say with complete certainty, which is beyond the scope of this study. an examination of some of the other nations that are part of the group whose membership in the organization is more than 50 years old, cuba, sierra leone, and burundi, suggests that some of the economic hardships experienced by these nations between the 1989 to 2002 time period in relation to annual gdp mean performance could have been cyclical, but it is more likely that they are showing annual gdp mean performance increases directly as a result of increased trade and the wto's promotion of free trade throughout the world in combination with the wto's focus on opening up developing economies to increased trade opportunities. the fourth measurement analyzed the best annual gdp mean performance from the 2002 to 2014 time period against the annual gdp mean performance of the same wto members from 1989 to 2002 time period, and it shows an increase of 433% or an increase in annual gdp mean performance by 7.54 by the wto nations in the group. country name year of acceptance gdp mean 1989-2001 gdp mean 2002-2014 gdp shift macao sar, china 1991 3.361538458 12.2342128 8.872674344 qatar 1994 not enough data 12.13820867 not enough data china 2001 9.311780299 9.930601164 0.618820865 chad 1963 2.909345526 9.298498454 6.389152928 sierra leone 1961 -1.996820231 9.175773867 11.1725941 mongolia 1997 0.38666376 8.576687919 8.19002416 nigeria 1960 3.265903504 8.328758113 5.062854608 cambodia 2004 not enough data 7.799371353 not enough data tajikistan 2013 -6.215384727 7.753788504 13.96917323 rwanda 1966 2.908670222 7.592289805 4.683619583 1985 1.741462101 9.282819065 7.541356964 (twbg, 2016) this data shows many members who joined the wto in the 1990s and newer members who have recently been accepted to the organization have benefitted significantly to increased access to global markets. it is clear that wto membership and bilateral, regional, and unilateral trade networks that have been put in place at the national level are having a direct impact of positive annual gdp mean shift. the intertwined global network of trade has clearly increased access to new markets for these nations to sell manufactured goods and raw materials needed to produce these goods. individuals within these nations are clearly seeing the benefit at the local level of their nations being members of the wto with increased standards of living, improved legislation regarding trade, and better employment opportunities. the wto's promotion of trade networks for developing nations has changed the lives of millions of individuals within these nations, and it is clear from their annual gdp mean performance that wto membership has continued to assist in the development of wealth within most of these nations that began previously economy, 2016, 3(2): 51-73 72 to the 1989 to 2001 time period and continued into the 2002 to 2014 time period, specifically the asian nations. for other nations in the group, the wto has assisted in helping in ending economic contractions and stagnant economic development between the 1989 to 2001 time period in comparison to the 2002 to 2014 time period. the fifth measurement analyzed the worst annual gdp mean performance from wto member nations from the 2002 to 2014 time period against the annual gdp mean performance of the same wto members from 1989 to 2002 time period, and it shows a decrease annual gdp mean performance of 93% or a decrease in the annual gdp mean performance by 2.04 by the wto nations in the group. country name year of acceptance gdp mean 19892001 gdp mean 2002-2014 gdp shift greece 1950 2.497079815 -1.239518088 -3.736597903 central african republic 1963 1.297202206 -0.519661276 -1.816863482 italy 1950 1.824300893 -0.287251327 -2.11155222 portugal 1962 3.183605039 -0.031230692 -3.214835731 jamaica 1963 2.384664038 0.239799255 -2.144864783 brunei darussalam 1993 1.949438381 0.458505288 -1.490933093 denmark 1950 2.296494483 0.599189118 -1.697305365 tonga 2007 2.374305096 0.614594398 -1.759710698 croatia 2000 not enough data 0.720533739 not enough data japan 1955 1.744543148 0.770255353 -0.974287795 1969.3 2.172403678 0.132521577 -2.039882101 (twbg, 2016) an analysis of this group of wto nations with the worst annual gdp mean performance during the 2002 to 2014 time period is startling. the majority of nations shown above are longtime wto members, and 5 of the nations listed are eu members. this data suggests that, despite increasing and promoting world trade, wto membership does not necessarily result in strong annual gdp mean performance. for greece, italy, portugal, denmark, and croatia, it can also be said that eu membership does not necessarily lead to strong annual gdp mean performance or increased access to trade networks that benefit annual gdp mean performance. all nations listed above have suffered drastic economic contractions in comparison to the overall performance of other wto members during the 2002 to 2014 period, and they must reevaluate their wto membership and other trade partnerships. it is clear that unemployment rates within these nations can be said to be high, the standard of living is decreasing, and austerity measures must be underway to avoid further economic contractions. the goal of these nations should be to implement austerity measures that focus on long-term growth of the nation that incorporate technology and supports innovation within its society. these nations should also consider establishing new bilateral, regional, and unilateral trade partnerships, and the eu member nations listed above should be reexamining the benefit derived from their membership in the eu or lack thereof. the sixth measurement analyzed the largest positive annual gdp mean performance shift by wto member nations from the 1989 to 2001 time period in comparison to the 2002 to 2014 time period, and the seventh measurement analyzed the largest negative annual gdp mean performance shift by wto member nations from the 1989 to 2001 time period in comparison to the 2002 to 2014 time period. the information received from this analysis displayed on the above chart shows a dramatic difference in the effectiveness of the wto promotion of developing economies versus developed, and the lack of benefit derived by many longtime wto members. one could easily argue that there is an imbalance of support by the organization for developed nations, and they are suffering from being wto members as it pertains to the annual gdp mean performances in comparison to the 1989 to 2001 time period and the 2002 to 2014 time period. the chart also shows substantial growth by newer members to the wto, and the obvious benefit to their economies displayed in their annual gdp mean performance as a result of increased access to the global markets through the wto and other trade partnerships. economy, 2016, 3(2): 51-73 73 country name year of acceptance positive gdp of gains between 1989-2001 and 2002-2014 country name year of acceptance negative gdp of losses between 1989-2001 and 20022014 tajikistan 2013 13.97 ireland 1967 -4.58 georgia 2000 13.13 cabo verde 2008 -4.47 moldova 2001 11.31 zimbabwe 1948 -3.59 congo, dem. rep. 1997 11.21 cyprus 1963 -3.41 sierra leone 1961 11.17 st. lucia 1993 -3.33 macao sar, china 1991 8.87 belize 1983 -3.32 mongolia 1997 8.19 portugal 1962 -3.22 ukraine 2008 8.06 malta 1964 -3.13 chad 1963 6.39 greece 1950 -2.87 kyrgyz republic 1998 5.95 korea, rep. 1967 -2.68 1992.9 9.825 1970.5 -3.46 (twbg, 2016) the sixth measurement, displayed on the left, shows a positive annual gdp mean performance shift by the nations. the commonality among these nations is that they are newer members of the wto in comparison the nations analyzed in the seventh measurement. geographically, the majority of these nations are in eastern europe or asia. they show an average date of acceptance to the wto in 1993, and they showed an average annual gdp mean positive performance shift between 1989 to 2001 in comparison to 2002 to 2014 of 9.83. the seventh measurement, displayed on the right, shows a negative performance shift by the nations. the commonality among these nations are that they are older members of the wto in comparison to the nations analyzed in the sixth measurement, the majority are islands, and 5 of the nations are members of the eu. the first commonality shows that long-term wto membership does not necessarily benefit nations in relation to trade in the twenty-first century, which suggests that nations constantly must work to establish and maintain bilateral, regional, and unilateral trade partnerships outside of the wto. this data also suggests that small island nations are vulnerable to economic fluctuations as a result of a lack of resources and diversification among economic sectors within their nations. this also shows that smaller nations can potentially be economically ostracized when they are not included large trade agreements, like the transpacific partnership and the trans-atlantic trade and investment partnership, because of the size of their national economies. finally, this data shows that nearly 20% of eu member countries are suffering in relation to annual gdp mean performance from the 1989 to 2001 time period in comparison to the 2002 to 2014 time period. this is alarming in consideration of the fact that the eu is one of the world's largest economies, and this information suggests that not all eu members benefit economically from eu membership. this study shows that free trade has increased throughout the world because of the wto's promotion of it and other trade networks established between nations. free trade has benefitted many that are wto member nations that are considered developing economies and caused other wto member nations that are considered developed economies to contract. it cannot be said that the wto's focus on developing economies has been bad specifically for developed economies in relation to the data reviewed in this study, so the initial hypothesis in this study is incorrect. china's entrance as well as other newer members of the wto have had a positive overall effect on the annual gdp mean performance of the 162 wto member nations, which can be seen in the increase of the annual gdp mean performance overall of the 162 member nations by 29% from the 1989 to 2001 time period in comparison to the 2002 to 2014 time period. this investigation has clearly shown that many longtime member nations of the wto are suffering economically, specifically smaller economies, island nations, and nations that are members of the eu. it cannot be specifically said that this is a result of wto's current policies or the entrance of large developing economies to the wto. it is, however, clear that the benefits seen between the two time periods measured are not being experienced by all member nations of the wto. many of the members who are presently suffering from poor annual gdp mean performance are longtime members of the wto, and some are conjunctively members of the eu. references akhtar, s., 2014. asia-pacific ready to lead and shape sustainable trade and development. international trade forum, 3(1): 16-18. baldwin, r., 2016. the world trade organization and the future of multilateralism. journal of economic perspectives, 30(1): 96-115. beattie, a., 2016. the dark side of the wto. available from http://www.investopedia.com/articles/economics/dark-side-of-thewto.asp?o=40186&l=dir&qsrc=999&qo=investopediasitesearch. european union, 2016. official website of the european union. available from http://europa.eu/index_en.htm. heakal, r., 2016. what is the world trade organization? available from http://www.investopedia.com/articles/03/040203.asp?o=40186&l=dir&qsrc=999&qo=investopediasitesearch. investopedia, 2016. what is gdp and why is it so important to economists and investors? available from http://www.investopedia.com/ask/answers/199.asp. jadhav, a., j. neelankavil and d. andrews, 2013. determinants of gdp growth and the impact of austerity. journal of applied business and economics, 15(1): 15-29. lee, c.y. and e. kolesnikova, 2008. russia’s accession of wto membership and its implications on the russian economy. journal of global business management, 6(1): 137-147. porter, r., 2015. the world trade organization at twenty. brown journal of world affairs, 12(2): 103-116. rose, a., 2004. do we really know that the wto increases trade? american economic review, 94(1): 98-114. subramanian, a. and s. wei, 2007. the wto promotes trade, strongly but unevenly. journal of international economics, 72(1): 151-175. the world bank group, 2016. data. available from http://data.worldbank.org/. world trade organization, 2016. members and observers. available from https://www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htm. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. http://www.investopedia.com/articles/economics/dark-side-of-the-wto.asp?o=40186&l=dir&qsrc=999&qo=investopediasitesearch http://www.investopedia.com/articles/economics/dark-side-of-the-wto.asp?o=40186&l=dir&qsrc=999&qo=investopediasitesearch http://europa.eu/index_en.htm http://www.investopedia.com/articles/03/040203.asp?o=40186&l=dir&qsrc=999&qo=investopediasitesearch http://www.investopedia.com/ask/answers/199.asp http://data.worldbank.org/ http://www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htm 1 © 2022 by the authors; licensee asian online journal publishing group economy vol. 9, no. 1, 1-8, 2022 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/economy.v9i1.4016 © 2022 by the authors; licensee asian online journal publishing group resource-use efficiency and firm performance in nigeria’s manufacturing industry dahunsi, olusola joseph1 soetan, olufunmilayo rosemary2 ( corresponding author) 1,2obafemi awolowo university, ile-ife, nigeria. 1email: olusoladahunsi@yahoo.com tel: +2348036922004 2email: rsoetan@oauife.edu.ng tel: +2348037169069 abstract the study investigated the existence of technical efficiency among manufacturing firms and examine its effects on firm performance in nigeria using firm level data between 2001 and 2017. variables such as capital, labour, total overhead inputs, total firm output, competition, capital intensity, firm market share, technical efficiency scores and firm profitability were used in this study. using the stochastic frontier analysis (sfa) to generate the technical efficiency scores, the study adopted system-gmm to examine the effects of technical efficiency on firm performance among quoted manufacturing firms operating in consumer (food beverages and tobacco), industrial and health (pharmaceutical) sectors in nigeria. the findings revealed that 29% of the variation between the observed and optimal outputs is attributed to inefficiency among manufacturing firms. however, firm competitiveness significantly increases the efficient use of resources among manufacturing firms. this study further showed that technical efficiency variable has positive effects on manufacturing firm performance in nigeria. the paper concluded that competition increases the efficient utilization of resources which positively improves firm performance in nigeria’s manufacturing industry. finally, the paper recommended that industrial policies should be geared towards promoting healthy competition (and not collusion) among manufacturing firms to attain optimal economic efficiency of resources. keywords: efficiency, competitiveness, capital intensity, market share, firm performance, manufacturing firms. jel classification: d22, l25, o14. citation | dahunsi, olusola joseph; soetan, olufunmilayo rosemary (2022). resource-use efficiency and firm performance in nigeria’s manufacturing industry. economy, 9(1): 1-8. history: received: 25 april 2022 revised: 30 may 2022 accepted: 15 june 2022 published: 28 june 2022 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. authors’ contributions: both authors contributed equally to the conception and design of the study. competing interests: the authors declare that they have no conflict of interest. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study followed all ethical practices during writing. contents 1. introduction ......................................................................................................................................................................................... 2 2. literature review ............................................................................................................................................................................... 2 3. stochastic frontier model ................................................................................................................................................................ 3 4. results and discussions ..................................................................................................................................................................... 5 5. conclusion ............................................................................................................................................................................................ 7 6. policy recommendations .................................................................................................................................................................. 7 references ................................................................................................................................................................................................. 8 mailto:olusoladahunsi@yahoo.com mailto:rsoetan@oauife.edu.ng https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v9i1.4016 https://orcid.org/0000-0002-5007-9402 economy, 2022, 9(1): 1-8 2 © 2022 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study investigated the existence of technical efficiency among manufacturing firms and examine its effects on firm performance in nigeria’s manufacturing industry between 2001 and 2017. the study revealed that 29% of the variation between the observed and optimal outputs is attributed to inefficiency among manufacturing firms. the study also added that intense competition among manufacturing firms increases the efficient use of resources which positively improves firm performance in nigeria’s manufacturing industry. 1. introduction manufacturing industry has been identified as a crucial driver of industrialization given its significant roles in the development of the contemporary developed and emerging economies. this could be attributed to the technological processes involved in the transformation of raw materials to finished goods as well as the accompanied technical efficiency generated from using factor inputs to achieve maximum outputs. the efficient use of both human and capital resources, therefore, has great potential for the production of differentiated goods, job creation, development of the industrial sector and firm performance. firm performance expressed in terms of profitability, growth, market value and some other socioeconomic indicators (selvam, gayathri, vasanth, lingaraja, & marxiaoli, 2016) can be achieved by improving on the efficient use of factor inputs that enhances competitiveness of manufacturing firms both locally and internationally. since independence in 1960, nigeria has aimed at industrialization with the hope of changing the economy from an agricultural and import-dependent to a more dynamic and export-oriented economy, especially through the export of industrial outputs (import substitution strategies). however, nigeria has continued to experience a concomitant decline in the manufacturing sector output. according to the national bureau of statistics (2014), manufacturing sector contributed 10% to nigeria’s outputs compared with the 70% contributed by the primary sector (agriculture) before crude oil exploration in the 1970s. with the windfall gain from crude oil, the manufacturing sector’s contribution to the national outputs declined drastically to 7.83% in 1982. in a bid to increase the performance of the industrial sector, the nigeria enterprise promotion decree of 1977, the structural adjustment programme (sap) of 1986; and other industrial development policies were directed towards domestic production of previously imported consumer products and the promotion of nigeria’s industrial sector to attain sustainable growth. with continued dependence on revenue from crude oil exports, the manufacturing sector performance decline in growth and value-added, contributing minimally to economic growth despite the emphasis placed on science, technology and innovation (sti) as key drivers of the economic reform of the national economic empowerment and development strategy (needs) between 1999 and 2007 and the economic policy blueprint of vision 20:2020 in nigeria chete, adeoti, adeyinka, and ogundele (2014). given the role of industrialization in attaining economic growth and development, efficient use of resources in the manufacturing industry has substantial implications for firm performance. efficient firms weed out less efficient ones because efficient firms tend to be competitive and, as a result, resources would be reallocated from inefficient firms to the efficient ones (ahn, 2002; obembe & soetan, 2015; soames, brunker, & talgaswatta, 2011). as the market becomes more competitive, efficient firms will increase their productivity and market share while inefficient firms lose their market share to the efficient ones, and either way firm profitability will be affected. thus, the relationship between the efficient use of resources and firm profitability ultimately influence the overall firm performance. however, studies by baten, kamil, and fatama (2009); essmui, berma, shahadan, and ramlee (2013); helali and kalai (2015) revealed that inefficiency exists in the use factor inputs among manufacturing firms, although, the effects of the inefficiency on firm performance is controversial (addai-asante & sekyi, 2016; din, ghani, & mahmood, 2007). hence, this study estimates the resource utilization efficiency as well as examine the effects of the technical efficiency on firm performance in the nigeria’s manufacturing industry. the technical efficiency measures the extent to which factor inputs are optimally utilized to produce outputs and this was achieved by separating inefficiency scores from random error (battese & coelli, 1995). this was estimated through the stochastic frontier analysis (sfa) as proposed by aigner, lovell, and schmidt (1977) and meeusen and van den broeck (1977) to estimate resources efficiency in applied economic research. the stochastic frontier analysis (sfa), a parametric approach, separates the deviations from the production frontier to white noise and technical inefficiency unlike the data envelopment analysis (dea) which is non-parametric approach that allocates the deviation to technical efficiency/inefficiencies (iinuma, sharma, & leung, 1999). hence, the sfa technique reveals a general relationship between output and inputs and also accounts for random shocks (white noise) which are lacking in non-parametric dea (silva, tabak, cajueiro, & dias, 2016). this study adopts the sfa approach because, in reality, the deviations from the production frontier in the manufacturing industry are not solely attributable to the inefficiency of manufacturers (bolarinwa & adegboye, 2020), certain deviations result from risk and uncertainty that surround the supply of materials and fluctuations in the market price of intermediate and finished goods of manufacturing firms. thus, this study generated a resource-use efficiency variable and examined its effects on firm performance among forty-three (43) quoted manufacturing firms operating in consumer (food beverages and tobacco), industrial and health (pharmaceutical) sectors by using stochastic frontier analysis. this was done in line with the nigerian economic recovery and growth plan (ergp) framework (2017-2020) that encourages sti to drive economic growth through the agro-processing sub-sector comprising firms operating in food, beverages, tobacco, and other manufacturing sub-sector. 2. literature review koh, rahman, and tan (2004) separated productivity growth into technical efficiency, technical progress and scale of economies effect and examined their contribution to productivity among 18 manufacturing industries between 1974 to 1998 in singapore. using the stochastic frontier analysis, it was revealed that the variation between the frontier and actual outputs resulted from technical inefficiency but the efficiency level tends to increase over time. the study further showed that technical progress contributed 1.5 per cent per annum, technical economy, 2022, 9(1): 1-8 3 © 2022 by the authors; licensee asian online journal publishing group efficiency change contributed 0.5 per cent per annum and scale of economic efficiency contributed 0.8 per cent per annum to the productivity growth in the singapore manufacturing industry. the study concluded that the singapore manufacturing industry requires technology to improve on technology growth. din et al. (2007) studied the efficiency level of the large scale manufacturing sector in pakistan. stochastic frontier analysis and data envelopment analyses were employed to investigate efficiency level among 101 industries in pakistan, the result of the stochastic frontier analysis showed that there is a small increase in the efficiency level of the large scale manufacturing firms. the result of the data envelopment analysis further supported that the efficiency level of the manufacturing sector has greatly improved and exert positive effects on firm performance as a result of economic reforms in the pakistan manufacturing industry. furthermore, baten et al. (2009) examined the effect of technical inefficiency on manufacturing industry performance among 279 industries in bangladesh. the study employed stochastic frontier analysis and the ordinary least square method and showed the existence of technical inefficiency in the bangladesh manufacturing sector, although, the inefficiency declines over the studied period. the study further revealed that the inefficiency of capital, labour (manual and non-manual) and raw material cost have significant effects on the manufacturing output level. similarly, essmui et al. (2013) investigated the level of inefficiency and its effects on the performance of 207 firms in the libya manufacturing industry. stochastic frontier model was used and the study showed the existence of technical inefficiency in the libya manufacturing industry as capital, labour and material inputs are not optimally utilized. the study concluded that outputs in libya manufacturing industry can be increased without necessarily increase capital, labour and material inputs. in a related vein, helali and kalai (2015) investigated technical, allocative and economic efficiencies and examined their effect on production output among 6 sectors in the tunisian manufacturing industry between 1961 and 2010. the study adopted the stochastic and bayesian model and found that technical inefficiency existed in the manufacturing industry and that output efficiency can be improved using the same inputs in production. it was also revealed that a lack of innovation and investment in technology in the manufacturing industry resulted in negative productivity growth. addai-asante and sekyi (2016) examined technical/resources efficiency in production among 39 ghanaian pharmaceutical firms. using stochastic frontier analysis and the ordinary least square method, the study revealed that technical inefficiency exists in the pharmaceutical industry and resources inefficiency exerted a diverse impact on output level. it further showed that capital was more productive in the production of capsule compared to labour (skilled and unskilled). although, skilled and unskilled labour was productive more than capital in the production of syrup. the study concluded that age and maintenance of plant, as well as the size of the professional labour, are technically efficient. 3. stochastic frontier model in stochastic frontier analysis (sfa), several functional forms are often used, however, the two most commonly used forms are cobb-douglas and transcendental logarithmic (trans-log) production functions. following the study of battese and coelli (1995), this study adopted the cobb-douglas stochastic frontier production model rather than the trans-log production function given the likelihood ratio (lr) test statistics. the cobb-douglas production function is specified as; ( ; )i iy f x = (1) where iy is the optimum output obtainable; ix is the vector of inputs and  represents unknown parameter. stochastic frontier production function incorporates measurement error and unobservable shocks into the model as; i i iy x  = + for 1,...,i n= (2) 0i i i iy x v u = + + − (3) where i i iv u = − here, iv ∼i.i.d. n(0, 2 v ) and iu ∼i.i.d. n(μ, 2  ) are independently and identically distributed of each other and other explanatory variables. following battese and coelli (1995) model which assumes truncated normal distribution, this study estimated the technical efficiency of firms in nigeria’s manufacturing industry through the cobb-douglas stochastic frontier model. the linear form of equation 3 can be rewritten as: 0 , 1 ( ) n it j j it it it j lny ln x v u  = = + + − for 1,..., , 1,...,i n t t= = (4) 0 , 1 n it j j it it it j lny lnx v u  = = + + − (5) 0 , 1 exp( ) n it j j it it it j y lnx v u  = = + + − (6) equation 6 can be rewritten as: 0 , 1 exp( ) exp( ) exp( ) n it j j it it it j y lnx v u  = = +   − (7) where 0 , 1 exp( ) n j j it j lnx  = + are the deterministic component and the composite error term, it , which is decomposed into noise effect itv and efficiency parameter itu . thus, technical efficiency (tei) is expressed as the ratio of observed output to optimum output. the technical efficiency (tei) for the i-th firm at time t is defined as: economy, 2022, 9(1): 1-8 4 © 2022 by the authors; licensee asian online journal publishing group exp( ) exp( ) it it it it it it x v u te x v   + − = + (8) equation 8 presents the technical efficiency model which measures the extent to which factor inputs are efficiently or optimally utilized to produce outputs and this is done by separating efficiency scores from random error. equation 8 can be rewritten as: exp( )it itte u= − (9) equation 9 argues that the expected value of the exponential (-uit) is the technical efficiency. given the truncated-normal assumption in the stochastic frontier analysis, the technical efficiency model is specified thus; it i it itu z w= + (10) equation 10 represents the technical efficiency level with respect to firm competitiveness. zit represents the exogenous variable which in this case is competition (com), wit represents the error term of the efficient model and δ is the estimated parameter. a negative coefficient of δ connotes an increase in technical efficiency or a reduction in technical inefficiency. 3.1. effects of resource-use efficiency on firm performance the system gmm estimator (s-gmm) theorized by arellano and bover (1995) which blundell and bond (1998) developed was adopted by the study as its estimation technique to examine the effect of resource-use efficiency on firm performance using secondary data obtained from forty-three (43) quoted manufacturing firms operating in consumer (food beverages and tobacco), industrial and health (pharmaceutical) sectors. the s-gmm is preferred to difference gmm (d-gmm) because the presence of a lagged dependent variable as an independent variable in the d-gmm violates the orthogonality assumption. this is because the lagged dependent variable 1itpef − depends on 1it − . however, system gmm augments difference gmm under the assumption that the first difference of instrumental variables is not correlated with the level errors. besides, the system gmm estimator is preferred to the ols and the fixed effects techniques in that the ols and the fixed effect results generally suffer from the problem of endogeneity (obembe & soetan, 2015). this study, therefore, adopted system gmm framework that accommodates the endogeneity problem inherent in the explanatory variables and it also gives consistent parameter estimates for a small period of time, t, and large cross-sectional dimension, n. to examine the effects of resource-use efficiency on manufacturing performance, this study employed the s-gmm model specified as follows; ' 1it it it it itpef pef eff x   −= + + + (11) in equation 11, itpef represents performance for firm i over period t; 1itpef − entails the lagged value of the dependent variable for firm i over period t, iteff represents resource-use efficiency, x represents other control variables included in the model such as capital intensity (cin) and firm market share (fms) for firm i over period t. to solve the problem of endogeneity inherent in the explanatory variables, this study examined the effects of resource-use efficiency on firm performance using the system generalized method of moment (s-gmm) estimator as propounded by arellano and bover (1995). 3.2. sources of data secondary data were sourced from annual reports of quoted manufacturing firms on the nigerian stock exchange (nse). the population of the quoted manufacturing firms is fifty-six (56) consisting of consumer (food, beverages and tobacco 26); healthcare (10); industrial (20) firms as categorised by securities and exchange commission (sec). total sampling technique was employed by the study, however, only forty-three (43) firms consisting of 19 firm operating in consumer (food, beverages and tobacco); 18 firms in industrial and 6 firms in healthcare (pharmaceuticals) were used due to unavailability of data for most of the quoted manufacturing firms for the period under study. these firms were chosen because they have greater access to foreign and domestic funds and they also invest more in research and development compared with non-quoted manufacturing firms. secondary data were specifically obtained from the published annual reports and financial statements of the manufacturing firms. firms’ total value of output (tvo) was measured by total annual sales of sampled manufacturing firms (battese & coelli, 1995). the labour input (lab) was measured by the labour-to-revenue ratio. it is calculated as total labour cost divided by revenue. the labour-revenue ratio measures the efficiency of the labour force in generating revenue and it is estimated to be positively related to output. the capital input (cip) was measured by the asset turnover ratio. the total asset turnover is calculated as revenue divided by average total assets which should be positively related to total output. the total overhead input (toh) was measured by the operating expenses ratio. it is calculated as total overhead expenses divided by revenue. the operating expenses ratio showed how efficiently an organization is being managed and it is expected to be positively related to output (edwards, allen, & shaik, 2006). year is the year of the observation involved. technical efficiency scores (eff) was derived by generating inefficiency from maximum output obtainable using stochastic frontier analysis (battese & coelli, 1995). firm performance (pef) was measured as the ratio of profit (profit before tax) to total asset. this shows the ability of a firm to generate profits by using all its asset (ti & chi, 2016). capital intensity was measured by the ratio of tangible assets (fixed assets) to the total number of employees (halpern & muraközy, 2015). firm market share which is the share of the market that each firm can economy, 2022, 9(1): 1-8 5 © 2022 by the authors; licensee asian online journal publishing group capture was measured by the ratio of each firm’s revenue to the industry revenue (edwards et al., 2006). competition (com) was measured by the price–cost margin (pcm). intense competition in a market stimulates efficiency among incumbent firms (forces inefficient firms out), thereby increasing the average pcm among firms (cranfield, 2002). re . re venue inventories labourcost costof materials pcm venue inventories +  − − = +  . 4. results and discussions this study examined the effects of resource-use efficiency on firm performance in nigeria’s manufacturing industry. in a bid to achieve this, the study generated a resource-use efficiency variable for all sampled firms through the stochastic frontier analysis (sfa) technique. following battese and coelli (1995) in estimating technical efficiency, the cobb-douglas and trans-log production functions were estimated and the appropriate production frontier between the two production functions was selected using the likelihood ratio test. the existence of inefficiency effects was also tested and analyzed using maximum likelihood statistics. this is because, manufacturing firms will not be able to achieve optimum technical efficiency until we can identify the sources of inefficiency (tingum & ofeh, 2017). finally, the technical efficiency scores (eff) of sampled manufacturing firms in nigeria were generated using 43 nigeria’s manufacturing firms operating in consumer (food, beverages and tobacco), industrial; and healthcare (pharmaceutical) sectors between 2001 and 2017. the stochastic frontier production function consisted of labour input, capital input, overhead expenditure and total revenue. 4.1. descriptive statistics of inputs and output data in estimating the stochastic frontier analysis, labour, capital, overhead expenditure and total revenue from the selected manufacturing firms were sourced for the period between 2001 and 2017 in nigeria. the dependent variable (total value of output) of the model is total revenue while labour input, capital input and overhead expenditure are the independent variables. the descriptive statistics results in table 1 reveal that the mean and median are in between their maximum and minimum values for all the inputs and output variables which show a high consistency level. the skewness statistics reveals that all the variables are negatively skewed. the kurtosis of all the variables exceeds 3 implying that the series is peaked (leptokurtic) compared to the normal distribution. table 1. descriptive statistics. descriptive statistics lab cip toh tvo mean -2.40 -0.45 -1.65 15.7 median -2.34 0.57 -1.54 15.9 standard dev. 0.80 0.91 0.81 2.07 minimum -6.89 -5.56 -5.22 8.39 maximum 0.16 2.59 0.64 20.5 skewness -1.15 -1.78 -0.98 -0.37 kurtosis 7.43 10.8 5.40 3.05 observations 610 647 577 658 note: lab, cip, toh and tvo represent the natural logarithm of labour input, capital input, total overhead expenditure and total value of output (sales). 4.2 stochastic frontier analysis results the maximum likelihood estimates of the time-invariant inefficiency model for the cobb-douglas production function (assuming a truncated-normal distribution) was obtained and reported in table 2. the cobb-douglas and the transcendental logarithmic (trans-log) production models were estimated, however, the cobb-douglas model was presented rather than the trans-log production function following the likelihood ratio (lr) estimates. the probability value of the likelihood ratio (14.42) is not significant at a 5% significant level, thus the rejection of the null hypothesis that the cobb-douglas production function is nested in full in the trans-log production function. this study accepts the alternative hypothesis that the cobb-douglas production function is not nested in full in the trans-log production function, hence, the cobb-douglas production function was presented. the results showed that the coefficients of labour (lab) and overhead (toh) inputs from the cobb-douglas model are negative and statistically significant at a 5% level except for capital input (cip) which is positive at a 5% significant level. the negative coefficient of labour (lab) input could be as a result of incessant activities of labour unions (such as strike actions), low wage rate and unfavourable working conditions of workers. these will, in turn, affect labour efficiency and reduce firm performance (tingum & ofeh, 2017). the mle further explains the concepts of elasticity and returns to scale. the output elasticity is explained by the estimated coefficients of input variables (labour, capital and overhead) from the mle. the results revealed that the elasticity coefficients of labour input (-0.6084) and total overhead input (-0.5361) are negative which implies that labour input (lab) and total overhead expenditure (toh) had significant negative effects on the outputs level in nigeria’s manufacturing industry. by implication, a percentage increase in all the input variables will result in less than a proportionate increase in firms’ outputs and revenue level. conversely, the elasticity coefficient of capital input (0.2114) is significantly positive, thus, capital input (cip) has a significant positive effect on outputs level among manufacturing firms in nigeria. succinctly, the summation of all elasticity coefficients (-0.9331) shows that nigeria’s manufacturing firms operate on a decreasing return to scale. 4.2.1. the inefficiency effects table 2 also reveal the existence of inefficiency in the cobb-douglas model. according to ahmadzai (2017), the coefficient of gamma implies that the variance between the observed outputs and optimum level of outputs is attributable to technical inefficiency. the coefficient ( =0.29) from the model shows that about 29% of the difference between the observed output and maximum outputs comes from inefficiency on the part of the economy, 2022, 9(1): 1-8 6 © 2022 by the authors; licensee asian online journal publishing group manufacturer/production team. by implication, about 29% of the difference between the observed output and the frontier outputs results from inefficiencies among manufacturing firms. this shows reductions in the frontier outputs using capital input, labour input and total overhead expenditure. however, 71% of the variation is attributable to random effects such as risk and uncertainty that surround the supply of raw materials as well as fluctuations in the market price of intermediate and finished goods of manufacturing firms. thus, the null hypothesis which states that the variation in production is not attributable to technical inefficiency is rejected. this finding is consistent with the study of helali and kalai (2015) which showed that the variation in production output is attributable to technical inefficiency and random effects. the knowledge of technical efficiency will not be useful if we do not understand the source of the efficiency. table 2 shows that the coefficient (δ) of competition (-1.1840) in the inefficiency effects section of the production function is negative and significant at a 5% level. the negative coefficient of competition showed a reduction in technical inefficiency or an increase in technical efficiency. this indicates that in manufacturing industry, firm competitiveness motivates the resource-use efficiency of manufacturing firms. this is in line with esquivias and harianto (2020) who found that competition (in terms of export and import activities) has positive impact on firms’ technical efficiency level. this implies that a higher level of efficiency will be attained by competitive firms (firms that are export-oriented as well as firms that have access to imported raw materials) compared with less competitive firms with no export and/or import activities which face the risk of being driven out of the market by competitive firms. hence, this study revealed that the source of technical efficiency among nigerian manufacturing firms is dependent on the level of industrial competitiveness. table 2. cobb-douglas maximum likelihood estimates. method variable coefficient std. error t-value prob. production frontier constant 331 284 1.17 0.24 lab -0.61 0.12 -5.22 0.00*** cip 0.21 0.11 1.96 0.05** toh -0.54 0.11 -5.10 0.00*** year -41.7 37.4 -1.11 0.27 inefficiency effects 2 u 0.49 0.30 1.63 0.10 2 v 1.69 0.73 23.2 0.00***  ` 0.29 0.36 0.82 0.41 constant 0.87 0.42 2.07 0.04** com ( ) -1.18 0.21 -5.54 0.00*** log-likelihood -1088 wald chi2 112 prob. 0.00 likelihood-ratio lr chi2 prob. 14.4 0.08 note: lab, cip, toh and year represent the natural logarithm of labour input, capital input, total overhead expenditure and year of observation involved. ***, ** significance at 1% and 5% respectively. 4.2.2. estimation of technical inefficiency scores table 3 reveals the existence of technical inefficiency with a sample mean of 19.15% in the selected sample of quoted manufacturing firms. this reveals that there are technical inefficiencies in nigeria’s manufacturing industry. by implication, manufacturing firms operating in consumer (food, beverages and tobacco); industrial; and healthcare (pharmaceutical) sectors obtained 80.85% outputs from utilizing available capital, labour and total overhead inputs. put differently, the sampled manufacturing firms only produced 80.85% outputs which were below the maximum obtainable output while the rest of their output (19.15%) is attributed to inefficiency. the analysis of technical inefficiency scores of sampled firms is also presented in table 3. table 3. technical inefficiency statistics. 4.3. effects of resource-use efficiency on firm performance under normal market conditions, resource-use/technical efficiency results in higher firm performance in terms of high profitability. however, when markets are characterized with imperfections and asymmetric information, resource-use efficiency together with other performance-related factors may negatively affect firm performance. the study had established that inefficiency existed in the resource utilization among nigeria’s manufacturing firms for the period between 2001 and 2017 (see table 2). given the existence of inefficiency in the use of factor inputs by manufacturing firms in table 3, the resource-use efficiency variable (eff) was derived by generating firms’ inefficiency scores from the maximum output obtainable to examine the effect of resource-use efficiency on firm performance in nigeria’s manufacturing industry. table 4 shows the effects of resource-use efficiency (eff) on firm performance in nigeria’s manufacturing industry using the generalized method of moments approach. the results indicated that the effect of resource-use efficiency (0.087%) is positive on firm performance, though not statistically significant at 5% level. by implication, the efficient utilization of factor inputs in the manufacturing industry has positive effects on profitability and subsequently on firm performance. besides, the results showed that firm performance in the previous period (pef(-1)) has a significant positive effect (0.1155) on the current firm performance at a 5% significant level. this means that a unit increase in the last mean median maximum minimum std. dev. 19.15812 18.9 22.5 17.3 1.07 economy, 2022, 9(1): 1-8 7 © 2022 by the authors; licensee asian online journal publishing group period performance leads to an 11.55% increase in the current period performance. similarly, firm market share (fms) exhibits a positive effect (1.3738) on firm performance at a 5% level of significance, meaning that a unit increase in the firm market share results in 137% increases in firm performance. conversely, the results show that capital intensity (cin) has significant negative effects (-0.0258) on manufacturing firm performance but insignificant at a 5% level. the adverse effect of capital intensity on firm performance is not unconnected with the existence of technical inefficiency among manufacturing firms as reported in table 3. the generalized method of moments diagnostic test was also reported in table 4 and it revealed the validity of instruments employed as well as the absence of auto-correlation in the model. hansen statistics explains the validity of instruments. the overall validity of instruments holds since the null hypothesis (p-value > 0.05) that supports the choice of the instruments at a 5% level of significance cannot be rejected. similarly, auto-correlation of the error term was carried out to test the null hypothesis that the error term is auto-correlated. the probability value of the ar(2) in table 4 which is 0.601 shows that the null hypothesis of no serial correlation cannot be rejected, rather, the results imply that the original error term is not correlated at 5% significant level, moment conditions are correctly specified and the model does not suffer from second-order auto-correlation. table 4. system gmm. variables coefficient std. error t-statistic prob. pef (-1) 0.11 0.04 2.71 0.01*** eff 0.00 0.02 0.04 0.97 fms 1.37 0.44 3.08 0.00*** cin -0.03 0.15 -1.69 0.09** c 0.23 1.77 0.13 0.89 no. of obs. 688 f statistic 4.89 group/instruments 43/21 ar (2) 0.60 hansen statistic 0.99 notes: ***, ** represent significance at 1% and 5% respectively. in addition, the study showed in table 5 that younger manufacturing firms between 0 – 20 years are the most inefficient (21%) compared with much older firms between 51 – 60 years (18.70%), suggesting that younger firms are likely to perform poorly compared to older firms in nigeria’s manufacturing industry. as reported by krusinskas, norvaisiene, lakstutiene, and vaitkevicius (2015) this can be attributed to the fact that small and medium-tech firms lagged behind the high-tech firm in innovation. according to soames et al. (2011) who opined that small and medium firms are not likely to survive if they are inefficient unlike large firms which can profitably remain in business even at sub-optimal production levels. this might be attributed to the fact that younger firms between 0 20 years, at the beginning of business operations, will have large sunk cost and are competing with large existing firms who have been in operation for 51 – 60 years. however, the high inefficiency scores of firms that are 61 years and above could be attributed to the technology employed in their production. many of these technologies are considered archaic and outdated compared to the types of technologies employed by younger firms. by implication, firms that are 61 years and above usually operate below production frontier level compared with younger firms. table 5. mean technical inefficiency by firm age. variable years inefficiency firm age 0-20 years 21.00% 21-30 years 20.60% 31-40 years 20.00% 41-50 years 19.50% 51-60 years 18.70% 61 and above 19.00% 5. conclusion the study identified the existence of inefficiency in the use of resources among manufacturing firms in nigeria. however, it was observed that competition significantly increases the efficient utilization of resources among manufacturing firms. this study further showed that resource-use efficiency has positive effects on manufacturing firm performance. the study concluded that intense competition increases efficient utilization of resources and resource-use efficiency subsequently improves firm performance in nigeria manufacturing industry. 6. policy recommendations the study revealed the existence of technical inefficiency (reduction in the optimum/frontier output) arising from capital input, labour input and total overhead expenditure among manufacturing firms. therefore, policies on the efficient utilization of resources (capital input, labour input and total overhead expenditure) that will bridge the gap between actual output and potential output should be developed to achieve optimal production efficiency and prevent voluntary winding up or outright relocation of nigerian firms to neighbouring countries. the study also showed that firm competitiveness enhances resource-use efficiency, as a result, the study recommends industrial policy that will promote healthy competition (and not collusion) among manufacturing firms to attain optimal economic efficiency of resources that will enable the economy to compete effectively with the developed and newly industrialized countries of the world. economy, 2022, 9(1): 1-8 8 © 2022 by the authors; licensee asian online journal publishing group references addai-asante, j., & sekyi, s. 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(2016). a comparison of dea and sfa using microand macro-level perspectives: efficiency of chinese local banks. physica a: statistical mechanics and its applications, 469, 216-223.available at: http://dx.doi.org/10.1016/j.physa.2016.11.041. soames, l., brunker, d., & talgaswatta, t. (2011). competition, innovation and productivity in australia. paper presented at the a conference paper for the 2012 international schumpeterian society conference 2-5 july 2012, brisbane. ti, h., & chi, x. (2016). competition, innovation, risk-taking, and profitability in the chinese banking sector: an empirical analysis based on structural equation modeling. discrete dynamics in nature and society, 1-10.available at: https://doi.org/10.1155/2016/3695379. tingum, e. n., & ofeh, m. a. (2017). technical efficiency of manufacturing firms in cameroon: sources and determinants. international journal of financial research, 8(3), 172-186.available at: https://doi.org/10.5430/ijfr.v8n3p172. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. http://purl.umn.edu/26625 http://dx.doi.org/10.1016/j.physa.2016.11.041 1 © 2019 by the authors; licensee asian online journal publishing group economy vol. 6, no. 1, 1-6, 2019 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2019.61.1.6 © 2019 by the authors; licensee asian online journal publishing group behind the volatility of beef price in indonesia made antara1 made sri sumarniash2 ( corresponding author) 1agribusiness study program, faculty of agriculture, udayana university, bali, indonesia 2agroecotechnology study program, faculty of agriculture, udayana university, bali, indonesia abstract the majority of indonesian people fond of beef, so beef into meat favourit among other meats. local beef cattle population which became a source of national beef production is likely to increase average 2.72% per year over a period of 16 years (2000 to 2016). the volatility of beef in indonesia who had reached rp 150,000 per kg before near the eid al-fitr 2015 has been troubling and troubling consumer society beef. this turbulence leads to an imbalance between consumption and production of local beef, where comsuption exceeds production, resulting in a deficit of beef. based on projected production and consumption of beef, until 2019 indonesia still deficit of beef. however behind the price volatility of beef in indonesia, not only because of deficit of meat, but also the existence of a cartel of beef trade. cartels are agreements some traders in setting the price of meat high in order to reach the high profit. the government, through the business competition supervisory commission (komisi pengawas persaingan usaha, kppu) has fined 32 feedloter accused cartel of beef trade. keywords: beef, meat deficit, volatility of prices, cartel. jel classification: d43. citation | made antara; made sri sumarniash (2019). behind the volatility of beef price in indonesia. economy, 6(1): 1-6. history: received: 8 october 2018 revised: 13 november 2018 accepted: 19 december 2018 published: 28 january 2019 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group contribution/acknowledgement: both authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ......................................................................................................................................................................................... 2 2. population development of beef cattle......................................................................................................................................... 2 3. beef production and consumption .................................................................................................................................................. 3 4. projections of beef production and consumption ....................................................................................................................... 4 5. volatility of beef price ...................................................................................................................................................................... 4 6. conclusions and recommendations ................................................................................................................................................ 6 references ................................................................................................................................................................................................. 6 http://www.asianonlinejournals.com/index.php/economy/article/view/1650 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2019.61.1.6&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ economy, 2019, 6(1): 1-6 2 © 2019 by the authors; licensee asian online journal publishing group 1. introduction along with the increase in population and improvement in the standard of living of the population in indonesia, the demand for food for the fulfillment of nutrition is increasing. beef is one of the food sources of animal protein that has a major contribution to the fulfillment of community nutrition in supporting the development of indonesia's human resources. unfortunately (supardi, 2009) states that beef is a source of animal protein fulfilling a very good nutritional standard for consumption in order to live a healthy and intelligent life. indonesian people who like meat (except vegetarian groups), beef is halal meat, tasty, tender, and high in protein, so it cannot be separated from the daily menu. eating on eid al-fitr feels incomplete if there are no beef dishes. this makes beef the most excellent meat from several other types of meat. when beef had penetrated the price of idr 120,000 per kg, people were restless and anxious, but this was not the case when other types of meat increased in price. dwiyanto and mahendri (2013) stated that beef is a "desire" for urban communities that are economically strong and have high purchasing power. whereas for some residents who live in rural areas or those with limited economic levels, beef "is not a basic necessity" because they are not culturally "meat eaters”. demand for beef tends to increase every year, both due to an increase in population, as well as an increase in meat consumption per capita per year due to increased income. increased awareness of the population is important to consume enough protein sources also encourage increased demand for protein-based food ingredients such as meat, so that the pattern of consumption of society also changes. initially more indonesian people consume carbohydrates, but now they consume a lot of meat, eggs and milk. to meet protein requirements from chickens and eggs can be fulfilled from within the country, but milk and beef still need to be imported. beef trade in indonesia, not only trades local beef and imported beef, but also involves many business people ranging from importers, feedloters, abattoirs, wholesalers and retailers. these traffickers are numerous, so that competition arises between them, even an evil agreement arises between them. business competition is increasing as the world economy increases. the desire to use all means to win the competition (machiavellian), strategy, tactics, techniques are sought to lead consumers & prospective consumers to use certain products. organizations/companies collaborate, cooperate and coordinate to capture opportunities to dominate the market. cartel, monopoly, monopsony, etc. emerged. the emergence of the cartel is basically based on the increasingly competitive conditions in the era of globalization. although it is more likely to be negative because it harms the public, the cartel will still emerge because of the demands of business people and consumers. in the beef trade in indonesia, indications of a cartel were detected, so the government took action to prevent it from suffering from their conspiracy. the purpose of this paper is to explore and then describe why the price of beef in indonesia often fluctuates on the one hand, while on the other hand the population of local beef cattle tends to increase from year to year thanks to various government programs. what's behind the turmoil of beef prices. this paper tries to reveal it. 2. population development of beef cattle looking at beef cattle population data by province in indonesia published by cbs (2017) it appears that in the last 16 years (2000-2016) beef cattle populations in indonesia tended to increase (figure 1). the population of beef cattle in 2000 was 11,008,017, ten years later in 2010 the population increased to 13,581,570 or increased by 2.34% per year. six years later in 2016 the population of beef cattle increased to 16,092,561 tails or increased by 3.08% per year. if observed per province, east java is the province with the largest beef cattle population, namely in 2000 as many as 3,312,015 birds, in 2010 it increased to 3,745,453 birds and in 2016 it increased to 4,534,460 tails. while the beef cattle population in bali in 2000 was 529,074, ten years later in 2010 the population increased to 683,800 and six years later in 2016 the cattle population declined to 559,517. anonymous (2012) informed that bali is one of the suppliers of live cattle for the dki jakarta beef market. based on the last year cattle population (2016), the 10 largest provinces were beef cattle population centers, namely (1) east java (28.18%), (2) central java (10.45%), (3) south sulawesi (8, 41%), (4) west nusa tenggara (6.84%), (5) east nusa tenggara (5.79%), (6) north sumatra (4.25%), (7) lampung (4.11 %), (8) aceh (3.73%), (9) bali (3.48%), and (10) west sumatra (2.51%). interestingly, the cattle population in east nusa tenggara (ntt) province in 2000 was higher than the cattle population in the west nusa tenggara province (ntb). but 16 years later in 2016 the cattle population in ntt was lower than the cattle population in ntb. . the cattle population in indonesia must be increased to increase meat supply to the market in balance with increasing demand for beef. breakthrough programs must be rolled out to stimulate cattle farmers and prospective breeders to raise beef cattle. in an effort to improve the quality and quantity of cattle owned by farmers, muladno (2012) suggests the implementation of breeding programs through a business institutional approach so that the implementation of feed, genetic and reproductive technology can be carried out maximally, thereby increasing fire productivity and ensuring quality sustainability. but kompas (2017) through the advertorial column page 12, entitled "beating self-sufficiency of beef with insurance", informs how the relation between cattle insurance and beef self-sufficiency? first, increased motivation to raise cattle, so that the addition of cattle population is more guaranteed. second, reducing the risk of loss in raising cattle, so that farmers are more willing to expand their business and more likely to increase the cattle population. third, with insurance coverage, bank loans and microfinance institutions for cattle will increase. economy, 2019, 6(1): 1-6 3 © 2019 by the authors; licensee asian online journal publishing group figure-1. development of beef cattle population in indonesia, 2000-2016 (note: 1 = year 2000; 17 = year 2016) 3. beef production and consumption 3.1. beef production according tonuryati et al. (2015) the development of beef production in indonesia in the period 1984-2015 generally had a similar pattern in java and outside java, which tended to increase (figure 2). during this period, beef production in indonesia increased by an average of 2.68% per year. the development of production in java is 2.41% and outside java is 4.44% per year. the production of beef in indonesia in 1984 amounted to 248.48 thousand tons and in 2015 it increased to 523.93 thousand tons. the development of beef production in the last five years has tended to decline, this has something to do with the increasing increase in beef prices. even though the price of beef is still high, the prediction of beef production per year will increase by 5.28%. figure-2. development of beef production in indonesia, java,and outside java, 1984-2015 (source: nuryati et al. (2015)) although there is more beef cattle outside java than in java, beef production in java is higher than outside java. in 1984 beef production in java amounted to 151.58 thousand tons or 61.00% of total beef production in indonesia, then in 2015 it increased to 301.35 thousand tons or 59.51% of total beef production in indonesia, however, the high rate of cuts in java is inseparable from the role of supply of cattle from outside java. as comparison, kubkomawa et al. (2018) inform that beef cattle production and marketing dynamics in nigeria involves pastoralism, home fattening, buying, selling, brokering, retailing, dealing, transporting and butchering. it is, therefore, concluded that, beef cattle production and marketing in the study area is a profitable venture if special consideration is given to tackle the bottlenecks militating against the smooth production, transactions and efficient marketing processes. however, amejo et al. (2018) stated that intensified feeding strategies from existing sources, improvement through rearing and herd management viewed to make potential improvement in livestock production and could reintegrate the strategies of the livelihood in smallholder mixed system. where variability assessment in herd demographic parameters could an opportunity suit livestock intensification interest to support the sustainable development of the rural poor. the beef industry in the united states consists of several distinct production levels ranging from the cow-calf producer at the lowest level to the final consumer. these sectors face varying levels of profitability, degrees of market power, conflicting goals, and price signals. environmental regulations involve questions of what costs are involved, who is in a position to pay these costs, and whether market prices are capable of signaling different environmental practices. understanding the relationships within the beef industry may allow researchers to finetune analyses of environmental issues in the beef industry (outlaw et al., 1997). according to subak (1999) the environmental impacts of a specific intensive us feedlot system and a traditional african pastoral system are calculated using a methodology that includes the major land-use and energy-related emissions. although assessments of carbon dioxide emissions find much greater impacts related to the us feedlot mode, the methane intensity of the pastoral mode is much larger because of the lower productivity of these systems. it is found that when indirect sources, which include emissions from fossil fuels and foregone economy, 2019, 6(1): 1-6 4 © 2019 by the authors; licensee asian online journal publishing group carbon storage on appropriated land, are considered as well as emissions from enteric fermentation and wastes, the social costs of the feedlot system at 15 kg co2 equivalent/kg beef are more than double that of the pastoralist system. accordingly, the results of the more complete greenhouse gas emissions analysis were found to converge somewhat with the biophysical capital alteration approach in this example, although it is also argued that the entropy-based environmental indicators may have limited use in evaluating agro-ecosystems' contribution to climate change. given an assumed, albeit uncertain, climate change impact value, a tax on beef production of about 9% of the unit price would represent the upper limit of the shadow costs of the associated greenhouse gas emissions flux from feedlot systems as estimated here, and a central value would correspond to a tax of about 4%. 3.2. beef consumption the amount of beef consumption is determined by the population and consumption of beef per capita. the increasing awareness of the indonesian people about the importance of animal protein, further increasing national beef consumption. based on the 2014 national socio-economic survey (susenas) data cited by nuryati et al. (2015) in the period 1993-2014 indonesian beef consumption per capita per year tended to increase, with an average of 2.08 kg / capita / year. consumption that creates demand for meat in indonesia in the coming years tends to increase. in 2013 the consumption of beef was 567.31 thousand tons, and in 2019 consumption increased to 642.76 thousand tons. however, predictions of beef consumption made by nuryati et al. (2015) for 2015 underestimate, while the prediction of beef consumption made by the ministry of trade seems overestimate. ningsih (2015) quoted a statement from the secretary of the directorate general of domestic trade of the ministry of trade (kemendag) suhanto that in 2015 indonesia had a beef deficit of 237.89 thousand tons or equivalent to 1.39 million live cattle. the calculation is based on the level of beef consumption in 2015 of 2.6 kg per capita per year with a population of 255,461,700 people, so that the demand for beef in 2015 reached 653,982 tons or equal to 3,843,787 live cattle, but the local capacity was only 2,445. 577 cows live, so there is a deficit in the availability of cattle as much as 1.39 million cows or equivalent to 237.89 thousand tons of meat. to cover the deficit, based on the calculation of beef coordination at the office of the coordinating ministry for economic affairs on august 31, 2015, the supply of imported beef in the form of 773,149 live cattle and 83.26 thousand tons of frozen meat was determined. 4. projections of beef production and consumption based on national beef production data (without imports) and national beef consumption, projections can be made in the next few years, then compare whether the balance of production and consumption of indonesian beef is surplus or deficit. nuryati et al. (2015) from the agriculture data and information center, ministry of agriculture of the republic of indonesia, made the projections of national meat production and consumption in the next five years (2013-2019) using multiple regression models, the results of which are presented in table 1. in table 1 it appears that national beef production for 2013-2019 is projected to increase with an average growth rate of 4.81% per year as the local cattle population increases. likewise for beef consumption from 20132019 is predicted to increase with an average growth from 2015-2019 of 2.11%. predictions of higher production growth than growth in consumption of beef have not been able to offset consumption, so that beef deficits still occur until 2019. table-1. projections for national meat production and consumption, 2013-2019 year production (000 tons) consumption of national beef (000 tons) surplus / deficit (000 tons) production of carcass meat(000 tons) pure meat production(000 tons) 1 2 3 4 5 2013 504.8 403.85 567.31 -163.45 2014 497.67 398.14 595.11 -196.97 2015*) 523.93 419.14 613.11 -193.97 2016**) 583.14 466.51 623.48 -156.97 2017**) 606.73 485.38 636.39 -151.01 2018**) 636.96 509.57 641.33 -131.76 2019**) 666.69 533.35 642.76 -109.41 rata-ratapertumbuhan 4.81 4.81 2.11 -5.60 source: nuryati et al. (2015) information: column 5 = column 3 column 4. *) production of provisional figures, dg pkh **) consumption of pusdatin estimates. the highest beef deficit occurred in 2014 which was equal to 196.97 thousand tons and the lowest was predicted in 2019 at 109.41 thousand tons, this was indicated by indonesia still importing beef cattle from abroad, namely from australia and new zealand until 2015. seeing the deficit beef until 2019 tends to decline, it is expected that beef imports will decline. however, as a note, the reduction in the beef deficit is only calculated based on household consumption, while the demand for beef outside the household which is estimated to be quite large has not been calculated. indonesia is still importing beef from abroad, namely from australia and new zealand until 2015. 5. volatility of beef price 5.1. development of beef price observing the development of beef prices over the past five years (2011 february 2016), it appears that beef prices tend to increase, on average 15% per year and never once a price decline from the previous year (figure 3) economy, 2019, 6(1): 1-6 5 © 2019 by the authors; licensee asian online journal publishing group figure-3. development of beef prices in 2011-february 2016 (idr / kg (source: cbs jakarta in anonymous (2016)) in figure 3, there is a pattern of increases and decreases in beef prices in the same month in the last five years. at the beginning and end of the year there was an increase in prices, before the fasting month there was an increase and the highest increase in prices when approaching eid. during the last five years (2011-2016), eid fell in august and july. likewise, the pattern of decline was in february and may, then in september, october and november it decreased. in september the decline was quite large compared to other months, because eid had ended towards a normal equilibrium price, but the decline for the three months was only one third of the increase before eid. since beef accounts for 71% of meat consumption in nigeria, efficient functioning of the beef market network is very important in nigeria’s development. empirical results showed that retail price growth rates were highest in 2002. growth was highest in benue market in 2002 (99.7%), sokoto market in 2009 (95.4%) and imo market in 2002 (54.9%). growth rates were generally stable in 2001 except in kwara market. the lowest growth rates were recorded in benue market (-35.1%) and imo market (-14.5%) in 2003. average growth rates were highest in borno market (17.4%), sokoto market (16.0%) and bauchi market (15.6%) while it was least in lagos market (11.3%)(bobola et al., 2015). 5.2. beef price calculation of kadin and government version according to the calculation of the indonesian chamber of commerce and industry/kadin (martaon, 2015; chandra, 2016) the price of local beef sold in the market for idr 120,000/kg is considered reasonable with details: the price of live beef per kilogram is around idr 43,000/kg (= us$ 3), then the price has doubled when it has been cut into a carcass of idr 86,000/kg. plus the cost of cutting around idr 20,000/kg in slaughterhouses (rumah potong hewan, rph). coupled with transportation costs to the market around idr 10,000 to idr 15,000. if accumulated the price of retail meat in the public market becomes idr 115,000 to idr 120,000 per kg (idr 83.00  idr 86,000 + idr 20,000 + idr 9,000 idr 14,000). however, the price of live beef according to the kadinversion is idr 43,000 per kg, the weight of live cattle is above the calculation of government prices (ministry of agriculture) of 38,000 rupiah per kilogram. 5.3.deficit and cartel behind the volatility of beef prices the beef deficit in indonesia triggered a rise in prices, and this price increase tempted the beef business actors to form a cartel. kusuma (2013) who cites oxford dictionaries, cartels or cartels defined, "cartel is a group of separate business firms." that is, the cartel is a group (group) of various different business legal entities that work together to increase their respective profits without going through business competition with other business actors. they are a group of producers or business owners who make an agreement to make pricing, distribution arrangements and distribution areas, including limiting supply. anonymous (2017) stated that the ministry of finance signed a cooperation agreement with the business competition supervisory commission (kppu) to reduce the price of beef in the market with a very thick cartel practice. the indonesian beef market is not only filled with local production, but also filled with imported meat. although beef imports and meat products have increased to a dozen times, the prices have continued to stay high. this reinforces the suspicion of cartel practices in the meat market. for this reason, the government and kppu are preparing fines of up to idr 25 billion to provide a deterrent effect. according to idris (2016) who quoted the statement of the business competition supervisory commission (kppu), kppu officially sentenced 32 feedlot companies to accusations of carrying out cartel practices or business conspiracy. thirty-two feedlots were considered to have carried out a cartel through an agreement within the indonesian meat producer and feedlot association (apfindo). the 32 feedlot companies were brought by the kppu to the trial because they were considered to be practicing unfair business competition by holding a supply of cattle. this makes the price of beef in jakarta-bogor-depok-tangerang-bekasi (jabodetabek) had penetrated above idr 170,000 / kg. deputy chairman of the corruption eradication commission (komisi pemberantasan korupsi, kpk) laode muhammad syarif (puspitasari, 2017) ensured that bribe judges of the constitutional court patrialis akbar, basukihariman, carried out a beef cartel. indications were revealed because of the many ministries and agency stamps found in basuki's office at pt sumberlaut perkasa related to meat import business. according to laode, the high price of beef at that time was the work of a meat cartel that monopolized the market. director general of taxes-ken dwijugiasteadi (rahmah, 2017) stated that the government would impose a high tax on business entities or businessmen suspected of being a cartel in the beef import trade business, whose calculations economy, 2019, 6(1): 1-6 6 © 2019 by the authors; licensee asian online journal publishing group were 25% plus sanctions up to 48%. according to ken, his office found allegations of fraud committed by employers to outsmart taxes. ken further said that his party is now exploring and investigating 82 beef-related business entities. it is said that business owners are all that, but they open branches and distribution everywhere, and they do cartels with their own companies or branches, and they set prices as they please, so the price of beef becomes high. 6. conclusions and recommendations 6.1. conclusions 1. the population of beef cattle in indonesia tends to increase by an average of 2.72% per year in the period 2000-2016, namely in 2000 as many as 11,008,017 birds, in 2010 as many as 13,581,570 tails, and in 2016 as many as 16,092,561 tails. 2. the rate of increase in beef consumption is higher than the rate of increase in national beef production, resulting in beef deficits. based on the project of beef production and consumption, until 2019 indonesia is still deficit of beef or not yet self-sufficient in beef. 3. the volatility of beef prices reaches idr 150,000 per kg, not only because of the national beef deficit, so prices move up, but also the cartel of fellow beef business people. even the government through the business competition commission (komisi pengawas persaingan usaha, kppu) has imposed fines on 32 feedloters. 6.2. recommendations 1. reducing the turmoil of volatility of beef prices on the public market, for the time being or in the short term the government can open bigger beef import tapes to meet domestic demand, but for permanent and long-term, the government must nurture farmers and prospective local cattle breeders intensively and extensively with various incentive programs, so that farmers and prospective farmers are more interested in raising cattle. 2. the cattle insurance program that was recently launched by the government in august 2016, needs to be disseminated and local cattle farmers need to be educated on the benefits of participating in this cattle insurance. references amejo, a.g., y.m. gebere, u. dickoefer, h. kassa, t. tana and p. lawrence, 2018. herd dynamics and productivity performance modeling of livestock in smallholder crop-livestock systems in southwestern ethiopia. international journal of veterinary medicine and animal husbandry, 3(1): 17-24. anonymous, 2012. economic analysis and marketing of bali cows. in the book bali cow original indonesian genetic resources. denpasar bali. publisher of bali cow study center and udayana university. pp: 241-267. anonymous, 2016. national beef price development pattern. in sapibagus web. available from http://www.sapibagus.com/2016/03/26/pola-perkembangan-harga-daging-sapi-nasional-2011-2016. anonymous, 2017. the government seriously combats beef cartel. tribunnews.com, jakarta. available from http://www.tribunnews.com/ bisnis/2017/ 03/03/pemerintah-serius-perangi-kartel-daging-sapi. bobola, o., t. mafimisebi and e. ikuemonisan, 2015. price fluctuations, linkages and causality in the nigerian beef market. journal of fisheries and livestock production, 3(135): 2. available at: https://doi.org/10.4172/2332-2608.1000135. cbs, 2017. animal husbandry statistics: beef cattle population in 2000-2016. on the web. jakarta: cbs. chandra, a.a., 2016. this is the calculation of kadin about the price of beef idr 120,000/kg. in detik of finance. available from https://finance.detik.com/berita-ekonomi-bisnis/d-3232978/ini-perhitungan-kadin-soal-harga-daging-sapi-rp-120000kg [accessed june 14, 2016]. dwiyanto, k. and i. mahendri, 2013. the role of bali cows in realizing sustainable national meat self-sufficiency. in proceedings of the bali cow national seminar the role of bali cows in realizing sustainable national meat self-sufficiency, bali. pp: 1-26. idris, m., 2016. kppu fines 32 beef cartel companies, the highest is idr 21 billion. in detik finance. available from https://finance.detik.com/berita-ekonomi-bisnis/d-3194665/kppu-denda-32-perusahaan-kartel-daging-sapi-tertinggi-rp-21miliar. kompas, m., 2017. songs of self-sufficiency in beef with insurance. jakarta: publisher of pt kompas media nusantara. kubkomawa, h.i., s. adamu, c. achonwa, k. adewuyi and i. okoli, 2018. beef production and marketing in nigeria: entrepreneurship in animal agriculture. international journal of veterinary sciences and ani mal husbandry 2018, 3(2): 26-40. kusuma, l., 2013. understanding the definition of cartel, monopoly and business competition. in journal of nusa bangsa. available from http://leo4kusuma.blogspot.com/2013/03/memahami-pengertian-kartel-monopoli-dan.html#.xeccl95b8ap. martaon, a., 2015. calculation of feedloter version of beef prices. in metro tv news.com. available from http://jabar.metrotvnews.com/read/2015/09/16/431504/perh. muladno, 2012. application of breeding technology for increased goal production and national beef quality. in the proceedings of the national seminar on increasing production and quality of national bali beef, bali september 14, 2012. center for bali cattle studies and udayana university. pp: 1-15. ningsih, d., 2015. beef deficit reaches 238,000 tons. in satu.com news. available from http://www.beritasatu.com/ekonomi/305538defisit-daging-sapi-2015-capai-238000-ton.html. nuryati, l., b.n. waryanto and r. widaningsih, 2015. outlook on agricultural commodities in livestock sub sector. beef. published by dara center and agricultural information system, secretariat general of the ministry of agriculture, jakarta. pp: 65. outlaw, j.l., d.p. anderson and d.i. padberg, 1997. relationships between market price signals and production management: the case of fed beef. journal of agricultural and applied economics, 29(1): 37-44. puspitasari, m.a., 2017. patrialis bribery case, here's the twists and turns of beef cartel. in tempo. available from https://m.tempo.co/read/news/2017/02/01/. rahmah, g., 2017. will beef cartel subject to high taxes. in tempo.co.bisnis. available from https://bisnis.tempo.co/read/851950/kartel-daging-sapi-bakal-dikenakan-pajak-tinggi. subak, s., 1999. global environmental costs of beef production. ecological economics, 30(1): 79-91. available at: https://doi.org/10.1016/s0921-8009(98)00100-1. supardi, s.w., 2009. bali cow "pearl" from bali. denpasar, bali: udayana university press. pp: 65. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. http://www.sapibagus.com/2016/03/26/pola-perkembangan-harga-daging-sapi-nasional-2011-2016 http://www.tribunnews.com/ http://leo4kusuma.blogspot.com/2013/03/memahami-pengertian-kartel-monopoli-dan.html#.xeccl95b8ap http://jabar.metrotvnews.com/read/2015/09/16/431504/perh http://www.beritasatu.com/ekonomi/305538-defisit-daging-sapi-2015-capai-238000-ton.html http://www.beritasatu.com/ekonomi/305538-defisit-daging-sapi-2015-capai-238000-ton.html 16 © 2021 by the authors; licensee asian online journal publishing group economy vol. 8, no. 2, 16-25, 2021 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2021.82.16.25 © 2021 by the authors; licensee asian online journal publishing group revisiting the relationship between poverty and environmental sustainability in sub-saharan african countries using dynamic econometric models owusu samuel mensah1 chen jianlin2 fu chuambo3 hu qio4 1,2,3,4school of business, jinggangshan university, qingyuan district, ji'an city, jiangxi province, china. 1email: omensju15@yahoo.com ( corresponding author) abstract sustainable development remains an important issue in the quest to achieve a safe and a better world. the expansion of the 8 millennium development goals into the 17 sustainable development goals is a testament of the conscious desire to improve the human environment to ensure better quality of life for its citizens. this study assembles a collection of four sophisticated econometric models to determine the impact of poverty and other variables on two indicators of environmental sustainability. beside, economic development, the study confirmed the negative impact of poverty on both indicators of sustainable development. the results prove that poverty in sub-saharan africa is a threat to environmental quality and its consequential challenges. the call to promote environmentally responsible behaviours should not be focused on developed countries alone. poverty is also associated with high levels of pollution and poor countries including countries in sub-saharan africa contributes must equally restrategise for effective environmental goals. the study further discloses that poverty is one of the strongest factors that affect environmental sustainability. this observation is not a contradiction to the well-established fact that prosperity or economic growth is a major precursor of unsustainable environment. on the contrary the evidence in this paper amplifies a consequence of a social crisis if they fester at both ends. in one breath, whereas economic growth or economic prosperity can compromise the quality of the environment. in conclusion, this result implies that african countries in their pursuit of economic growth, education and effective healthcare to ameliorate poverty must incorporate other aggressive strategies to hasten poverty reduction. keywords: relationship, environment, sustainability, dynamic ordinary least square regression, poverty, sub-saharan africa. citation | owusu samuel mensah; chen jianlin; fu chuambo; hu qio (2021). revisiting the relationship between poverty and environmental sustainability in sub-saharan african countries using dynamic econometric models. economy, 8(2): 16-28. history: received: 2 september 2021 revised: 30 september 2021 accepted: 22 october 2021 published: 15 november 2021 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group acknowledgement: all authors contributed to the conception and design of the study. funding: the study is funded by the national self-finance fund project “based on the dual network embedding of small and micro enterprises' life cycle trap breakthrough mechanism and path research”item number: 71563022. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ...................................................................................................................................................................................... 17 2. methodology ..................................................................................................................................................................................... 18 3. empirical results and discussion ................................................................................................................................................ 21 4. conclusion ......................................................................................................................................................................................... 24 references .............................................................................................................................................................................................. 24 mailto:omensju15@yahoo.com http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ https://www.doi.org/10.20448/journal.502.2021.82.16.25 https://orcid.org/0000-0002-9931-1284 economy, 2021, 8(2): 16-25 17 © 2021 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study contributes to existing literature by determining the impact of poverty and other variables on two indicators of environmental sustainability. 1. introduction globally, there is the growing concern that environmental quality is depleting at an alarming rate and has even reached unsustainable levels. with escalating scarcity of clean air, drying water bodies, shifting climates, and destructions of entire ecosystems, asongu, agboola, alola, and bekun (2020) predicts an unprecedented global environmental calamity if extraordinary and globally-coordinated measures are not implemented in time to arrest the spiralling situation. increasingly, a number of well-established literature links economic growth and environmental pollution and this gratuitous environmental destruction nexus (adedoyin, alola, & bekun, 2020). a significant number of the available research materials provide empirical evidence to support the claims that economically advanced countries are largely responsible for the continuous decline in environmental quality (joshua & bekun, 2020). the reason is that increasing environmental pollution may be a negative spill-over of the overbearing pursuit of economic growth through unsustainable means (joshua & bekun, 2020). expectedly, most of the discontent with the provisions of the 2015 paris accord and its predecessor kyoto protocol, have come from developed countries such as usa, china, japan etc that emits high carbon dioxide into the atmosphere (adekunle, 2020). these countries believe that some of the provisions in the protocol are unfairly targeted at them. the protocols are believed to impose unworkable and unrealistic carbon reduction targets on developed economies with recourse to the economic responsibility to less developed economies (khan, zhang, kumar, zavadskas, & streimikiene, 2020). in the extant literature, four main theories have emerged that links economic growth to environmental pollution. these are an inverted u-shaped relationship between economic growth and environmental pollution (bekun, yalçiner, etokakpan, & alola, 2020), a monotonically increasing relationship economic growth and environmental pollution (eluwole, saint akadiri, alola, & etokakpan, 2020), a u-shaped relationship (khan, yu, sharif, & golpîra, 2020) economic growth and environmental pollution and an n-shaped relationship economic growth and environmental pollution (ibrahim & alola, 2020). theoretically, several theories that explain the interplay between economic growth and environmental pollution emerged as early as the 1970s but grossman and krueger’s (demissew beyene & kotosz, 2020) environmental kuznet curve (ekc) theory laid the foundation of modern advances in the subject. this same position is well explained in the later work of panayotou (lan, 2021). the environmental kuznet curve theory indicates that an inverted u-shaped relationship exists between the level of income and the environmental degradation and it evolves in stages. at the onset of economic growth, the increase in industrial activities contributes to high environmental deterioration (asongu & odhiambo, 2021). the deterioration at this stage occurs due to increase in energy intensive production that quickens the emission of pollutants. at the second stage of industrialisation, the service and technology-intensive knowledge-based industry begins to develop. at this point, the decline in environmental degradation begin to slow down correspondingly due to the changes in production, environmental awareness and the promulgation of stricter environmental regulations (kirikkaleli & sowah, 2020). thus, the ekc theory implies that composition effect, scale effect and technique effect are the main channels through which environmental welfare is affected by economic growth. in this theory it is argued that growth in economic scale leads to proportional growth in environmental pollution whiles changes in the structure of the industry leads to a reduction in the intensity of the pollution. additionally, grossman and krueger (usman, akadiri, & adeshola, 2020) suggest that economic growth inspires technological progress which brings in enhanced, and cleaner technologies to replace obsolete ones to further improve the quality of the environment. related studies on economic growth and environmental pollution have also examined the reverse effect of environmental pollution on economic growth. however, an emerging strand of literature that is receiving significant academic curiosity is the linkages between economic poverty and environmental pollution. according to baloch, khan, and ulucak (2020) academic interest that establishes the relationship between poverty and environmental pollution dates back to the early 1980s but this area of academic specialisation failed to elicit the needed research interest and global interest due to the overbearing effect of economic growth on environmental pollution. secondly, several groups have emerged at both national and international level to highlight, protest and finance the advocacy on the effect of economic growth on environmental pollution but this is not the case with how poverty affects environmental pollution. the imbalance in studies in this regard is explained in baloch, khan, ulucak, and ahmad (2020) when they content that even though global effort has been concentrated on how to mitigate environmental stress through sustainable economic growth, poverty also plays a major role in environmental degradation and health related quality of life across the globe. this may have influenced the millennium fathers to declare the need to reduce absolute poverty as the first of both the millennium development goal (mdgs) and the successor sustainable development goals (sdgs). the objective of these goals is to alleviate absolute poverty by 2030. this bias in studies about environmental pollution explains the paucity of studies on africa’s contribution to environmental pollution globally as the continent is deprived of the large industries that emit high carbon dioxide into the atmosphere. yet poverty can be a major source of environmental pollution and its reduction can further accentuate effort to reduce environmentalled calamities in africa. generally, literature on african growth and development and poverty reduction is extensive; however, few have attempted to establish the link between public investment and poverty reduction in sub-saharan africa. according to world bank (2015) africa for the past two decades has seen a tremendous increase in its economy recording an annual growth rate of 4.5 percent, however, translating these economic gains into improving the wellbeing of the people has been a major concern. sub-saharan africa in 2015 had 27 out of 28 poorest countries living in an absolute poverty in the world and the average poverty was at 41 percent in sub-saharan africa as https://borgenproject.org/poverty-environment-done-survive/ economy, 2021, 8(2): 16-25 18 © 2021 by the authors; licensee asian online journal publishing group compare to 13 percent in the other regions in 2015 (world bank report, 2018b). the sub-region continues to record high population growth, high level of poverty, and the weak economic situation coupled with poor management of the covid-19 pandemic is deteriorating and worsening socioeconomic conditions of the people. the continent saw its population doubled between 1990 and 2015, with significant number of people living on less than $1.90 a day (world bank report, 2018a). sub-saharan africa is among the worst regions in the world with high rate of poverty and their income per capita or gdp per capita fall toward the bottom of list of countries globally (adeyeye, adebayo-oyetoro, & tiamiyu, 2017; baloch et al., 2020). poverty is classified as one of the greatest challenges in sub-region and its eradication remains an integral part of the developmental agendas (fombad, 2018). in the opinion of jan and shah (2020) poverty affects environmental quality through deforestation and other negative farming practices. the forest is the main source of fresh and clean air and water to enhance the quality of the human environment. forest act as sinking hoes to reduce the drastic effect of climate change on human health. conversely, an increase in deforestation compromises how forests play this role. many impoverished communities are aware of the errant and harmful effect of deforestation but have limited choices. poor communities purposely raze down forest lands to make space for agricultural activities, animal grazing and obtain wood for fuel. through lumbering, quarrying, extensive road construction into regions that were once almost inaccessible, building and upgrading of roads into forests along with other destructive patterns further spirals the environmental quality downwards. deforestation can result in more carbon dioxide being released into the atmosphere. that is because trees take in carbon dioxide from the air for photosynthesis, and carbon is locked chemically in their wood. when trees are burned, this carbon returns to the atmosphere as carbon dioxide. with fewer trees around to take in the carbon dioxide, this greenhouse gas accumulates in the atmosphere and accelerates global warming. according to radosavljevic, haider, lade, and schlüter (2020) due to poor environmental and sanitation planning at both government and domestic level, environmental pollution persists in several underdeveloped economies. in some of these countries human and other household waste are directly dumped into water bodies. these may be the same sources of farming and livestock production that increases the chances of pollution. in relation to air pollution, hirons (2020) explains that poor communities lack knowledge about proper production techniques hence employ very crude methods which may compromise the quality of air. in essence, waste disposal is one of the major challenges associated with poverty. poor communities lack efficient waste disposal systems which affect the health of the individuals and the health of their environment. mnini and ramoroka (2020) also explain that extreme poverty is strongly correlated with high birth rates. the resulting population boom in poorer communities is an additional burden on the environment. this is because more people will have to extract the maximum benefit from the limited primary resources available. for example, in some countries, water and air quality has reduced significantly due to the activities of small-scale miners as pertain in the case in ghana. the effect of poverty on carbon emission is specifically addressed in the work of baloch et al. (2020). their study specifically explored the linkages between income inequality, poverty, and carbon dioxide (co2) emissions for the 40 sub-saharan african countries over the period 2010 2016. using the driscoll kray regression estimator, this study revealed that suggest income inequality was positively related to co2 emissions but negatively related to environmental pollution in sub-saharan african countries. this together with related studies truly affirms the influence of poverty as a major cause of environmental pollution. thus, if poverty is eradicated, it may minimize several environmental problems. that notwithstanding, the genealogy of the relationship between poverty and environmental sustainability is highly convoluted (aust, morais, & pinto, 2020). to this end, previous efforts to measure the precision of this relationship have often ended with inconclusive or conflicting outcomes. for example, one school of thought suggests that the linear causal link between poverty and environmental quality or sustainability is too simplistic. instead, the nexus is governed by a complex web of factors. there are institutional and market failures factors, conflicts between different agents (income groups) and other compounding factors. this paper explores the relationship between poverty and environmental sustainability in sub-saharan africa. the rest of the paper is arranged as follows. section 2 provides further information on poverty in the sub-region. section 3 provides data and the empirical methodology. section 4 presents the empirical findings. section 5 concludes with suggestions 2. methodology this paper employs (stock & watson, 1993) dynamic ordinary least square regression (dols), the two-staged least square regression model and dynamic panel model using system-gmm to provide comprehensive understanding of the relationship between poverty and environmental sustainability in sub-saharan africa (ullah, awan, & ul hasan, 2020). the dols is used because it allows integration of variables of alternative orders (in this sense, a higher order of integration). it also reduces possible simultaneity amongst the regressors. the two-staged least square regression model is also applied in this study as the regressor is contemporaneously correlated with the equation’s disturbance and consequently, the ols estimates will be bias and inconsistent. the system-gmm proposed by arellano (2003) and developed by blundell and bond (1998) is adopted for the study due as it is widely used and affirmed in similar studies with robustness of inferences the model is formulated as follows; 2.1. panel causality test this paper adopted the panel causality test by dumitrescu and hurlin (2012) to understand the causal relationship among the variables. this form of test takes into consideration two heterogeneity classifications. following, arellano (2003) the equation is formulated as follows: ( ) ( ) , , , , 1 1 h h h h i t i i i t h i i t h i t h h y      − − − − = + + +  1,2,....... : 1,2,.....,i n t t= = (1) economy, 2021, 8(2): 16-25 19 © 2021 by the authors; licensee asian online journal publishing group from the equation above, we represented the two stationary variables used in the study by x and y as n individuals in t periods. ( ) ( )( )1 ,...., h i i i  = along with individual effects i are fixed in the time dimension specification. moreover, it is believed that the lag orders of h are homogenous for the complete cross-section of the panel data of the study. besides the ( )h i and ( )h i , which are autoregressive parameters and the regression coefficients are permitted to be different cross groups, equation 1. the test approach has the assumption that the null hypothesis have no causal relationship for the units available (x and y) in the panel data. if, however, the hypothesis (h0) is rejected the study can conclude that there is causal relationship between the x and y variables. the x and y can also be used to measure the bidirectional causality, which is also termed as feedback impacts. the assumption is referred to as homogeneous non-causality (henc) hypothesis, which can be explained as: 0 : 0, 1,....i ih d =  = under the alternative hypothesis, which is heterogeneous non-causality (henc) hypothesis only two categories of cross section units are allowed. the study further takes into consideration the heterogeneous panelised data, which constitute fixed coefficients and the alternative hypothesis is therefore, presented as follows: there is the assumption that i comes in divers ways across groups in addition to the 1d , where d represents the each procedure without causal relationship between the x and y variables. from the hypothesis above, it is assumed that the 1d cannot be identified, however it allows the condition 10 / 1d d  . the study , therefore proposed the statistics , hnc d tw linked to null homogenous non-causality as bellow: , , 1 1 . d hnc d t i t t w w d = =  (2) from the equation 2, the ,i tw represents the individual wald statistics as regards to the thi cross-section unit to have a relationship with the test hypothesis 0 : 0ih  = on individual bases, equation 2. let  1 : :i iv y x=  represent the ( ),2 1t h − matrix, in which shows a ( ),1t unit vector and ( )1 2 1 2 ' ': : ..... : , : : ..... : .h h i i i i i i i i i i iy y y y x x x x       = = =    illustrates vectors of parameters of the framework and represented  0:1hf = be a  ,2 1h h + matrix. according to the module, for every 1,.... ,i d= the wald statistics make an estimation of ,i tw to match the individual test 0 : 0ih  = . thus is can be formulated as follow: ( ) 1 12 ,i t i i i i iw f b f v n v v  − −     =   (3) with regards to the null hypothesis of non-causality, the wild statistic value is linked up to the a chi-squared distribution that has h degrees of freedom for t → , equation 3. the standardized test statistics estimate , hnc d tv for ,t d → is presented as: (4) the study further presents the standardized test estimate hnc dv for fixed t samples outlined as: ( ) ( ) , 2 5 2 3 . . . (0,1) 2 3 2 1 hnc hnc d d t t hd t h v x x w h d h t h t h − − − −  = − → − − − −  (5) the equation 4 and 5 can be simply illustrated as ( ), 1 1/ dhnc d t iti w d w − =  . in short the statistics values shown above the granger causality process output represents the values for w(w-bar), z(z-bar), and then ( ), ( ), ( ),w w bar z z bar z z bar− − − and z(z-bar tilde). ( ) ( ) ( )( ) ( ), /it itf x a y ln y a ln x a ln y a = − − − − 1 1( , ) ( , ) ( , )it it it itf x x a y f x a y f x a y   − −= − where a is the highest possible value and b is the lowest possible value of indicator x for country i at time t and ln represents the natural logarithm, equation 5. 2.2. generalised methods of moments this paper adopted generalised methods of moments (gmm) to investigate the dynamism, heteroskedasticity and endogeneity found in the regression models. following dumitrescu and hurlin (2012) the paper formulated two regression models as follows: 2 , ( ), 1.......i t iw h d→  = ( ) ( ), , 0,1 2 hnc hnc d t d t d v w k d h = − → economy, 2021, 8(2): 16-25 20 © 2021 by the authors; licensee asian online journal publishing group 1 2 1 3 4 5 6 7 8it it it it it it it it itest esd pov fin ins edu urb top        −= + + + + + + + + (6) 1 2 1 3 4 5 6 7 8it it it it it it it it itesd esd pov fin ins edu urb top        −= + + + + + + + + (7) where, i denotes the country 1,...i n= while t represents the time itest and itesd are two different indicants of the lagged dependent factor of environmental sustainability, whereas pov is the proxy for poverty, equation 6 and 7. fin represents financial development whiles ins is the proxy for institutional quality. edu is the proxy for government expenditure on education (% of gdp), while urb measures urbanization and top is an indicator of openness to trade. oseni (2016) further argues that including lagged dependent variables as an independent violate “orthogonality assumption”, however, when the coefficient of the interest are finite-dimensional. the gmm estimators are known to be consistent, asymptotically normal, and efficient in the class of all estimators that do not use extra information aside from that contained in the moment conditions (edrees, 2015). 2.3. data source and variable specification the study adopts a cross-country panel data of 15 sub-saharan african (ssa) countries with related economic and poverty indicators. to enable comparative analysis based on regions, the countries were further sub-divided into the four regions with ssa. the countries selected from western ssa were ghana, senegal, côte d’ivoire, and benin while angola, cameroon, and dr congo were selected from central african region. on the other hand, ethiopia, kenya, rwanda, and uganda were selected from eastern africa whereas south africa, botswana, namibia, lesotho was selected from southern africa. the data span the period of 2009 and 2019 as they were those available at the time of the study. the entire data was selected from world bank database, 2019. the reliability of the data was cross-checked with complementary data from other international and independent sources. the variables of study were carefully chosen to reflect previous analysis on the significant factors that affect environmental quality or sustainability. table 1 shows the detailed description of variables. table-1. variable definition and data source. variables definitions operational definition data source est adjusted net savings, excluding particulates emission damage. (%of gni) world bank database esd forest depletion is the product of unit resource rents and the excess of round wood harvest over natural growth. natural resources depletion is the sum of net forest depletion, energy depletion, and mineral depletion etc. world bank database pov poverty headcount ratio at $1.90/ a day (2011 ppp) world bank database fin financial development (percentage of private sector share of gdp) world bank database ins institutional quality (governance effectiveness and regulatory quality index) world bank database edu government expenditure on education, total (% of gdp) world bank database urb urbanization (% of urban population/total population) world bank database top openness to trade (% of import and export as % of gdp) world bank database notes: n variables are converted into their natural logarithm to ensure normal distribution of data. the extant literature presents a plethora of measures admitted as proxy for environmental sustainability or sustainable development. researchers argue that the different measures are useful depending on the context of study. in this study, two measures of environmental sustainability were used and each of them was tested differently. using the two measures of environmental sustainability is helpful as it enables the study to determine the impact of poverty on all aspects of environmental sustainable. the first measure of environmental sustainability (est) is based on the adjusted net savings plus education expenditure and minus energy depletion, mineral depletion, net forest depletion, and carbon dioxide level. this measure of sustainable development was first introduced by pearce and atkinson (1998) as proxy for a weak sustainability ranking. this measure itself was an improvement of an earlier one introduced by hartwick (1990). in this model, it is assumed that income from non-renewable resources must be reinvested in renewable resources to maintain the ecological balance and social wellbeing. pearce and atkinson (1993) is the one that saves more than its combined depletion of natural resources and produced capital. a country is perceived to be on an unsustainable path if the value of this proxy is negative. recent studies that has used this measure of sustainable development has been successfully used in arrow, dasgupta, goulder, mumford, and oleson (2012); blum, ducoing, and mclaughlin (2017); greasley et al. (2014), and have obtained robustness of inference. the second proxy of environmental sustainability (esd) is adopted from ntow-gyamfi, bokpin, aboagye, and ackah (2020) which combine forest depletion, natural resource depletion, energy and mineral resources depletion, co2 emissions and total greenhouse emissions. since these variables are measured in different units (ntow-gyamfi et al., 2020). to standardize the measure and make it suitable for the estimation, the natural log of each indicant is taken. since the index of environmental sustainability is made up of different variables, with different units of measurement, kakwani, wagstaff, and van doorslaer (1997) approach was used to reconstruct all into a unit free variable. the final unit free environmental sustainability index was constructed using the following steps. in the first place an achievement index was constructed for each variable. the formula for achievement index for the variables is mathematically expressed as; ( ) ( ( ) ( )) ( ), , /xit b t ln t b ln xit b ln t b= − − − − (8) where t is the highest possible value and b is the lowest possible value of indicator x for country i at time t and ln is the natural logarithm, equation 8. an improvement index for indicator x which shall later feed into the sustainability index is therefore given as: ), 1, , , , )1, ,( ( ) (f xit xit t b f xit t b f xit t b− = − − (9) economy, 2021, 8(2): 16-25 21 © 2021 by the authors; licensee asian online journal publishing group we then obtained the second index of sustainable development by taking the average of the improvement index of the sustainability variables explained above. with the result obtained from the equation above, a higher value indicates more sustainable environment, equation 9. since the effect of poverty (pov) is the focus of this study, poverty is the first explanatory variable. again many different measurement of poverty have emerged with context specific factors. according to pezzey (2004) increasingly, the measurement of poverty keeps changing. while some people recommend a multidimensional approach that comprises social, economic, natural and socio-political factors, there are those that insist on using only economic wellbeing. this debate has intensified the emergence of both monetary and non-monetary poverty theories. further, the extant literature is inconclusive as to whether relative or absolute poverty is the best definition of poverty. based on the peculiarities of sub-saharan africa, we measured poverty using the existing poverty headcount ratio at $1.90/ a day as which was proposed by the world bank in 2011. this measures economic poverty by the percentage of the population that lives on less than $1.90 a day at 2011 international prices. the other explanatory variables include the financial development (fin) and institutional quality (ins). further, education (edu), urbanization (urb), trade openness (top) are included as control variables based on previous established studies in other parts of the world. exploring how these affect environmental sustainability in sub-saharan africa is critical considering the number of uneducated persons that live in this part of the world. it is the belief of the authors that increase in education must positively correspond to increase in eco-system awareness and environmentally responsible behaviour. conversely an illiterate community will struggle to understand and appreciate the futuristic benefits of preserving the eco-system in preference for immediate benefit. like the other variables, measuring education lends itself to several interpretations but this study measured education by the number of secondary school enrolment. financial development is measured by the percentage of private sector share of gdp whereas institutional quality is proxy by governance effectiveness and regulatory quality indexes. urbanization is measured based on the percentage of urban population as proportion of the total population whiles trade openness is measured as the sum of imports and exports expressed as a percentage of gdp. 3. empirical results and discussion 3.1. pre-estimation results the mean and median of the variables used for the study are presented in table 2 below and fall within the maximum and minimum values. the results from table 2 further shows that 60 % of the variables are positively skewed, which include esd, fin, ins, edu and top, and est, pov and urb variables are negatively skewed. from table 2 all the values of the kurtosis, including est,esd,fin,pov,ins,edu,urb and top reveal the leptokurtic nature of the variables used for the study (oseni, 2016). table 2 further reports the values of the jarque-bera and their p-values of the coefficient less than 0.01, which means rejecting the null hypothesis of the normal distribution. the jarque-bera statistic is used to test whether a sequence follows a normal distribution. furthermore, the correlation among the variables was tested to detect whether the variables used for the study have high multicollinearity among themselves in table 3. multicollinearity among variables occurs when the correlation coefficient results is more than 0.5. table 3 gives the results of the correlation coefficients among the independent variables used for the study. the results indicates the absence of any multicollinearity among the predictor variables. table-2. descriptive statistics, normality test and correlation matrix. variables est esd fin pov ins edu urb top mean 1.7245 1.0453 21.58298 15.27824 21.58298 1.88263 72.37603 1.88263 median 10.7 1.9483 11.10415 10.7 11.10415 1.577535 5.047062 1.577535 maximum 32.7 6.3821 121.7331 78.9 121.7331 7.43594 511.4585 7.43594 minimum -40.47 0.0381 0.08363 0.38 0.08363 0.37105 4.489647 0.37105 std. dev. 13.173 0.3102 24.48723 13.4183 24.48723 1.438195 107.9503 1.438195 skewness -0.37253 0.8103 1.861627 -0.225505 1.861627 2.499982 -1.508621 2.499982 kurtosis 5.361412 0.3812 6.284153 5.361412 6.284153 8.215936 4.435162 8.215936 jarque-bera 84.9473 43.523 180.754 84.9473 180.754 382.8412 81.86523 382.8412 probability 0.1924 0.1749 0.0000 0.1924 0.0000 0.0000 0.0168 0.0000 sum 2688.97 1742.10 3798.604 2688.97 3798.604 331.3429 12738.18 331.3429 sum sq. dev. 31508.88 2841.90 104934.3 31508.88 104934.3 361.9711 2039323 361.9711 observations 176 176 176 176 176 176 176 176 table-3. correlation matrix. variables est fin pov ins edu urb top esd est 1 fin 0.02765 1 pov -0.13224 -0.06313 1 ins 0.207613 0.024357 -0.29576 1 edu 0.06463 0.233936 0.023083 -0.14467 1 urb -0.20761 0.024357 -0.29576 0.03432 0.3286 1 top 0.06463 0.233936 0.023083 -0.14467 0.6532 0.5432 1 esd 0.3201 0.4621 0.9407 0.64301 0.4593 0.9482 0.4588 1 economy, 2021, 8(2): 16-25 22 © 2021 by the authors; licensee asian online journal publishing group table-4. unit root test result. variables levin level first difference hadri level first difference order of integration autocorrelation est 4.1733*** 10.6220* 9.2497* 1.7418 i(1) no esd 1.220.321 9.09250* 8.5012 0.4473** i(1) no fin 3.1092** 3.7987 13.7611*** 0.8540 i(1) no pov -4.1733*** -10.6220* -9.2497* -1.7418 i(1) no ins 3.1092** 3.7987 -13.7611*** 0.8540 i(1) no edu 20.321 21.0925*** 11.5012 0.7046** i(1) no urb -2.5662*** -3.8131 -7.7809*** -2.7355 i(1) no top 1.9064 0.0283*** 15.2917 2.3223* i(0) no notes: ***, ** and * denote significance at the 1%, 5% and 10% levels, respectively. table-5. result of lag length selection criterions. lag logl lr fpe aic sc hq 0 -3458.71 na 1.69e+11 40.04288 40.13402 40.07985 1 -2932.18 1016.529 5.13e+08 34.2449 34.79171* 34.46674 2 -2868.26 119.7155 3.27e+08 33.79493 34.79743 34.20164* 3 -2842.44 46.86218* 3.25e+08* 33.78547* 35.24364 34.37704 note: * indicates lag order selected by the criterion lr: sequential modified lr test statistic (each test at 5% level) fpe: final prediction error. aic: akaike information criterion. sc: schwarz information criterion. hq: hannan-quinn information criterion. the study adopted levin-lin-chu and hadri tests to test for the presence of the unit roots in the panel data, table 4. the results disclosed that the variables adopted for the study. the autocorrelation from results from table 4 shows no serial autocorrelation problem among the variables used for the study. to determine the appropriate lag length to be used for the study, we adopted lag selection used the var for the variable in levels for the analysis adopted by akalpler and hove (2019). the results presented in table 5 show that all the lag selection criterions including sequential modified lr test statistic (lr), final prediction error (fpe), and the akaike’s information criterion (aic) suggest lag 3 for the study. table-6. wald test. variable esd est fin pov ins edu urb value 1.46123 1.6404 3.60505 18.31570 5.14551 18.31570 5.14551 p-values 0.001 0.009 0.049 0.0081 0.026 0.0081 0.0163 table 6 presents the wald test framework in eviews 10. we restricted the respective coefficients of the independent variables to zero after running the ordinary least square regression. the wald test statistics, presented in table 6 show statistically significant contributions of est, esd, fin, pov, ins, urb and top to the model so all the variables were adopted for the study. table-7. results of model analysis of effect of explanatory variables of environmental sustainability (est). variables dols 2sls gmm fixed effect constant 1.2609** 1.0238** 1.5107** 2.3484** (0.0378) (0.0285) (0.0279) (0.0465) fin 0.6278 -0.5400 0.5816 0.6037 (0.0689) (0.0759) (0.0652) (0.0859) pov -0.5278** -0.6400** -0.2861** -0.4047** (0.0289) (0.0415) (0.0495) (0.0379) ins 0.2804** 0.1843** 0.0505** 0.0908** (0.0040) (0.0395) (0.0073) (0.0218) edu 0.3263 0.7600 0.3789 0.7559 (0.1297) (0.9231) (0.0635) (0.0559) urb -0.0275* -0.0356* -0.0045* -0.0143* (0.0058) (0.0017) (0.0092) (0.0383) top 0.0275* (0.0058) 0.0356* (0.0017) 0.0045* (0.0092) 0.0143* (0.0383) r2 0.6775 0.7983 0.7337 0.8746 f-test f= 11.65 (0.0000) f=11.13 (0.0000) f=10.76 (0.0000) f=10.43 (0.0000) dw-stat 2.102 2.053 2.0431 2.0183 j-b-stat (normality) 0.738 (0.262) 0.539 (0.247) 0.722 (0.573) 0.705 (0.602) breusch pagan lm test χ2=0.052 (0.5533) χ2=0.047 (0.5021) χ2=0.054 (0.5532) χ2=0.045 (0.5092) hausman test χ2=18.42 (0.0000) χ2=17.13 (0.0000) χ2=17.77 (0.0000) χ2=18.06 (0.0000) note: est is dependent variable, given the results from the various tests conducted (f-test, dw-stat, j-b-stat, breusch pagan lm test and the hausman test); the fixed effects model has been chosen and consequently reported. *, ** means 5% and 1% significant levels respectively, and t –values are reported in parenthesis. economy, 2021, 8(2): 16-25 23 © 2021 by the authors; licensee asian online journal publishing group 3.2. empirical results table 7 presents the results of the analysis conducted to determine the effect of explanatory factors on environmental sustainability (est). all models affirm the positive effect of financial development on environmental sustainability. the table however reveals that the effect is stronger based on the dols model. this finding is consistent with the established position in the extant literature that economic growth is a major contributing factor to environmental sustainability. significantly, the association between poverty and environmental sustainability is negative. this implies that an exacerbating level of poverty has the potential to mutilate gains made in environmental sustainability. this observation is the most important in the case of this study that seeks to affirm the importance of reducing poverty to support environmental quality agenda. the results of the other variables namely trade openness, education and institutional quality returned a positive association with environmental sustainability. when these attributes are high in a country or region, it promotes environmentally responsible behaviours. regarding the impact of urbanisation, the table discloses similar expectation as a negative association exits between urbanisation this results is not surprising as they affirm previous findings (hafeez et al., 2020) of regression of the effect of health expenditure on environmental sustainability. table-8. results of model analysis of effect of explanatory variables of environmental sustainability (esd) variables dols 2sls dols 2sols constant 1.3744 1.0955 1.5862 1.4189 (0.0412) (0.0305) (0.0293) (0.0479) fin 0.3056 0.1972 0.0530 0.0935 (0.0044) (0.0423) (0.0077) (0.0225) pov -0.3557 -0.8132 -0.3978 -0.7786 (0.1414) (0.9877) (0.0667) (0.0576) ins -0.0300 -0.0381 -0.0047 -0.0147 (0.0063) (0.0018) (0.0097) (0.0394) edu -0.5659 -0.6838 -0.0431 -0.0082 (0.0471) (0.0524) (0.0076) (0.0187) urb -0.0427 -0.0419 -0.0412 -0.1997 (0.0485) (0.0476) (0.0467) (0.0897) top -0.1758 0.2173 -0.2220 -0.1731 (1.0110) (0.8960) (0.8542) (0.6921) r2 0.6775 0.7983 0.7337 0.8746 f-test f= 11.65 (0.0000) f=11.13 (0.0000) f=10.76 (0.0000) f=10.43 (0.0000) note: esd is dependent variable, *, ** means 5% and 1% significant levels respectively, and t –values are reported in parenthesis. table 8 on the other hand presents the effect of the explanatory variables on the second measure of environmental sustainability (esd). the results again confirm the previous findings in table 7 regarding the effect of poverty on environmental sustainability. in this particular case, the analysis indicates that all the models confirms the existence of a negative influence of poverty on the improvement in environment. sustainable development remains an important issue in the quest to achieve a safe and a better world. the expansion of the 8 millennium development goals into the 17 sustainable development goals is a testament of the conscious desire to improve the human environment to ensure better quality of life for its citizens. to that extent the findings of this research adds to the stock of studies that attempts to unveil some of the key challenges that confronts todays and how they can be controlled. specifically, the results of this study confirm the impact of poverty on both indicators of sustainable development. the results prove that poverty in sub-saharan africa is a threat to environmental quality and its consequential challenges. this therefore calls for the need to promote sustainable development. previous findings have attested to the fact that strong financial development is necessary to enhance sustainable development. additionally, the idea that good institutional and governance quality as well as education are important factors that can affect the sustainability war in africa have all been affirmed in the findings of this research. there is an inalienable responsibility on the part of african governments and their development partners to promote both formal and non-formal education at all levels to give its citizens the greater understanding of the challenges that unsustainable development can impose. fortunately africa has been spared the challenges of urbanisation on sustainability with the slow pace of urbanisation in the region. that notwithstanding the evidence adduced in this research supports and reinforces the outcome of prior studies that increase urbanisation will invariably affect sustainability negatively. there is therefore the need for african countries to brace up with more sustainable urban development measures as the region increases its urbanisation drive with economic growth. most importantly, this paper explored the effect of poverty on the environmental sustainability in sub-saharan africa. this result reflects earlier findings and suggestions made in the extant literature. in the works of ansari, haider, and khan (2020); pirgaip, ertuğrul, and ulussever (2021) they contend that while mankind, in general, places stress on the environment, poverty in particular has played a major role in environmental sustainability across the world. the results of this paper support this position. the analysis indicates that a unit increase in poverty corresponds to a massive decline in environmental sustainability. this places the burden to promote environmental sustainability equally at the door step of african leaders and private sector activities whose responsibility it is to support poverty eradication in africa. again the results give evidence to assert that private sector participation can significantly promote environmental sustainability. this is supported by the fact that financial development which was proxy by percentage of private sector share of gdp improves sustainability previous studies provide several ways by which sub-saharan economies can improve poverty reduction to enhance sustainable development. the study notes that poverty is one of the strongest factors that affect environmental sustainability. this observation is not a contradiction to the well-established fact that prosperity or economic growth is a major precursor of unsustainable environment. on the contrary the evidence in this paper economy, 2021, 8(2): 16-25 24 © 2021 by the authors; licensee asian online journal publishing group amplifies a consequence of a social crisis if they fester at both ends. in one breath, whereas economic growth or economic prosperity can compromise the quality of the environment, in like manner can abject poverty also reduce the quality of environment through environmentally irresponsible behaviors. this result implies that african countries in their pursuit of economic growth, education and effective healthcare to ameliorate poverty must incorporate other aggressive strategies to hasten poverty reduction. according to fan, zhang, and zhang (2002), poverty problem can be better solved through welfare redistribution but few developing countries have been able to reduce poverty through direct income transfer. for example, promoting income-generation capacity of the poor through effective public spending policy can lead to poverty alleviation and reduction in inequality among the poor. this will help them to alter their methods of production which can effectively stimulate pro-environmental behaviours. in other areas where aggressive poverty reduction strategy has already been initiated, this study calls for greater support to consolidate the gains made. for example, according to mensah and benedict (2010) entrepreneurship training has reduced poverty alleviation through the empowerment of the poorer people in the eastern free state of south africa. this effectiveness of this policy is further demonstrated in kolade (2018) who noted that entrepreneurship education (ee) intervention in nigeria is transforming lives of poor communities. this is because such ee programme generates awareness and facilitates skills development, which has consequential effect on poverty reduction. the long-term effect is enhanced environmentally responsible behaviours of the beneficiaries. thus, the findings of this research support the established view that the path to environmental sustainability is not through slower economic growth but rather through slower poverty levels. 4. conclusion the objective of this study was to examine the relationship between poverty and environmental sustainability in sub-saharan africa. previous findings have shown the environmental pollution is associated with higher economic growth. thus, rich countries are believed to pollute the environment more than poor countries. the findings of this research however disagree with this notion. on the contrary the findings reveal that poverty is also associated with high levels of pollution and poor countries including countries in sub-saharan africa contributes to reduction in sustainability in its two folds as used in this study. while the finding of this research is important contribution to the subject, there are some limitations. firstly, the measurement of environmental sustainability takes many forms. this study adopted just two definitions of sustainability and that limits the concept of sustainability in this research. moreover, the measurement of education, urbanisation, financial development, institutional quality and trade openness has all been measured by many different indicants. these varying differences in measurement limits the extent to which the generalisability of the findings of this research. future research should compare the case in sub-saharan african with emerging economies especially the brics to better appreciate the development gap in terms of how different factors affect environment especially poverty. references adedoyin, f. f., alola, a. a., & bekun, f. v. 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(2018b). year in review: 2018 in 14 charts. from the world bank. retrieved from https://www.worldbank.org/en/news/feature/2018/12/21/year-in-review-2018-in-14-charts. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. http://www.worldbank.org/en/publication/poverty-and-shared-prosperity http://www.worldbank.org/en/news/feature/2018/12/21/year-in-review-2018-in-14-charts 1 © 2021 by the authors; licensee asian online journal publishing group economy vol. 8, no. 1, 1-9, 2021 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2021.81.1.9 © 2021 by the authors; licensee asian online journal publishing group technical efficiency of sorghum production in garu district of the upper east region, ghana gifty sienso1 mohammed ishmael2 munkaila lambongang3 ( corresponding author) 1,2,3department of agricultural & resource economics, faculty of agribusiness & applied economics, university for development studies, tamale, ghana. abstract this study analyzed the technical efficiency and identified its determinants in sorghum production. two-stage sampling technique was used to collect cross-sectional data from 100 smallholder sorghum farmers in garu district in the upper east region of ghana using a semi structured questionnaire. the stochastic frontier analysis was used to estimate the level and determinants of technical efficiency while kendall's coefficient of concordance approach was used to identify and rank the constraints restraining sorghum production. the study revealed that only farm size and fertilizer were found to have a significant influence on the output. technical efficiency varied widely among sorghum farmers, ranging from 16.14% to 99.11% with a mean technical efficiency of 88.92%. this means that farmers could improve the productivity of sorghum by 11.08% without requiring extra inputs. the main determinants of technical efficiency were age, level of education, association membership, household size, experience, crop variety, and access to extension, access to credit, access to market and distance to market. major constraints limiting sorghum production were natural disasters, the incidence of pest and diseases, lack of access to credit and high production cost. the study recommends that fertilizer supply at subsidized prices to farmers in the study area should be improved. also, the ministry of food and agriculture through extension agents should educate farmers on the impact of these farm and farmer specific characteristics on technical efficiency. keywords: sorghum, technical efficiency, garu district, upper east region, stochastic frontier analysis, ghana. jel classification: a12. citation | gifty sienso; mohammed ishmael; munkaila lambongang (2021). technical efficiency of sorghum production in garu district of the upper east region, ghana. economy, 8(1): 1-9. history: received: 2 november 2020 revised: 27 november 2020 accepted: 18 december 2020 published: 4 january 2021 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group acknowledgement: all authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ......................................................................................................................................................................................... 2 2. methodology ........................................................................................................................................................................................ 2 3. results and discussion ...................................................................................................................................................................... 4 4. conclusion and recommendations .................................................................................................................................................. 8 references ................................................................................................................................................................................................. 8 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2021.81.1.9&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ https://www.asianonlinejournals.com/index.php/economy/article/view/2537 https://orcid.org/0000-0003-3864-1893 https://orcid.org/0000-0003-0187-7659 https://orcid.org/0000-0001-7808-6340 economy, 2021, 8(1): 1-9 2 © 2021 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study is the first in literature that employed a production economics technique to estimate the technical efficiency of sorghum production in the study area. 1. introduction sorghum is an essential cereal crop grown worldwide for animal nutrition (jacob, fidelis, salaudeen, & queen, 2013). this crop is very well adapted to the ecological conditions under which it is traditionally grown (muyukani & muthama, 2019). globally, sorghum is being used in food products and various food items that are made from this crop, including malted drinks, cake, ethylene glycol, flour, sweets and beers (zalkuwi, 2015). it is usually cultivated in the semi-arid tropics where water availability is limited and mostly exposed to drought (deb, 2004). in africa, sorghum is second to maize as the staple grain for millions of people (mundia, secchi, akamani, & wang, 2019). according to hariprasanna and rakshit (2016) over 90% of the world’s sorghum harvested areas lie in the developing economies, mainly in africa and asia, with africa contributing about 61% of the production land and 41% of production. asia, on the other hand, contributes about 22% of the production land and 18% of production (mundia et al., 2019). the contribution of the agricultural sector to the general development of ghana cannot be underestimated as it employs about 50% of the labour force and has contributed 23.6% to the gross domestic product (gdp) of ghana (gss, 2014). in 2018, the agricultural sector accounted for about 20.5% of our gdp as compared to the industrial and service sectors, which contributed 31.3% and 48.2% respectively (ghana statistical service (gss), 2018). the agricultural sector growth in 2018 was 4.8%, relative to a growth rate of 6.1% in 2017. though the contribution of agriculture to gdp should decrease with development, the growth rate should be persistent over time according to arthur lewis theory of development (lambongang, ansah, & donkoh, 2019). although the agricultural sector’s share to the gdp of ghana is smaller compared to the other sectors, the ripple effect of the inefficiency of the sector on the livelihoods of farmers, food security and other benefits cannot be underrated (konja, mabe, & alhassan, 2019). the crop sector is the largest (14.5%) contributor to the agricultural sector to gdp (ghana statistical service (gss), 2018). even though the crop sector plays a significant role in gdp growth, its yield in ghana is low, as growth in output over the years has come as a result of an increase in land under cultivation rather than improvement in yields which leads to deforestation and associated effects (danso-abbeam, bosiako, ehiakpor, & mabe, 2018). in ghana, sorghum is usually grown in guinea and sudan savanna zones in the upper west, upper east and northern regions of the country with a respective average rainfall of 1000mm and 990mm per year (darfour & rosentrater, 2018). sorghum is seen as a common food crop in ghana and is among the baseline crops of farmers in the savanna zones (darfour & rosentrater, 2018). the researchers noted that sorghum comes after maize and rice concerning the quantity of cereal production, with 12% on aggregate cereal production value. studies on the effect of climate change on sorghum yields reveal that there will be enormous yield declines and increased volatility from west africa (ray et al., 2019). it is possible that sorghum production will face greater challenges in the future, and people who rely on sorghum as a staple food is likely to face food insecurity (mundia et al., 2019). in this context, insight into the essentials of sorghum production in the garu district of the upper east region, compared to other strong sorghum-producing regions will provide a relevant understanding of what factors to consider to increase production and secure food supply. many developing economies, including ghana, have invested a lot in the agricultural sector (sienso, asumingbrempong, & amegashie, 2014). despite these great investments in agriculture, its productivity in developing economies faces great challenges due to the high degree of the unfamiliarity of farmers with modern technologies, inadequate extension and education facilities, weak infrastructure, among others (anang, 2016). but in places where inefficiencies exist, trying to implement new technology may not bring the expected results, unless factors related to inefficiency among farmers are identified and dealt with (dessale & tegegne, 2017). therefore, analyzing the technical efficiency of farmers cannot be overemphasized. the measurement of technical efficiency in agric production is a relevant interest for agricultural development and it provides vital information for making relevant decisions in the use of scarce resources and for formulating agricultural policies. though there have been numerous empirical studies undertaken to measure the efficiency of agricultural production in ghana, for example (bempomaa, 2014; danso-abbeam., dahamani, & bawa, 2015; donkoh, 2013; konja et al., 2019; sienso et al., 2014; tambo, 2010) there are no similar studies conducted to measure technical efficiency in sorghum production in the area of study. thus this study has tried to ascertain information for policy implementation by identifying factors that are associated with technical efficiency in sorghum production in the garu district of the upper east region of ghana. 2. methodology 2.1. description of the study area the analysis was undertaken in the garu district of the upper east region of ghana. the district is located in the south-eastern portion of the upper east region. it occupies an area of 1060.91 square kilometres with an estimated population of about 130,003, comprising 62,025 males and 67,978 females. this accounts for 1.2 per cent of the total population of the region (ghana statistcal service (gss), 2014). garu district lies approximately on latitude 11038l n and110 n and longitude 00 06l e and 00 23l e (gss, 2014). the majority (95.4%) of families in the district are engaged in farming (ghana statistcal service (gss), 2014) of which majority (98.8%) of these farmers are engaged in crop cultivation (gss, 2014). the district shares borders to the north with bawku municipal, to the south with bunkpurugu-yunyoo district; to the west with bawku west district, and the east with the republic of togo. the district is part of the nation’s internal continental climate region marked by pronounced dry and wet seasons. two opposing air masses have an impact on the two seasons. one of them is the cold, dusty and dry harmattan air or the north east trade winds that often blow in the north-eastern direction from late november to early march. throughout that period, rainfall is unlikely because the humidity is quite economy, 2021, 8(1): 1-9 3 © 2021 by the authors; licensee asian online journal publishing group weak, often less than 10 mm and humidity levels rarely exceed 20% all day, but can rise to 60% during the night and early morning (ghana statistcal service (gss), 2014). temperature is typically moderate under tropical conditions at this time of year (260-2800 c) (gss, 2014). temperatures could reach as high as 3800o c between march and may (ghana statistcal service (gss), 2014). the maximum monthly mean temperature is 4000o c in april, while the minimum temperature is 180o c in december / january (gss, 2014). 2.2. sampling procedure and data collection the data was collected from smallholder sorghum farmers during the cropping season 2019/2020 with a questionnaire as a research instrument. a two-stage random sampling technique was used. in the first stage, five major sorghum producing communities were randomly selected for the study. with the second stage, there was another random selection of 20 sorghum farmers from each community were selected making a total sample size of 100. the sample size for the analysis was calculated based on equation 1 below, the following the formula by yamane (1967). 𝑛 = 𝑁 1 + 𝑁(𝛼)2 (1) 𝑛 = 130003 1 + 130003(0.1)2 = 100 where: n is the sample size, n is the total populace and α is the preferred level of accuracy. therefore, a total of 100 respondents were selected for the interview. 2.3. data analysis the study employed the stochastic production frontier and kendall’s coefficient of concordance. the stochastic frontier production function was employed to estimate the skill of sorghum farmers to use the least possible quantity of inputs under a given technology to produce a greater level of output. kendall’s coefficient of concordance was used to rank constraints face by farmers in sorghum production. 2.3.1. estimation of te of sorghum according to aigner, lovell, and schmidt (1977) and meeusen and van den broeck (1977). the stochastic frontier production function is expressed in equation 2 below as; 𝑌𝑖 = 𝑓(𝑥𝑖; 𝛽) + 휀𝑖 (2) where i = 1, 2, 3, 4…..n 휀𝑖 = 𝑉𝑖 − 𝑈𝑖 (3) where yi is the output level of the ith farmer, xi is the vector of the input level used by the ith farmer, β,s are the unknown parameters to be calculated, and εi denotes the stochastic composite error. it is presumed that the two elements of the error terms are individually and equally distributed. component vi is an asymmetrically distributed error term that captures production variance due to factors outside the domain of the farmer, ui is a one-sided error term that captures the inefficiency of the decision-making unit as shown in equation 3. based on this technical efficiency was specified as; 𝑇𝐸𝑖 = 𝑌𝑖 𝑌∗ 𝑖 = 𝑓(𝑥𝑖; 𝛽) exp(𝑣𝑖 − 𝑢𝑖) 𝑓(𝑥𝑖; 𝛽) exp(𝑣𝑖) = exp(−𝑢𝑖) (4) where yi is the observed output of the ith farmer and yi * is the unobserved output as indicated in equation 4. technical efficiency takes a value between zero and one. thus 1,0  te . if ui = 0, then the production firm is 100% efficient and if ui >0, then there is some inefficiency. to estimate the determinants of te, this study followed (battese & coelli, 1995). table-1. description of variables in the stochastic frontier translog production model. variable description measurement expectation y quantity of output kilogram (50kg/bag) s quantity of seeds kilogram (4kg/acre) + l quantity of labour man-day + w volume of weedicide litres + f quantity of fertilizer kilogram (50kg/bag) + fs farm size acreage + age age of farmer number of years + sex sex of farmer dummy (0=male 1=female) mstat marital status farmer dummy (1=married o=otherwise) edul level of education number of years fa farmer association dummy (0=yes 1=no) hhs household size number of persons exp farming experience number of years vrty variety of sorghum dummy (0=improved 1=local) accext access to extension dummy (0=yes 1=no) acccrdt access to credit dummy (0=yes 1=no) accmrkt access to market dummy (0=yes 1=no) dist distance from market kilometres source: field survey, 2020. the empirical stochastic translog production function for finding factors affecting the output levels of ith sorghum farm is specified in equation 5 below; economy, 2021, 8(1): 1-9 4 © 2021 by the authors; licensee asian online journal publishing group 𝑙𝑛𝑌𝑖 = 𝛽0 + 𝛽1𝑙𝑛𝑆𝑖 + 𝛽2𝑙𝑛𝐿𝑖 + 𝛽3𝑙𝑛𝑊𝑖 + 𝛽4𝑙𝑛𝐹𝑖 + 𝛽5𝑙𝑛𝐹𝑠𝑖 + 1 2 𝛽11𝑙𝑛𝑆𝑖 2 + 1 2 𝛽22𝑙𝑛𝐿𝑖 2 + 1 2 𝛽33𝑙𝑛𝑊𝑖 2 + 1 2 𝛽44𝑙𝑛𝐹𝑖 2 + 1 2 𝛽55𝑙𝑛𝐹𝑠𝑖 2 + 𝛽12𝑙𝑛𝑆𝑖𝑙𝑛𝐿𝑖 + 𝛽13𝑙𝑛𝑆𝑖𝑙𝑛𝑊𝑖 + 𝛽14𝑙𝑛𝑆𝑖𝑙𝑛𝐹𝑖 + 𝛽15𝑙𝑛𝑆𝑖𝑙𝑛𝐹𝑠𝑖 + 𝛽23𝑙𝑛𝐿𝑖𝑙𝑛𝑊𝑖 + 𝛽24𝑙𝑛𝐿𝑖𝑙𝑛𝐹𝑖 + 𝛽25𝑙𝑛𝐿𝑖𝑙𝑛𝐹𝑠𝑖 + 𝛽34𝑙𝑛𝑊𝑖𝑙𝑛𝐹𝑖 + 𝛽35𝑙𝑛𝑊𝑖𝑙𝑛𝐹𝑠𝑖 + 𝛽45𝑙𝑛𝐹𝑖𝑙𝑛𝐹𝑠𝑖 (5) the model assessing the determinants of technical inefficiency is also specified in equation 6 below as; 𝑈𝑖 = 𝛿0 + 𝛿1𝐴𝑔𝑒𝑖 + 𝛿2𝑆𝑒𝑥𝑖 + 𝛿3𝑀𝑠𝑡𝑎𝑡𝑖 + 𝛿4𝐸𝑑𝑢𝑌𝑟𝑠𝑖 + 𝛿5𝐹𝐴𝑖 + 𝛿6𝐻ℎ𝑠𝑖 + 𝛿7𝐸𝑥𝑝𝑖 + 𝛿8𝑉𝑟𝑡𝑦𝑖 + 𝛿9𝐴𝑐𝑐𝐸𝑥𝑡𝑖 + 𝛿10𝐴𝑐𝑐𝐶𝑟𝑑𝑡𝑖 + 𝛿11𝐴𝑐𝑐𝑀𝑟𝑘𝑡𝑖 + 𝛿12𝐷𝑖𝑠𝑡𝑖 (6) the table 1 shows the explanatory variables with their hypothesize effects in the stochastic frontier translog production model. 2.3.2. kendall’s coefficient of concordance to rank the limitations faced by sorghum farmers in the district, kendall's coefficient of concordance was used (kendall & smith, 1939). this measure known as kendall's coefficient of concordance is a non-parametric statistical measure. the measure of agreement between respondents is used to define a set of limitations, from the most important to the least. the major limitations on the development of sorghum were established and the magnitude was assessed at a level of 1-8. the rankings were then subjected to kendall's coefficient of concordance to know the degree to which various sorghum farmers agreed to the rankings. the minimum score constraint is interpreted as the most pressing constraint after determining the total rank score for each constraint, while the maximum score constraint is defined as the lowest. the equation 7 shows the mathematical expression of kendall’s coefficient of concordance: 𝑊 = 12[∑ 𝑇2 − (∑ 𝑇) 2 𝑛 𝑛𝑚2(𝑛2 − 1) (7) where w denotes the coefficient of concordance; t represents the sum of ranks for the constraints being ranked; m denotes the number of sorghum farmers; n signifies the number of constraints being ranked. kendall’s coefficient takes a value between 0 and 1. a value of 0 means that there are maximum disagreement and a value of 1 means that there is perfect agreement among sorghum farmers. here the null hypothesis is that there is no agreement among sorghum farmers. 3. results and discussion 3.1. demographic and farm-specific characteristics of the farmers the results in table 2, reveals that most (35%) of the farmers fell within 30-39 age bracket while 27% were within the ages of 40-49. this result indicates that a relatively economic active adult population are engaged in sorghum production. the results also show that the majority (61%) of the farmers were males whiles 39% were females. also, the majority (77%) of the farmers have married whiles 23% were unmarried. on average, there were 10 people per household as indicated. the large household size guarantees labour availability and the extension of farm size (konja et al., 2019). results in table 3 further indicate that on the average farmers had been in sorghum farming for 21 years. a large number (56%) of the sorghum farmers did not belong to any farmer association (fa), while 44% were members of various farmer associations. according to konja et al. (2019) farmer association membership provides farmers with the opportunity of accessing the information on effective production methods, enjoying discounts when purchasing inputs, as well as enjoying labour support from members. also, though 49% of the farmers had extension service, 51% did not have access to the extension. access to extension service helps farmers to get orientation on good agricultural practices (konja et al., 2019). farmers with access to extension services are expected to be more technically efficient than their counterparts since they would have more orientation on good agronomic practices than their counterparts. table-2. distribution of respondents by demographic characteristics. variable range frequency percentages (%) age 20 – 29 8 8.00 30 – 39 35 35.00 40 – 49 27 27.00 50 – 59 22 22.00 60+ 8 8.00 total 100 100 household size 1 – 9 59 59.00 10 – 19 30 30.00 20 – 29 10 10.00 30 – 39 1 1.00 total 100 100 marital status married 77 77.00 single 9 9.00 divorce 5 5.00 widowed 9 9.00 total 100 100 sex male 61 61.00 female 39 39.00 total 100 100 access to credit yes 34 34.00 no 66 66.00 total 100 100 source: field survey, 2020. economy, 2021, 8(1): 1-9 5 © 2021 by the authors; licensee asian online journal publishing group results from table 2 also shows that 34% of farmers had access to credit for sorghum production. however, the average total output of sorghum observed in this study was 465kg/acre while the quantity of seed sowed per acre was 4.75kg/acre. the research also revealed that the average quantity of labour employed per care was 8 mandays. also, an average of 149.5kg of fertilizer was applied for an acre of production of sorghum in the study area. table-3. descriptive statistics of explanatory variables used in the model. variable mean std. dev. min max age 2.87 1.09 1 5 sex 0.39 0.49 0 1 marital status 1.46 0.94 1 4 level of education 2.52 1.56 0 9 farmer association 0.56 0.49 0 1 household size 10.58 6.59 2 30 experience 21.5 9.32 2 50 variety 1.91 0.96 1 3 access to extension 0.51 0.50 0 1 access to credit 0.66 0.47 0 1 access to market 0.26 0.44 0 1 distance 42.03 30.46 1 150 farm size 3.06 1.45 1 8 fertilizer 149.5 67.51 50 400 weedicide 1.76 1.18 1 9 labour 18.42 8.47 6 70 seed 4.75 1.18 3 8 output 465.3 169.66 100 900 source: field survey, 2020. 3.2. empirical estimation of stochastic frontier production function table 4 presents the maximum likelihood estimation for parameters in the stochastic translog production frontier of sorghum farmers in garu. from the results, fertilizer and farm size were found to significantly influence the level of sorghum output in the study area. however, variables such as labour, seed and weedicide did not meet the prior expectation and also statistically insignificant. the coefficient of fertilizer was 2.34 and statistically significant at 1%. this implies that holding other variable inputs constant, a percentage increase in the quantity of fertilizer used per acre increases output by 2.34%. appropriate fertilizer rates have been noted by kugbe, mbawuni, and wisdom (2019) to increase sorghum yield as fertilizer application adds nitrogen to the soil to improve its fertility. from the table, the coefficient of farm size is -1.45 and statistically significant at 1%. this implies that holding all other variable inputs constant, a percentage increase in farmland allocated to sorghum production decreases output by 1.45%. as the farm size of a farmer increases, the law of diminishing returns sets in as the managing ability of the farmer will decrease given the level of technology, this lead to reduced efficiency of the farmer (dessale & tegegne, 2017). for instance, farmers may not efficiently combine land with other variable inputs such as labour, seeds and fertilizer as they increase their farmland (danso-abbeam. et al., 2015). the squared variables in the translog stochastic production frontier indicate the effect of continuous use of that variable on output. the interaction terms indicate a complementarity or substitutability of the inputs used on the farm, depending on the sign of the coefficient of the interaction. table-4. maximum likelihood estimates of the stochastic frontier production function. variable coeffi cient standard error p-value constant 0.54 3.40 0.87 lnseed -0.60 1.71 0.72 lnlabour 0.29 1.57 0.85 lnweedicide -1.03 0.76 0.17 lnfertilizer 2.43* 1.37 0.07 lnfarmsize -1.45* 0.94 0.12 lnseed*lnseed 1.54*** 0.63 0.01 lnlabour*lnlabour -0.32*** 0.13 0.01 lnweedicide*lnweedicide -0.03 0.09 0.71 lnfertilizer*lnfertilizer -0.08 0.17 0.65 lnfarmsize*lnfarmsize -0.11 0.13 0.37 lnseed*lnlabour 0.84** 0.42 0.04 lnseed*lnweedicide -0.20 0.31 0.51 lnseed*lnfertilizer -1.14*** 0.41 0.00 lnseed*lnfarmsize -0.95*** 0.38 0.01 lnlabour*lnweedicide -0.19 0.18 0.27 lnlabour*lnfertilizer -0.05 0.29 0.86 lnlabour*lnfarmsize 0.59** 0.30 0.04 lnweedicide*lnfertilizer 0.34* 0.19 0.08 lnweedicide*lnfarmsize 0.23 0.20 0.25 lnfertilizer*lnfarmsize 0.34* 0.22 0.12 sigma squared 0.15 gamma 0.80 log-likelihood function 23.42 note: ***, ** and * represent 1%, 5% and 10% level of significance respectively. economy, 2021, 8(1): 1-9 6 © 2021 by the authors; licensee asian online journal publishing group the results from the table indicate that continuous use of seeds has a positive significant effect on sorghum output. the results further postulated that continuous use of labour has a significant negative influence on sorghum output, whilst the continuous use of fertilizer, weedicide and farm size has no significant effect on output. results in table 4 also shows that there is significant input complementary effect between “weedicide and fertilizer”, “labour and farm size” and “seed and labour” “seed and farm size”, “fertilizer and farm size”, “seed and fertilizer” in sorghum production in the study area. this means that a joint increase in the level of these factors will lead to an increase in output. “seed and farm size” and “seed and fertilizer” were found to be substitutes in sorghum production. this indicates that an increase in one of the variables must be accompanied by a decrease in the other. 3.3. determinants of technical efficiency the results presented in table 5 identified the factors influencing technical efficiency in sorghum production. from the table, age, level of education, farmer association, household size, experience, seed variety, access to extension, access to credit, and access to market as well as the distance to the market were significant determinants of technical efficiency in the study area. whereas age, access to credit, access to market, variety and distance from farm to market centre were found to significantly reduce the technical efficiency level of farmers. other variables such as level of education, farmer association, household size, experience and access to the extension were found to significantly increase the technical efficiency level of the farmers. the results show that the coefficient of age was positive and significant at 10%. this shows that as the age of a farmer increases by a year, technical efficiency decreases accordingly. the reason for this may be because, as the farmer increases in age, he becomes weak in terms of carrying out farm operations thus decreasing technical efficiency. this outcome is similar to the finding of katungwe, elepu, and dzanja (2017) and kusse, gemeyida, and haji (2019) but contradicts the finding of abdul-rahaman (2016) who found age to have a positive significant influence on technical efficiency. the coefficient of the level of education variable was negative and significant at 5%. this implies that technical efficiency increases as the level of education of the farmer increases. education plays a vital role in enhancing agricultural productivity. for example, farmers who have access to education usually have better access to information about farming technologies and how they are used. education is assumed to increase the farmer’s capability to apply existing technologies and achieve higher efficiency levels (battese & coelli, 1995). this agrees to the results of donkoh (2013) and konja et al. (2019) but opposes the finding (ahmad & singh, 2018) who found education to have a negative relationship with technical efficiency. the coefficient of farmer association was found to be negative and significant at 1%. this implies that members of farmer association are more technically efficient than non-members of farmer association. this could be because farmer association members receive input and support services from many donors and ngos (danso-abbeam. et al., 2015). farmers who belong to farmer associations were expected to benefit from better access to inputs such as improved sorghum varieties and information on improved farming practices. similar results were also realized by konja et al. (2019) and contrary to the finding of danso-abbeam. et al. (2015) and abdul-rahaman (2016) who found it to have a negative association with technical efficiency. the parameter estimate of experience was also found to be negative and statistically significant at 1%. this shows that as years pass with continuous sorghum farming, farming experience tends to improve farmers ability to do better, thus they better their technical efficiency. farmers with more years of farming experience are better placed to acquire knowledge and skills necessary for choosing appropriate new farm technologies over times. this conforms to the results of danso-abbeam. et al. (2015) but contrary to the result of bempomaa (2014) who found the experience to have a negative influence on technical efficiency. the coefficient of household size was negative and significant at 10% implying that as the household size increases the technical efficiency of sorghum production increases as well. it is possible that the household with more members can perform farming activities faster and on time (kusse et al., 2019). sorghum production is labour intensive in this regard, the effect of household size on technical efficiency cannot be overemphasized. the coefficient of variety was positive and significant at 10% implying that farmers using an improved variety of sorghum, tend to decrease their level of technical efficiency (sienso et al., 2014). this could be due to the fact that they farmers aren’t aware of the appropriate agronomic practices to be use with the improved sorghum varieties in order to ensure maximum yield. access to extension services was negative and statistically significant at 5% indicating that the more the farmer had extension visit the more he/she becomes technically efficient. the constant contact enables the sharing of new farming methods between the extension agent and the farmer, hence providing a platform for improvement in technical efficiency. access to credit was also found to have a positive coefficient and significant at 1%. this implies that access to credit does not have a positive effect on technical efficiency. however, access to credit was expected to reduce the financial challenges farmers encounter at the start of the production process. table-5. determinants of technical inefficiency in sorghum production variables coefficient standard error p-value age 0.71* 0.42 0.09 sex -0.10 0.43 0.80 marital status 0.10 0.18 0.58 level of education -0.52** 0.23 0.02 farmer association -2.20*** 0.81 0.00 household size -0.11* 0.06 0.07 experience -0.17*** 0.06 0.00 variety 0.50* 0.32 0.12 access to extension -4.11** 1.98 0.03 access to credit 4.18*** 1.24 0.00 access to market 2.62*** 0.92 0.00 distance 0.01** 0.00 0.04 note: * = 10% significance level and *** = 1% significance level. economy, 2021, 8(1): 1-9 7 © 2021 by the authors; licensee asian online journal publishing group the credit could help farmers to have funding to acquire inputs and also to cultivate their land on time before planting. access to the market was found to negatively affect the technical efficiency. this is in line with a priori expectation because if farmers get access to the market they can reinvest in their farming activities to increase productivity. finally, the coefficient of distance to market was positive and significant at 5%. this shows that farmers whose farms are far from the market centre have a lower level of technical efficiency. this might be because as farmers are situated far from the market, they would have limited access to inputs and output markets as well limited access to market information (ahmed, lemma, & endrias, 2014). besides, longer distance to market leads to increased production cost which decreases the benefits accruing to the farmer. also, long-distance from markets does not motivate farmers in engaging in market-oriented production (ahmed et al., 2014). 3.4. percentage distribution of technical efficiency scores the table 6 below presents the frequency distribution of technical efficiencies of the smallholder sorghum farmers in the garu district. the predicted efficiency levels ranged between 16.14% and 99.11%. the mean technical efficiency level of sorghum farmers in the study area was 88.92%. this indicates that the average sorghum farmer in the study area produces about 88.92% of the potential output given the existing technology available. thus about 11.08% of output was lost due to inefficiency. table-6.frequency distribution of technical efficiency index. efficiency score frequency percentage (%) < 50 7 7.00 50 – 60 3 3.00 61 – 70 2 2.00 71 – 80 1 1.00 81 – 90 13 13.00 91 – 99 74 74.00 total 100 100 minimum = 16.14% maximum = 99.11% mean = 88.92% note: standard deviation = 17.63%. 3.5. constraints to sorghum production sorghum farmers were required to identify and rank the factors restraining the production of sorghum. the constraints were ranked in descending order of magnitude. the mean rank indicates the averages as computed by kendall’s coefficient of concordance. results from table 7 indicate that natural disaster was ranked as the first constraint limiting farmers in sorghum production. agricultural production in the district is mainly rain-fed. following bempomaa (2014) rainfall variability as a result of climate change has become a concern for many farmers. during the survey, many farmers raised their concern about the uneven rainfall pattern that has affected their ability to plan properly for their farming activities. also, the draught was mentioned as another factor which affects the productivity level of sorghum. this finding is supported by kudadjie, struik, richards, and offei (2004) whose research revealed that insufficient and delayed rainfall was the major constraint faced by farmers in producing sorghum. they stressed that the unreliable nature of rainfall is a key drawback for farmers as their agriculture is characteristically rain-fed. according to them, farmers also clarified that a delay in the start of the rains defers planting, so their local varieties which are late in maturing will likely not survive.the second major constraint limiting sorghum production was the incidence of pest and diseases. according to the farmers, pest and diseases is another factor affecting sorghum production both on the field and in its storage. following kudadjie et al. (2004) the incidence of pest and diseases was ranked as the sixth constraint restraining sorghum production in the north-east region of ghana. in the occurrence of a long dry spell, insects such as black ants tend to confiscate seeds from the soil immediately after sowing, and infilling becomes necessary, which is an additional cost to the farmer. the third constraint faced by farmers in sorghum production is lack of access to credit. most smallholder farmers cannot afford the necessary inputs needed for sorghum production on time, and that goes a long way to affect productivity. according to yaw (2018) the credit problem can be looked at from two perspectives. one is farmers’ inaccessibility to credit facilities and another been the problem of high-interest rates. few farmers can access long term loans from financial institutions particularly banks, because the majority of these farmers are typically not credit-worthy because they are incapable to meet the collateral necessities. farmers lean towards loans from microfinance institutions which also come with the problem of the high-interest rate. therefore, their revenue from production is worn away after paying such high interests charges. the least constraint faced by farmers was lack of storage facilities. sorghum produce is also prone to infestation from storage pest, therefore, necessary for farmers to have safe facilities where they can store their produce for future use. this conforms to the study of yaw (2018). table 7 below shows the level of agreement among the farmers on the constraints at a significance level of 1%. the null hypothesis that there is no agreement among sorghum farmers is rejected at 1% significance level. table-7. ranking of constraints by sorghum farmers. constraint mean rank lack of access to credit 3.63 incidence of pest and diseases 2.71 lack of access to extension service 4.88 marketing problems 6.00 lack of storage facilities 6.44 high production cost 4.25 high labour cost 5.94 natural disaster 2.14 source: field survey, 2020. economy, 2021, 8(1): 1-9 8 © 2021 by the authors; licensee asian online journal publishing group table-8. kendall’s w test statistics. n 100 kendall’s w 0.424 chi-square 297.136 df 7 asymp. sig. 0.000*** source: field survey, 2020. 4. conclusion and recommendations the study aimed to unravel the technical efficiency level of sorghum farmers including its determinants in the garu district of the upper east region. we first estimated the level of technical efficiency of sorghum farmers, the determinants of technical efficiency and finally identified and ranked the constraints restraining sorghum production. results show that sorghum farmers were producing below the production frontier. the level of technical efficiency varied significantly among farmers with a minimum of 16.14% and a maximum of 99.11%. the estimated mean technical efficiency level was 88.92% which means that 11.08% of sorghum output was not realized. the results also indicated that age, level of education, farmer association, household size, experience, variety, access to extension, access to credit, access to the market and distance to the market were the significant variables affecting technical efficiency in sorghum production. age, variety, access to credit, access to market and distance to the market were found to have an indirect relationship with technical efficiency, whereas the level of education, farmer association, household size, experience and access to extension was found to have a direct relationship with technical efficiency. results also showed that natural disasters, the incidence of pest and diseases, lack of access to credit and high production cost were the major constraints limiting sorghum production. the study revealed that farm size and fertilizer were found to have a significant influence on sorghum production in the study area. based on the highlighted findings, we recommend that the government through the ministry of food and agriculture should educate farmers on climate-smart technologies to help lessen the impact on climate variability that serves as a constraint in sorghum production in the study area. apart from access to extension, farmers should also be encouraged to form farmer associations where they can learn from one another to correct some of the inefficiencies. also, the current planting for food and jobs policy should be encouraged and improved to enhance production and productivity in the country as a whole since is a major source of credit for the farmers. references abdul-rahaman, a. 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(2010). resource-use efficiency in tomato production in the dangme west district, ghana. paper presented at the conference on international research on food security, natural resource management and rural development, tropentag. eth zurich. yamane, t. i. (1967). statistics: an introductory analysis (2nd ed.). new york, usa: harper and row. yaw, o.-a. (2018). production efficiency analysis of pineaple farmers in the akwapim-south district of ghana. masters thesis, university of ghana, legon. zalkuwi, j. (2015). socio – economic factors that affect sorghum production in adamawa state , nigeria. international journal of science and research, 4(2), 1610–1614. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. 7 © 2019 by the authors; licensee asian online journal publishing group economy vol. 6, no. 1, 7-12, 2019 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2019.61.7.12 © 2019 by the authors; licensee asian online journal publishing group rural women entrepreneurial skills in maize value addition in abeokuta metropolis, nigeria omoare, ayodeji motunrayo1 oyediran, wasiu oyeleke2 ogbonna chinna3 ( corresponding author) 1,3department of agricultural education, federal college of education, abeokuta, ogun state, nigeria. 2department of agricultural extension and rural development, federal university of agriculture, abeokuta, nigeria. abstract maize is a common staple food for human consumption and livestock feeds. it provides employment and means of livelihood for women in both rural areas and urban centres in nigeria. however, the entrepreneurial skills of women engaged in its value addition have not been fully enhanced. this study was conducted to look into rural women entrepreneurial skills in maize value addition in abeokuta metropolis of ogun state, nigeria. two hundred and ten respondents were selected using snow ball sampling technique. data were analyzed with chi-square. results revealed that fifty percent of the respondents were 31 40 years of age and 60% had spent 6 – 10 years in maize processing. most (85.7%) of the respondents’ added value to maize by converting it to popcorn, 80.0% turned it to corn cake and 52.9% processed it to kokoro. majority (88.6%) of the respondents acquired entrepreneurial skills through fellow processors and 62.9% got it from friends and neighbours. serious constraints identified by 95.7% and 88.6% of the respondents were scarcity of raw materials during off season and ineffective preservation methods respectively. results of chi-square revealed that significant association existed between sources of entrepreneurial trainings for the rural women and value addition at p < 0.05. the study concluded that value addition of maize is very low in the study area. it is hereby recommended that extension service providers should pay more attention to the maize processors in terms of entrepreneurial trainings for better processing and value addition of maize. keywords: processing machines, rural women, entrepreneurial skills, maize, value addition, livelihood. jel classification: q16, q12, j26, q10, d46, q19. citation | omoare, ayodeji motunrayo; oyediran, wasiu oyeleke; ogbonna chinna (2019). rural women entrepreneurial skills in maize value addition in abeokuta metropolis, nigeria. economy, 6(1): 7-12. history: received: 15 april 2019 revised: 21 may 2019 accepted: 26 june 2019 published: 22 august 2019 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group acknowledgement: all authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ......................................................................................................................................................................................... 8 2. methodology ........................................................................................................................................................................................ 8 3. results and discussion ...................................................................................................................................................................... 9 4. conclusion ......................................................................................................................................................................................... 11 5. recommendations ............................................................................................................................................................................ 11 references .............................................................................................................................................................................................. 11 http://asianonlinejournals.com/index.php/economy/article/view/935 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2019.61.7.12&domain=pdf&date_stamp=2017-01-14 http://orcid.org/0000-0001-7881-9524 http://orcid.org/0000-0003-4490-5736 http://orcid.org/0000-0002-3691-7713 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ economy, 2019, 6(1): 7-12 8 © 2019 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study is one of the very few studies that identified low value addition for maize by the rural women in nigeria, and listed major limitations to entrepreneurial skills of rural women in maize value chain. 1. introduction value addition focuses on perishable crops after harvest to reduce losses, enhance financial or nutritional cropvalue, and assure food safety. entrepreneurial skills of adding value to maize offer good potentials for increasing income generation, women empowerment and utilization of the crop. however, the rural women entrepreneurial skills in maize processing is not well harnessed for value addition in nigeria which is seriously undermine the potential benefits of the maize crop to the rural women, consumers and other chain actors. nigeria is the largest maize producer in africa (ita, 2012) and currently ranked tenth largest maize producer in the world. its cultivation started on a subsistence level and has gradually risen to a commercial crop on which many agro-based industries depend on as raw materials in nigeria (iken and amusa, 2014). over fifty million farmers grow maize every year while over ninety million people are employed in its processing and usage daily. it has become one of the most important food, feed and industrial crops in nigeria. it provides energy, vitamins and has some amount of protein (onyibe et al., 2014). the food products that can be obtained from maize in nigeria include ogi, eko or agidi, egbo, elekute, aadun, abari and guguru (okoruwa, 1997). the production of most of the indigenous food products, particularly in the developing countries, has not progressed much beyond the traditional processing techniques because of slow pace in technological development which is obviously aggravated by misplaced government priority on the importance of technology in small scale agroprocessing (vonortas, 2002; king and nowack, 2003). the traditional food processing methods are labour-intensive, susceptible to food losses and poor quality endproduct (kordylas, 1990). nigerian rural women are largely involved in food processing activities from where they derived their livelihood means. they form an indispensable part of human resources for agricultural development because of their contributions to the nation economy. according to ogunlela and mukhtar (2009) women play a dominant role in agriculture in nigeria and are believed to make up to 60–80% of the agricultural workforce. charmas (2000) reported that women’s activities in food processing remain underestimated because most of their activities are undertaken as secondary activities generally hidden behind subsistence agriculture. women’s contribution in creating value-added products through entrepreneurial skills acquisition need to be estimated in order to design more appropriate measures to help their empowerment. entrepreneurial skills in maize processing and value addition would help in changing the colour, flavour and texture to make the maize products more attractive and palatable and extending the shelf life and storage time of the products. it would bring wide range of benefits to enterprising people in nigeria which include: promoting access to wider markets, improving small-scale producers and entrepreneurs’ income-earning ability, allowing improved use and control of local resources and helping to create employment for poor people, particularly in the rural areas (ihekoronye and uzomah, 2011). in addition, it is expected that the rural women’s activities can reduce or eradicate postharvest food losses during glut through adequate training and capacity building on value addition. it is in view of this background information that this study assessed rural women entrepreneurial skills in maize value addition in abeokuta metropolis of ogun state, nigeria. this study identified the entrepreneurial skills of the respondents, sources of training for the maize value addition, and constraints to the maize value addition. 1.1. hypotheses of the study are stated in null forms h01: there is no significant association between personal characteristics of the respondents and entrepreneurial skills of the women in the study area. h02: there is no significant association between sources of entrepreneurial trainings for the rural women and value addition in the study area. 2. methodology 2.1. description of study area the study was carried out in abeokuta metropolis of ogun state, nigeria. ogun state is one of the six states in southwest nigeria. the state was created in february 3rd, 1976. it is bounded in the west by republic of benin, bounded in the south by lagos state and atlantic ocean, in the north by both oyo and osun states and in the east by ondo state. abeokuta is the largest city and state capital of ogun state in southwest nigeria. it is situated on the east bank of the ogun river, near a group of rocky outcrops in a wooded savanna 77 kilometres north of lagos by railway and 130 kilometres by water (hoiberg, 2010). abeokuta metropolis has a total population of 593.143 people as at 2006 (npc, 2006). abeokuta metropolis has only two local government areas namely abeokuta south local government area having its headquarters at ake with 15 wards and abeokuta north local government area having its own headquarters at akomoje with 17 wards. the agro-industrial potential of the ogun state makes abeokuta an important trading center for rice, maize, cassava, yam, banana, cocoa, palm-oil and palm kernel, and the largest producer and exporter of kola nuts in nigeria. rural women are involved in the value addition of maize across the state. 2.2. sampling procedure and sample size primary data were used for the study. snow ball technique was used to select 42 maize processors in five diverse products namely: popcorn, corn starch, pap processors, maize ball, and corn cake. the respondents were selected from the urban markets in asero, kuto, lafenwa and panseke. interview guide was used to obtain information on the respondent’s personal characteristics, entrepreneurial skills, sources of the trainings on value addition, and constraints to maize value addition. frequencies, percentages and chi-square were used to analyze the data. economy, 2019, 6(1): 7-12 9 © 2019 by the authors; licensee asian online journal publishing group 2.3. validity and reliability test the instrument used for the data collection was subjected to face validity through the efforts of experts in the field of agricultural extension and rural development. items that lack clarity were immediately removed. pearson product moment correlation was used to obtain the reliability result of 0.85 from test re-test method at interval of two weeks with twenty maize processors who were not included in the sample size hence, the instrument is assumed reliable. 2.4. measurement of variables and data analysis age, years of experience and household size was measured at ratio level while educational status, marital status and religion were nominally measured by assigning numbers. entrepreneurial skills were measured as great (3), little (2) and very little (1) while sources of capacity building were nominally measured as yes (1) and no (0). simple descriptive statistics such as percentage, mean and frequency were used to analyze the objectives while chi-square analysis was used to test the hypotheses of the study. 3. results and discussion 3.1. personal characteristics of the respondents in table 1, the results revealed that about fifty percent of the respondents were between ages of 31 40 years while 21.43% were less than 30 years of age. this indicates that the maize processors are young and economically active. fifty percent of the respondents were married while 21.43% and 17.14% were single and divorcee respectively. the result further showed that 60% of the respondents had spent 6 – 10 years in maize processing while 22.86% had had spent more than 10 years in maize processing. it implies that maize processors have wealth of experience in maize processing activities. more than half (52.86%) of the respondents had primary school education while 21.43% attended secondary school, and only 10% attained tertiary education. this implies that the respondents had formal education which can be harnessed for entrepreneurial skills acquisition in maize processing and value addition in ogun state. education is a very important determinant in adoption of innovation (asiabaka (2002) cited in oyediran et al. (2014). majority (71.43%) of the respondents were christians while the remaining 28.57% were practicing islam. in addition, the result also showed that about sixty percent of the respondents have 6 – 10 people in their households while 30.0% have 1 – 5 people and 12.86% have more than 10 people as household size. this is an indication that the household size of the maize processors was relatively large. the reason for having more than 5 children among the maize processors could be attributed to the need for assistance in their economic engagement and other domestic activities which they could not satisfactorily get from outside. table-1. distribution based on maize processors personal characteristics (n = 210). variable frequency percentage age (years) ≤ 30 45 21.43 31-40 99 47.14 41-50 51 24.29 above 50 15 7.14 marital status single 45 21.43 married 105 50.00 divorced 36 17.14 widowed 24 11.43 years of experience less than 5 36 17.14 6-10 126 60.00 above 10 48 22.86 educational status no formal education 33 15.71 primary education 111 52.86 secondary 45 21.43 tertiary 21 10.00 religion christianity 150 71.43 islam 60 28.57 household size 1-5 63 30.00 6-10 120 57.14 above 10 27 12.86 source: field survey, 2019. 3.2. entrepreneurial skills in maize value addition the results on entrepreneurial skills presented in table 2 showed that majority of the respondents have greater skills of transforming maize into diverse products. the maize processors reported that they processed maize very well into popcorn (85.7%), corn cake (80.0%), corn balls (64.3%) and kokoro (52.9%). however, many of the respondents indicated that they have great entrepreneurial skills in making aadun (61.4%), pap (45.7%), kokoro (22.8%). economy, 2019, 6(1): 7-12 10 © 2019 by the authors; licensee asian online journal publishing group similarly, majority of the respondents have very little entrepreneurial skills in value addition for packaging (50.0%) and labelling (41.4%) of processed maize products. this implies that value addition to maize products in the study area was very low in terms of branding. this result corroborates the findings of omoare et al. (2014) in a study conducted on sweet potato value addition in osun state which was found to be very low among the processors. value addition to maize therefore requires urgent intervention from reputable organizations in form of training and capacity building to upgrade maize products packaging, acceptability, sales and consumption in the study area. this will go a long way to boost the income of the rural women and their economic empowerment. table-2. distribution based on respondents entrepreneurial skills in maize value addition (n = 210). entrepreneurial skills great (%) little (%) very little (%) processing skills corn balls 135 (64.3) 60 (28.6) 15(7.1) corn cake 168 (80.0) 30 (14.3) 12 (5.7) popcorn (guguru) 180 (85.7) 15 (7.1) 15 (7.1) corn starch (ogi) 126 (60.0) 54 (25.7) 30 (14.3) pap (eko) 45 (21.4) 69 (32.9) 96 (45.7) aadun 12 (5.7) 69 (32.9) 129 (61.4) kokoro 111 (52.9) 51 (24.3) 48 (22.8) value addition skills packaging 48 (22.9) 57 (27.1) 105 (50.0) labelling 45 (21.4) 78 (37.1) 87 (41.4) source: field survey, 2019. 3.3. sources of entrepreneurial training for the maize value addition the results in table 3 showed that majority of the respondents got entrepreneurial training on maize value addition through fellow processors (88.6%) and friends and neighbours (62.9%). the findings are in line with that of ajagbe et al. (2014) that predominant sources of information to rural households are fellow farmers, friends and relatives. this implies that the maize processors acquired entrepreneurial skills from their associates because of their closeness, rapport and business tie. meanwhile, social organizations (38.6%), apprenticeship training (35.7%), and religious organizations (17.1%) constituted least avenue of getting skills on maize value addition in the study area. table-3. sources of entrepreneurial training for the maize value addition (n = 210). sources of entrepreneurial training for the maize value addition yes (%) no (%) through fellow processors 186 (88.6) 24 (11.4) friends and neighbours 132 (62.9) 78 (37.1) social organizations 81 (38.6) 129 (61.4) religious organizations 36 (17.1) 124 (82.9) through apprenticeship training 75 (35.7) 135 (64.3) *multiple responses recorded. source: field survey, 2019. 3.4. constraints affecting maize value addition it was found from the results in table 4 that major constraints to maize value addition are scarcity of raw materials during off season periods (95.7%), ineffective preservation methods (88.6%), lack of modern processing equipment (82.9%), and high cost of processing machines (72.9%). omoare et al. (2014) reported similar findings that major impediments to food processing and value addition are high cost of processing equipment, lack of modern facilities and poor extension service support. also, lack of training on diverse products forms (71.4%), inadequate financial support (64.3%), and poor branding techniques (61.4%) affected maize value addition in the study area. table-4. distribution based on constraints affecting maize value addition (n = 210). constraints yes (%) no (%) rank lack of modern processing equipment 174(82.9) 36(17.2) 3rd ineffective preservation methods 186(88.6) 24(11.4) 2nd inadequate financial support 135(64.3) 75(35.7) 6th low consumers acceptability 90(42.8) 120(57.2) 9th poor branding techniques 129(61.4) 81(38.6) 7th high cost of processing machines 153(72.9) 57(27.1) 4th scarcity of raw materials during off season periods 201(95.7) 09(4.3) 1st high cost of raw materials 35(50.0) 105(50.0) 8th lack of training on diverse products forms 50(71.4) 60(28.6) 5th source: field survey, 2019. 3.5. test of hypotheses 3.5.1. relationship between respondent’s personal characteristics and entrepreneurial skills of the women the results of chi-square as shown in table 5 revealed that there is significant association between personal characteristics of the respondents and entrepreneurial skills of the women. personal characteristics variables such as age (χ2 = 12.90, df = 6, p = 0.01), marital status (χ2 = 8.11, df = 6, p = 0.02), years of experience (χ2 = 25.63, df = 4, p = 0.00), educational status (χ2 = 17.42, df = 6, p = 0.00), religion (χ2 = 5.99, df = 2, p = 0.02), and household size (χ2 = 13.81, df = 4, p = 0.03) were significant to entrepreneurial skills of the women at p < 0.05 level of significance. this means that personal characteristics variables have relationship with entrepreneurial skills of the economy, 2019, 6(1): 7-12 11 © 2019 by the authors; licensee asian online journal publishing group women. thus, the null hypothesis that “there is no significant association between personal characteristics of the respondents and entrepreneurial skills of the women” is rejected. table-5. relationship between respondent’s personal characteristics and entrepreneurial skills of the women. variables χ2 df p-value decision age 12.90 6 0.01 s marital status 8.11 6 0.02 s years of experience in maize processing 25.63 4 0.00 s educational status 17.42 6 0.00 s religion 5.99 2 0.02 s household size 13.81 4 0.03 s source: field survey, 2019. df – degree of freedom. significant at p < 0.05 level of significance. 3.6. relationship between sources of entrepreneurial trainings for the rural women and value addition chi-square results in table 6 showed that there is significant association between sources of entrepreneurial trainings for the rural women and value addition. entrepreneurial skills acquisition of the women through fellow maize processors (χ2 = 78.32, df = 2, p = 0.00), friends and neighbours (χ2 = 49.25, df = 2, p = 0.02), and social organizations (χ2 = 33.30, df = 2, p = 0.01) were significant to value addition at p < 0.05 level of significance. however, entrepreneurial skills acquisition through religious organizations (χ2 = 1.04, df = 2, p = 0.19) and apprenticeship training (χ2 = 0.53, df = 2, p = 0.34) were not significant to value addition because there is little contributions from these channels to the rural women. it can therefore be said that sources of entrepreneurial trainings for the rural women have influence on the level of value added to the maize in the study area. thus, the null hypothesis that “there is no significant association between sources of entrepreneurial trainings for the rural women and value addition” is rejected. table-6. relationship between sources of entrepreneurial trainings for the rural women and value addition. sources of trainings df χ2 p-value decision through fellow processors 2 78.32 0.00 s friends and neighbours 2 49.25 0.02 s social organizations 2 33.30 0.01 s religious organizations 2 1.04 0.19 ns through apprenticeship training 2 0.53 0.34 ns source: field survey, 2019. s significant at p < 0.05 level of significance. ns not significant at p > 0.05 level of significance. 4. conclusion the study concluded that respondents have great entrepreneurial skills in maize processing but the skills for value addition was very low. sources of entrepreneurial skills are limited to fellow maize processors and friends/neighbours. also, scarcity of raw materials during off season periods, ineffective preservation methods, lack of modern processing equipment and high cost of processing machines constituted serious constraints. chi-square result showed that there is significant association between personal characteristics of the respondents and entrepreneurial skills of the rural women. 5. recommendations based on the findings of this study, it is hereby recommended that: 1) extension service providers should pay more attention to the maize processors in terms of entrepreneurial trainings for better processing and value addition of maize. 2) maize processors should form themselves into a mega cooperative association to be able to access banks loans and other government largesse. 3) subsidized processing equipment should be made available to the maize processors in the study area by the state and local governments and non-government organizations (ngos). references ajagbe, b., w. oyediran, a. omoare and o. sofowora, 2014. assessment of post-harvest practices among tomato (solanum lycopersicum) farmers/processors in abeokuta north local government area, ogun state, nigeria. international journal of education and research, 2(3): 1-12. charmas, j., 2000. african women in food processing: a major but still underestimated sector of their contribution to the national economy. a paper presented at the idrc in france: university of versailles-saint quentin en yves. hoiberg, d.h., 2010. abeokuta. encyclopedia britannica. in: a-ak bayes. 15th edn., chicago, il: encyclopedia britannica inc. pp: 27. ihekoronye, a.i. and a. uzomah, 2011. manual on small-scale food processing. a guide to opportunities for enterprise development in smallscale food processing. springfield publishers ltd. pp: 3. iken, j.e. and n.a. amusa, 2014. maize research and production in nigeria. institute of agricultural research and training (iar&t), obafemi awolowo university, moor plantation, ibadan. nigeria. pp: 302-307. ita, 2012. international institute for tropical agriculture growing in nigeria. commercial crop production guide series. information and communication support for agricultural growth innigeria. usaid. pp: 1-8. king, d.r. and m.l. nowack, 2003. the impact of government policy on technology transfer: an aircraft industry case study. journal of engineering and technology management, 20(4): 303-318.available at: https://doi.org/10.1016/j.jengtecman.2003.08.007. kordylas, j.m., 1990. processing and preservation of tropical and 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217: 23. oyediran, w.o., c.i. sodiya and a.m. omoare, 2014. determinants of melon production in iseyin local government area of oyo state, nigeria. scholars journal of agriculture and veterinary sciences, 1(2): 42 -49. vonortas, n.s., 2002. building competitive firms: technology policy initiatives in latin america. technology in society, 24(4): 433459.available at: https://doi.org/10.1016/s0160-791x(02)00034-9. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. 1 © 2020 by the authors; licensee asian online journal publishing group economy vol. 7, no. 1, 1-10, 2020 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2020.71.1.10 © 2019 by the authors; licensee asian online journal publishing group socio-economic implication of political and economic participation of women in nigeria faruq umar innovation and technology policy department (itpd), nigerian institute of social and economic research (niser), ibadan, nigeria. abstract this paper examined social-economic impacts of economic and political empowerment of women in nigeria between 1990–2018. to achieve our main objective, we employed a trend analysis and ardl technique with data sourced from the wdi (2019) and various issues of national bureau of statistics. we observed that the growth of women (between age 15 and 64) in labour force participation in nigeria is trending downwardly during the period under consideration. while the proportion of female representation in the parliament has been on the increase since the advent of the fourth republic in 1999. finally, we unsurprisingly, discovered that despite the huge resources committed to advocacy for women‟s empowerment, the social costs in terms of the increased crime rate among youth and the level of insecurity in the country significantly overwhelmed the economic benefits in term of increased economic growth. consequently, we inter alia recommended that the governments together with these advocacy groups should channel the same amount of resources devoted to campaigns for women empowerment into reversing the ugly trend of juvenile delinquency if the level of insecurity in nigeria is to be curtailed. and, the proposed bill by the national assembly and the 36 state houses of assemblies to increase the maternity leave from its current level of 3 months to 6 months should be fast-track and duly implemented across board in both public and private organizations. keywords: women empowerment, insecurity, endogenous growth model, ardl technique, juvenile delinquencies. jel classification: j13; a1; b23; c22; o11; o47. citation | faruq umar (2020). socio-economic implication of political and economic participation of women in nigeria. economy, 7(1): 1-10. history: received: 13 january 2020 revised: 18 february 2020 accepted: 25 march 2020 published: 21 april 2020 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. competing interests: the author declares that there are no conflicts of interests regarding the publication of this paper. transparency: the author confirms that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ......................................................................................................................................................................................... 2 2. literature review ............................................................................................................................................................................... 2 3. research methodology ...................................................................................................................................................................... 4 4. results and discussions ..................................................................................................................................................................... 6 5. conclusion ............................................................................................................................................................................................ 8 references ................................................................................................................................................................................................. 9 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2020.71.1.10&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ https://www.asianonlinejournals.com/index.php/economy/article/view/1530 https://orcid.org/0000-0001-8264-1212 https://www.asianonlinejournals.com/index.php/economy/article/view/1530 https://orcid.org/0000-0001-8264-1212 https://www.asianonlinejournals.com/index.php/economy/article/view/1530 https://orcid.org/0000-0001-8264-1212 economy, 2020, 7(1): 1-10 2 © 2020 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study contributes to existing literature by examining social-economic impacts of economic and political empowerment of women in nigeria between 1990–2018. 1. introduction 1.1. background to study crime rate among nigerian youths has assumed a worrisome dimension, today. if the current trajectory in crime rate among these youths is allowed to continue unabatedly, the future of nigeria and its productive army is clearly on the path of destruction (see (adebayo, 2013; ajaegbu, 2012; ajufo, 2013)). nigeria is a developing country and it is no doubts currently experiencing rising crime waves, criminal intentions and varying degree of delinquencies. nigeria has been on the global crime map since 1980s (dambazau, 2007). these crimes are in different dimensions that include armed robbery, murder, rape, religious radicalism, banditry, kidnapping, car theft, burglary, fraud, bribery and corruption, smoking and drug addiction, gambling, exam malpractices, smuggling, human trafficking, kidnapping, drug trafficking, terrorism, money laundering, internet scam, advanced fee fraud (419), cultism, „aristo‟ among ladies just to mention a few (aremu & ahmed, 2011). sadly, these forms of crimes are committed mostly by the youth virtually in every nooks and crannies of the country. criminality has become an integral part of the daily life of many of these youths who are supposed to be the ingredients required for the upliftment of the country amongst the comity of nations. this spate of crimes is capable of, if not already, undermining the corporate existence of the country as well as efforts towards sustainable growth and development (tanimu, 2006). security and crime have been deeply rooted in the political history of this country, particularly in the recent times, which has emerged as a key concept in nigeria‟s struggle for good governance, sustainable democracy and development. the main concept behind the formation of a state is security. the state therefore has the responsibility of maintaining law and order in the society and also to protect and defend the national integrity of the state. as enshrined in the 1999 constitution of the federal republic of nigeria the security and welfare of the people is the primary purpose of the government. however, it appears government has failed to provide a secured and safe environment for lives and property including the free conduct of economic activities. since the return of the country to democratic rule, security of lives and property has been so threatened by these juvenile delinquencies that has manifest in various forms (okafor, 2011; onwuka, ugwu, chukwuma, & chijioke, 2015). in an attempt to contain these increasing waves of violent crime in nigeria, the federal government has been committing huge budgetary allocation to security via the federal ministry of defence and the office of the national security adviser to the president in its various forms since 1999. for example, the 8th national assembly of nigeria comprises of the senate and house of representative in 2018, gave an approval to a loan of about one billion us dollars from international creditors to fight terrorism and other forms of crimes. all these monies are meant to purchase fighting equipment and organized special training for the security forces which is a trade-off for developmental strides. meanwhile, the national security adviser (nsa) has continued to organize trainings for the military and para-military personnel both local and international in order to de-radicalize the youth and nip the insecurity in the bud. despite these, it appears the level of violent crime in the country is still rife, and a confirmation of this is the low ranking (148/163) of nigeria in the global peace index (2019) and the united states of america put nigeria on a watch list of potential terrorist countries in 2009. meanwhile, there are already avalanche of literature on the factors responsible for the rising crime rate in nigeria, none seems to be focusing on the rising trend of women empowerment (see (adebayo, 2013; onwuka et al., 2015; osawe, 2015)) as a possible causal factor. little or no attention has been given to the impact of employed or politically active married women on the upbringing and nurturing of their children in our society. the campaign for women empowerment is getting stronger by the day by a number of advocacy groups but no one is really doing much to examine the implications of this on the social evolution of the children and youths. in reality, in a traditional african setting, family remains fundamental to caring for the old and the sick as well as the children who are the next generation, however, the modern society seems to steer more educated women from marriage and child bearing, giving zero attention to the abandonment of women‟s traditional roles notwithstanding the grave warning signs. maternal support that are highly required by children while growing up are now deprived of due to full-time job obligations with increasing social vices and thereby affects the economic growth target, in the longrun. according to laub and sampson (1993) a mother-child relationship is a social and psychological resource from which the children draw as they grow in life. this relation is like a social investment or social capital, thus if politics or economic activities prevent mothers from investing in their children, it directly or indirectly results in negative consequences. in this respect, this study intends to observe a trend analysis of political and economic participation of women in nigeria and its implication on juvenile delinquencies. thus, the main objective of the study is to investigate the social-economic implication of political/economic empowerment of women in nigeria. to achieve our objectives, the following research questions are formulated: what are the observable trends in economic and political empowerment of women in nigeria? lastly, has empowerment of women exhibited any significant impact on socioeconomic growth in nigeria? the rest of the paper is structured as follows: section two presents the review of literature on women empowerment and economic growth; section three presents the theoretical framework and research methodology; the empirical findings of the study are discussed in section four; and the final section presents the conclusion and policy recommendations. 2. literature review 2.1. factors responsible for economic growth and development economists generally agree that economic development and growth are influenced by four factors: human resources, physical capital, natural resources and technology (see (romer, 1990; todaro, 1992)). highly developed countries have governments that focus on these areas. less-developed countries, even those with high amounts of economy, 2020, 7(1): 1-10 3 © 2020 by the authors; licensee asian online journal publishing group natural resources, will lag behind when they fail to promote research in technology and improve the skills and education of their workers. the skills, education and training of the labor force have a direct effect on the growth of an economy. a skilled, well-trained workforce is more productive and will produce a high-quality output that adds efficiency to an economy. a shortage of skilled labor can be a deterrent to economic growth. an under-utilized, illiterate and unskilled workforce will become a drag on an economy and may possibly lead to higher unemployment. improvements and increased investment in physical capital – such as roadways, machinery and factories – will reduce the cost and increase the efficiency of economic output. factories and equipment that are modern and wellmaintained are more productive than physical labor. higher productivity leads to increased output. labor becomes more productive as the ratio of capital expenditures per worker increases. an improvement in labor productivity increases the growth rate of the economy. the quantity and availability of natural resources affect the rate of economic growth. the discovery of more natural resources, such as oil or mineral deposits, will give a boost to the economy by increasing a country's production capacity. the effectiveness of a county at utilizing and exploiting its natural resources is a function of the skills of the labor force, type of technology and the availability of capital. skilled and educated workers are able to use these natural resources to spur the growth of the economy. improvements in technology have a high impact on economic growth. as the scientific community makes more discoveries, managers find ways to apply these innovations as more sophisticated production techniques. the application of better technology means the same amount of labor will be more productive, and economic growth will advance at a lower cost. countries that recognize the importance of the four factors that affect economic growth will have higher growth rates and improved standards of living for their people. technological innovation and more education for workers will improve economic output which lead to a better living environment for everyone. increases in labor productivity are much easier to achieve when investments are made on better equipment that require less physical work from the labor force (grossman & helpman, 1991; romer, 1990). 2.2. recent political landscape in nigeria: women participation in nigeria politics women are reported to form 49.4 per cent of nigeria‟s population (nbs, 2017). however, female political representation in the just concluded 2019 general elections is negligible relative to the approximately half of the population they constitute. according to the inec (2019) 2019 general election reports; only 62 women out of the 2,970 who contested for different political offices in the 2019 general elections got elected into the various offices they vied for. apart from the 1999 election which signaled the birth of the fourth republic in nigeria that saw women occupying 15 seats in the national assembly – three in the senate and 12 in the house of representatives – the number of elected female lawmakers has never been this poor in any other election at the federal level. although, there is currently the affirmative action of 35% representation of women in political and non-elective positions in nigeria, the number of women in the legislative houses is not so encouraging as a result of the patriarchal dominance of the men in nigeria. in the elective positions in nigeria since 1999, it is evident that women have not reached 10% representation. from 1999 till date, no woman has been vice president of nigeria and not to talk of being the president. in 2011 for instance, only one woman contested for the post of the president in nigeria under the platform of the people‟s democratic party and she did not survive the primary election. in 2015, 5 women out of the 14 contestants contested for the vice-presidential position while 14 men contested the post of president. the number of women elected to public offices in nigeria did not increase after the 2019 election. instead, there was a decline to any progress made in women‟s previous outings since the inception of the fourth republic, this is evident from table 1, below. in the 2019‟s national assembly election, 235 women, forming 12.34 per cent of candidates, contested for seats in the senate of which seven (6.42 per cent) were elected. this remained constant in the 8th senate, which also accounted for 6.42 per cent of the total number of elected senators. in the house of representatives, 533 women contested and only 11 (3.05 per cent) got elected. the record from the 8th assembly has thus been halved, as it had 22 female lawmakers. table-1. statistics of women elective office holders since the inception of the fourth republic. s/n position no of seats 1999 2003 2007 2011 2015 2019 1 presidency 1 0 0 0 0 0 0 2 vice president 1 0 0 0 0 0 0 3 governors 36 0 0 0 0 0 0 5 senate 109 3 (2.8%) 4 (3.7%) 9 (8.3%) 7 (6.4%) 7(6.4%) 7(6.4%) 6 house of representative 360 12 (3.3%) 21(5.8%) 26(7.2%) 25(6.9%) 19(5.2%) 11(3.1%) 7 states houses of assembly 990 24(2.4%) 40(3.9%) 57(5.8%) 68(6.9%) 54(4.6%) 40(4.0%) 2.3. review of empirical studies ehigie and umoren (2003) examined the psychological factors influencing entrepreneurial success among nigerian women in small-scale businesses. the study focused on self-concept, perceived managerial competence, and work stress and business commitment as important psychological variables for entrepreneurial success among female entrepreneurs. the study concludes that success for female entrepreneurs relies on a high self-concept regarding their role in business, commitment to business and reduction of a conflict between home responsibilities and business. finally, the study recommends training programs as essential for effective business management among women entrepreneurs. ekpe (2011) conducted a study on “women entrepreneurs and economic development in nigeria: characteristics for success”. using women entrepreneurs who were clients of 4 microfinance institutions in the northern region of nigeria, the study found that motivation, foresight and achievement are vital characteristics for success; and that women entrepreneurs in nigeria possess the necessary characteristics economy, 2020, 7(1): 1-10 4 © 2020 by the authors; licensee asian online journal publishing group for entrepreneurial success. ekesionye and okolo (2012) examined women empowerment and participation in economic activities as indispensable tools for self-reliance and development of nigeria. using 351 randomlyselected women respondents in anambra state, it was found that the major economic activities of women in the area included farming, trading, craft, food processing, hair dressing and poultry. their sources of fund include personal savings, family assistance, philanthropist‟s assistance, loans and credits, cooperative society assistance, and group contributions (esusu). inability of government to provide support, corruption on the part of implementers, family burden, cultural restrictions, husband influence and illiteracy were the obstacles women encounter in carrying out their economic activities. in a related development, fapohunda (2012) carried out a study on women and the informal sector in nigeria: implications for development. the study was based on library sources and a field survey of 150 women in the mushin, agege and lagos island areas of lagos, nigeria. he observed that employment opportunities in the formal sector are often denied women because of family responsibilities, lack of skills, social and cultural barriers; the informal sector is often the only possibility for women to get access to employment and to earn an income. consequently, women dominate the informal sector, necessitating why policies and developments affecting the informal economy thus have a distinctly gendered effect. the paper argued that the informal sector has a high labour-absorption capacity and there is the need to increase the level of stimulation of employment opportunities. 2.4. theoretical review 2.4.1. the gender empowerment theory. this theory assumes that nations, businesses, communities, and groups can benefit from the implementation of programs and policies that adopt the notion of women empowerment (deneulin & shahani, 2009). the empowerment language can actually lead to raised awareness (rappaport, 1986). empowerment can be understood by examining the concepts of power and powerlessness (moscovitch & drover, 1981). power is defined by the cornell empowerment group as the “capacity of some persons and organizations to produce intended, foreseen and unforeseen effects on others” (cornell empowerment group, 1989). there are many sources of power. personality, property/wealth, and influential organizations have been identified by galbraith and schendel (1983) as critical sources of power in the last part of 21stcentury. others have pointed out that the class-dominated nature of our society means that a small number of people have vast economic or political power, while the majority has little or none (moscovitch & drover, 1981). according to wallerstein (1992) empowerment is a social-action process that promotes participation of people, organizations, and communities towards the goals of increased individual and community control, political efficacy, improved quality of community life, and social justice. gender empowerment can be measured through the gender empowerment measure (gem). the gem shows women‟s participation in a given nation, both politically and economically. gem is calculated by tracking the share of seats in parliament held by women; of female legislators, senior officials and managers; and of female profession and technical workers; and the gender disparity in earned income, reflecting economic independence. it then ranks countries given this information. other measures that take into account the importance of female participation and equality include the gender parity index and the gender-related development index (deneulin & shahani, 2009). 2.4.2. the u-shape hypothesis the u-shaped hypothesis is a stylized description of the relationship between the female labor force participation rate with economic development, which is typically measured in terms of gdp per capita. in its basic form, the hypothesis posits that female participation rates are highest in poor countries, where women are engaged in subsistence activities, and fall in middle-income countries because of the transition of (mainly) men to industrial jobs. as education levels improve and fertility rates fall, women are able to join the labor force in response to growing demand in the services sector. this is a stylized fact, but it is not robust to different data sets and econometric methodologies. while some countries follow this path, many labor markets do not exhibit this ushaped relationship. according to verick (2018) as society develops and begins to shift to a more industrialized economy, women‟s opportunities for employment decrease. family production aimed at self-consumption decreases and most consumed goods are produced outside the home, making it more difficult for women to reconcile childcare and work. moreover, technical change requires employees with a higher level of education and the capacity to use machines, diminishing women‟s employment opportunities, and thus, their labour participation. this process is reinforced by the existence of social norms that dictate that women are responsible for domestic chores and stigmatize female participation in the workforce, making it difficult for women to work in the manufacturing industry. however, with the subsequent expansion of the service industry and the associated increase in female levels of education, new opportunities of employment for women are created. this, together with their higher wages, increases the opportunity cost of staying at home and reduces fertility rates. during this process, both income and substitution effects take place (goldin & kanellakis, 1995). 3. research methodology this section is divided into three sections; the first part presents the source of data and description of variables; the second section depicts the theoretical framework while the last section contains estimation techniques employed in the study. 3.1. data sources and description the data are sourced from the world development indicators (wdi, 2019) of the world bank group and the national bureau of statistics (nbs, 2013, 2018) of nigeria. the wdi database with focus on the gender statistics consists of more than 500 indicators on topics such as economic growth, education, population, environment and natural resources, national accounts, social policy statistics, development assistance, for over 200 countries from economy, 2020, 7(1): 1-10 5 © 2020 by the authors; licensee asian online journal publishing group 1960 to 2018. the choice of a times series data analysis was premised on the nature of our database while the rationale behind the adoption of wdi database was based on the availability of a wide range of indicators. specifically, the study utilized data on female labour force, political participation of women, gross domestic product and gross capital formation as the relevant macroeconomic performance indicators from wdi database while data on child delinquencies were from the (nbs, 2013, 2018). table 2 describes the various variables employed in our analysis. table-2. description of variables. dependent variables variable description lrgdp natural log of gross domestic product from (1990 – 2018). independent variables ljdllf natural log of the interactive factor (ljdllf) (i.e., interaction of female labour force participation (flfp) and juvenile delinquency (jdl) (1990 – 2018) control variables lgcf natural log of gross capital formation (1990 – 2018). flfp female labour force participation (1990 – 2018) jdl juvenile delinquency (1990 – 2018) 3.2. analytical framework adopting and modified the endogenous growth model by romer (1990) with significant contributions from grossman and helpman (1991) and aghion and howitt (1992) by incorporating realities into the model. the endogenous growth model is the ak production function; a special case of a cobb–douglas production function: y = akαl1-α (1) where: y = the total production in an economy. a = effectiveness of labour. k = capital. l = labor. and the parameter α measures the output elasticity of capital. 3.3. the underlying assumptions of our study from reality there is a good producing sector. y = akαl1-α (2) 0<α<1 equation 2 implies constant returns to scale for labour and capital we assume the labour factor (l) in the model can be decomposed into 2: female labour force (lf) and male labour force (lm). that is, l = lm + lf. (3) it has been established in the literature that crime rate among children and youth is a positive function of female labour participation and negative function of income (verick, 2018). as a result, the increased female labour force participation leads to increase in crime rate among children and youth. the consequences of the increased crime rates among children will eventually affect father‟s concentration at work and leads to loss of male productive hours as well as income and thereby affects economic growth. hence, jdl = ƒ(lm rgdp). this can be written explicitly as jdl = ylm. (4) from equation 4, lm = jdl/y (4a) then, substitute equations 4 and 4a into 2 and take the natural log of both sides. lny = lna+ αlnk + (1α)ln(jdl/y+ lf) thus, y = β0a + β1k + β2ljdllf (5) from (5) is either β2 < 0 or β2 > 0, depending on the size of the net contribution of flfp to the economic growth and reduction in economic growth due to loss in productive hours of male labour force participation. that is, if impact of flfp is greater than impact of jdl, β2 > 0 and otherwise, β2 < 0. thus, equation 5 is the model of our study. 3.4. analytical techniques to achieve the first objective of the study, trend analyses of female labour force participation and political participation were conducted using data from the wdi (2019). and the second and final objective of the study is achieved using the ardl bound test technique. the ardl bound test technique is employed to determine the long run relationship if any, between series with different order of integration (pesaran, shin, & smith, 1999; pesaran., shin, & smith, 2001). the reparameterized result gives the short-run dynamics and long run relationship of the considered variables. although ardl cointegration technique does not require pre-testing for unit roots, to avoid ardl model crash in the presence of integrated stochastic trend of i(2), we therefore conducted unit root tests to determine the number of unit roots in the series under consideration. the functional form of the model used to investigate the social implication of economic and political empowerment of women in nigeria is therefore specified as: lrgdp = f(lgcf, ljdllf) where lrgdp = natural log of gross domestic product; lgcf = natural log of gross capital formation, ljdllf = natural log of the interactive factor (ljdllf) (i.e., interaction of female labour force participation (flfp) and juvenile delinquency (jdl)) this is incorporated in the model as a relevant explanatory, control variable). lrgdp = α0 + α1lgcf + α2ljdllf + t https://en.wikipedia.org/wiki/cobb%e2%80%93douglas_production_function https://en.wikipedia.org/wiki/cobb%e2%80%93douglas_production_function economy, 2020, 7(1): 1-10 6 © 2020 by the authors; licensee asian online journal publishing group where μ = residual term. the α‟s represents the long run parameters. thus, the general ardl model follows the following equation: ∆lrgdpt = α0t + ∑ β11∆lrgdpt-1 + ∑β12ljdllft-1 + ∑β13∆lgcft-1 + 1t where, (δlrgdp and ∆lrgdpt-1) are the dependent variables in first-difference and level, and (δlflfp, δlgcft-1 and lflfp, lgcft-1) are the independent variables in the model in first-differences and levels. indeed, the α0 is the intercept, β11… β15, ϕ1… ϕ5 are the parameters of variables and is the error term of the model. 4. results and discussions 4.1. economic and political empowerment of women and economic development in nigeria this subsection presents the results of the trend analysis of women‟s empowerment in nigeria from 1990 to 2018 and its implications for economic growth. in order to underscore the context of the study, the discussion starts with an overview of the trends in female labour force participation (flfp) and the proportion of women in parliament from 1990 to 2018. to juxtapose the trend in women‟s empowerment in nigeria, the following three largest economies in africa (south africa, egypt and algeria) and the brics countries (brazil, russia, india, china and south africa) are selected for the comparative analysis. the brics are emerging economies with regional dominance but were similar to nigeria in economic performance in the 1960‟s when nigeria gained political independence. four of the brics countries are also characterized by large population like nigeria. 4.1.1. trends analysis of female labour force participation 1990 2018 figure 1 shows female labour force participation in nigeria by taking a look at the proportion of women that participate in paid employment. it reveals that proportion of nigeria‟s women in labour force dwindled throughout the period under review. the average proportion for instance, was 35.4 per cent 1990-1994 but in 2015-2018 it is found to be 21. 3 per cent. that is, despite the advocacy towards women‟s empowerment, the trend is not even on the rise. while within the same period, only brazil recorded some level of appreciation in flfp from approximately 46 per cent to 48 percent. egypt remains constant over the entire period but surprisingly china, india and south africa like nigeria were equally on the decline. this shows that in the majority of the countries understudied, the trend of female labour force participation is even still on the decline in spite of the amount of capital outlays for women‟s empowerment advocacy in both developed and developing economies. this view is corroborated by the finding of verick (2018) that shows that though more than 307 million women have joined the labor market in the past 20 years, women still account for just 39.2% of the global labor force. figure-1. female labour force participation 1990 – 2018. source: wdi (2019). 4.1.2. proportion of female in parliament figure 2 shows the proportion of female in parliament in nigeria by taking a look at the proportion of women that are elected into parliaments to participate in legislative activities at the national level. it reveals that proportion of nigeria‟s women that involves in parliamentary activities in nigeria is on the increase though with a slight decrease at the tail end of the period under review. the average number of women in parliament in nigeria for instance, was approximately 4 per cent in 1999-2003 and increased to almost 7 percent in 2011-2015 but declined slightly in 2015-2019 (see (inec, 2019)). thus, it is obvious that political participation of women in nigeria has been on the rise since the inception of the fourth republic in nigeria. comparatively, for instance, women representation in algeria shows the highest increase from approximately 5 per cent in 2000-2004 to roughly 30 per cent between 2015 and 2018 and, followed by south africa from 30 per cent to around 42 per cent within the same period. egypt moved from 2 per cent to above 12 per cent under same period. economy, 2020, 7(1): 1-10 7 © 2020 by the authors; licensee asian online journal publishing group figure-2. proportion of female in parliament, 2000-2018. source: wdi (2019). 4.2. social implications of economic and political empowerment of women in nigeria 4.2.1. descriptive statistics the statistical features of the data under consideration including the mean, the minimum and maximum values, standard deviations, kurtosis, skewness and the jacque-bera for the data in their levels. the descriptive statistics provide a historical background for the behaviour of our data. table 3 details the descriptive statistics for each series. table-3. descriptive statistics. statistics lrgdp lgcf lflfp ljdl ljdlfp mean 7.500684 3.242562 3.878085 11.60285 44.99748 median 7.4915 3.28009 3.8622 11.7483 45.47013 maximum 7.852513 3.938836 3.921072 12.35469 47.66205 minimum 7.204986 2.638039 3.852891 10.44242 40.27585 variance 0.0569777 0.1917075 0.000622 0.273608 4.215786 std. dev. 0.2387 0.4378441 0.0249391 0.5230755 2.053238 skewness 0.14224 -0.0077698 0.663158 -0.5802762 -0.8673573 kurtosis 1.39008 1.555577 1.773855 2.375225 2.655757 observations 116 116 116 116 4.2.2. unit root test the results of the unit root test table 4 shows that all the series under study have unit root, i.e they are nonstationary as depicted in table 4 below. in particular, all specifications of adf (with trend or drift) and pp tests could not reject the null hypothesis of a unit root process, even at a 10% significance level for all the variables at level. when the series in first difference are tested, the null hypothesis of a unit root process is rejected at 1 per cent significance level except for the lflfp; according to all specifications of adf and pp tests. therefore, adf and pp unit root tests conclusively show that all variables of study are i(1) except the flfp that is i(2). table-4. unit root test. variable augmented dickey-fuller phillips-perron statistic with trend with drift level first diff. level first diff. level first diff. lrgdp -1.884 -3.136** -0.461 -3.201* -2.166 -3.862** lgcf -2.791 -4.84* -1.187 -4.822* -2.139 -5.956* lflfp -1.865 -1.598 -0.516 -1.961 -1.826 -1.981 ljdl -2.437 -4.92* -2.536** -4.897* -2.032 -6.034* ljdlfp -2.499 -4.926* -2.545* -4.909* -2.073 -6.04* note: *, **, and *** represents significance at 1%, 5% and 10% respectively. 4.2.3. ardl bounds test of cointegration in this study, after determining the unit root characteristics of the variables, the bounds test of cointegration was conducted in order to analyse the long-run relationship between the variables. table 5 reports the estimated f-statistics values for the models. the second row in the table represents the optimal lag length for the model, which was selected using the aic criterion. the table shows no evidence of cointegration in the model. this implies that there is no long-run relationship between the selected variables. for instance, the estimated f-statistics value for the model is 2.393, which is below the lower bound i(0) critical values provided by pesaran. et al. (2001) at 1%. that is, it is not significant and thus, we cannot reject the null hypothesis of no cointegration. hence, we estimate a short-run model that is the ardl equation rather than the ardl long-run equation. from table 6 below, the sign of coefficient reported for ljdlfp is positive and statistically significant. this implies that female labour participation directly leads to increase economic growth (gdp) but the increased female labour participation also leads to a rise in the juvenile delinquencies (jdl) and thereby, reduced the expected net increase in economic growth (gdp). that is, the increased economic growth due to increased female labour force participation is less than the expected increase. thus, it is inferred that the social costs of economic and political participation of women in terms of the increased crime rate among youths and the level of insecurity in the country economy, 2020, 7(1): 1-10 8 © 2020 by the authors; licensee asian online journal publishing group overwhelms the economic benefits in term of increased economic growth. meanwhile, for the gross capital formation (lgcf), though not surprising, the sign of the coefficient is negative but significant. this may be due the fact that there is a negative growth in capital formation (obsolete and depreciation) in many african countries which results in a decrease in economic growth (see onyinye, idenyi, and ifeyinwa (2017)). table-5. cointegration results. estimated model lrgdp (lgcf, ljdlfp) optimal lag length (2,1,2) f-statistics (bound test) 2.393 critical values 1% 5% 10% lower bound i(0) 5.15 3.79 3.17 upper bound (1) 6.36 4.85 4.14 r-squared 0.6637 adj. r-squared 0.6415 f-statistics 421.8166* note: *, **, and *** represents significance at the 1%, 5%, and 10% levels, respectively. the akaike information criterion (aic) criterion is used to determine the optimal lag. the critical values are determined from pesaran. et al. (2001). table-6. estimated coefficients of autoregressive distributed lag ardl (2,1,2) long-run results. variables coefficients standard error t-statistic lrgdp (-1) 1.682376* 0.0658449 25.55 lrgdp (-2) -0.6977592* 0.064128 -10.88 lgcf -0.0493248* 0.020248 -2.44 lgcf (-1) 0.0406982* 0.0203099 2 ljdlfp 0.0040157* 0.0014992 2.68 ljdlfp (-1) -0.006892 0.0025079 -2.75 ljdlfp (-2) 0.0032659 0.0014542 2.25 constant 0.1264991 0.0945996 1.34 note: *, **, and *** represents significance at the 1%, 5%, and 10% levels, respectively. the akaike information criterion (aic) criterion is used to determine the optimal lag. the critical values are determined from pesaran. et al. (2001). 4.3. model stability test the stability of estimated model enhances its reliability for policy. we test the stability of the model with the plots of the cumulative sum of recursive residuals (cusum6). the plot is shown in figure 3 below. it can be observed that the plot of the cucusumsq lies between the straight lines representing critical bounds at 5% significance level. this suggests that the (parameters of the) models are structurally stable, and hence the models could be relied upon for policy formulation. figure-3. testing the stability of the model: the cusum6 approach. 5. conclusion this study examined social implication of economic and political empowerment of women in nigeria between 1990 and 2018 from the standing point of the often neglected but not too palatable effect of female labour force participation on children, adolescent, family and the society at large. we estimated trend analyses and ardl estimator with inclusion of control variables. we observed that proportion of nigeria‟s women (between age 15 and 64) in labour force is on a downward trend between year 2000 and 2018. the mean values for instance, was 35.4 per cent 1990-1994 but in 2015-2018 it is found to be 21. 3 per cent. on the political participation captured by the proportion of female representation in the parliament, we found that proportion of nigeria‟s women that involves in parliamentary activities in nigeria has been on the increase since the advent of the fourth republic in 1999. the average number of women in parliament in nigeria for instance, was approximately 4 per cent of total members of parliament in 1999-2003 which increased to almost 7 economy, 2020, 7(1): 1-10 9 © 2020 by the authors; licensee asian online journal publishing group percent in 2011-2015 but with a slight fall to about 6 per cent in 2015-2019. many factors such as increasing education of women, cost of living, attractive political largesse, family responsibilities to mention a few are among the factors responsible for this rising trend among women folks. for the realized increased incomes from female labour participation, the entire society have completely jettisoned the attendant negative impact of women influx into labour market on the society at large. finally, we observed that the increased economic growth due to increased female labour force participation is less than what it ought to be. this implies that in spite of the resources committed to campaigns for economic and political empowerment of women, the social costs in terms of the increased crime rate among youths and the accompanied level of insecurity in the country in general still significantly overwhelmed the economic benefits in term of increased economic growth. unfortunately, the gains from women employment are rarely noticed to be also accompanied by social losses. the poor upbringing and supervision of children due to female labour participation increases the probability of delinquency as a result of low self-control (see (adebayo, 2013; burt, 2019; vazsonyi, jiskrova, ksinan, & blatný, 2016)). succinctly, this study successfully confirms a seemingly positive correlation between political/economic empowerment of women and economic growth but these economic gains are indirectly eroded by criminal activities among children and the youth. flowing from the conclusions of the study, the following recommendations are proposed: i. the government as well as advocacy groups must channel the same efforts and resources devoted to campaigns for women empowerment into reversing the ugly trend of juvenile delinquency if the level of insecurity in the nigeria is to curtail. ii. to stem this ugly slide, the proposed bill by the national assembly and the 36 state houses of assemblies to increase the maternity leave from its current level of 3 months to 6 months should be fast-track and duly implemented across board in both public and private organizations. though, this is already being implemented in one or two states of the federation (e.g kaduna). iii. our women need training and re-training (parent education) on child rearing responsibilities for them to appreciate the importance of their traditional role on the society at large. iv. there is a need for the government to further strengthen all the agencies (e.g naptip, ndlea) that are in charge of comprehensive national programs for the prevention and detection of all forms of physical, drug and sexual abuses of children and the rehabilitation of those that have already been abused. v. governments at all levels need to ensure that all the youth who are deprived of a family and parental cares (e.g alimajiris in the north and area boys in the south) have access to appropriate forms of alternative cares where their rights are fully safeguard. vi. incentives should be provided by the government and other stakeholders to encourage women to take up only formal jobs which do not interfere with their domestic responsibilities and their bonds with the children. references adebayo, a. a. 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(2019). the united nations world development indicators. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. economy issn: 2313-8181 vol. 3, no. 1, 40-50, 2016 www.asianonlinejournals.com/index.php/economy 40 determinants of exchange rate sensitivity on the nigerian manufacturing sector ezeanyeji clement i.1 onwuteaka ifeoma. c.2 1,2 department of economics, faculty of social sciences, chukwuemeka odumegwu ojukwu university, anambra state, nigeria ( corresponding author) abstract this paper examines the exchange rate sensitivity and its determinants with special focus on the nigerian manufacturing sector (1980-2014). the motivation for this study is driven by the exposure of nigeria’s exchange rate and economy excessively to external shocks as revealed by the effects of the recent global economic crisis on nigeria. in doing this, error correction model (ecm), augmented dickey-fuller (adf) testand the johansen co-integration technique were adopted to examine the impact of exchange rate fluctuations on nigeria’s manufacturing sector. the variables employed include: average official exchange rate of naira vis-à-vis us dollar and nominal effective exchange rate indices, interest rate, inflation rate, balance of payment (bop), real gross domestic product (gdp), manufacturing index of ordinary shares listed on the nigerian stock exchange, and average manufacturing capacity utilisation rates. the result of the empirical analyses showed that the nigerian manufacturing sector is not sensitive to exchange rate fluctuations in the long-run. also, it was found that interest rate and gross domestic product are the main determinants of exchange rates in nigeria but interest rateis insignificant in the determination of exchange rate in the country. some of the recommendations made in this study are that: the monetary authorities should maintain stability of the exchange rates through proper management so as to encourage local production, the monetary authorities must endeavour to force the interest rate down and continue to advocate for priority lending to the manufacturing firms. equally, the government must continue to discourage importation in order to maintain exchange rate stability. keywords: exchange rate, sensitivity, manufacturing sector, determinants, error correction model, nigeria. contents 1. introduction ......................................................................................................................................................................... 41 2. theoretical framework for exchange rate determination............................................................................................... 42 3. methodological issues and sources of data ........................................................................................................................ 44 4. data presentation and analysis of result ........................................................................................................................... 46 5. conclusion and recommendations ..................................................................................................................................... 48 references ................................................................................................................................................................................ 49 citation | ezeanyeji clement i; onwuteaka ifeoma. c (2016). determinants of exchange rate sensitivity on the nigerian manufacturing sector. economy, 3(1): 40-50. doi: 10.20448/journal.502/2016.3.1/502.1.40.50 issn(e) : 2313-8181 issn(p) : 2518-0118 licensed: contribution/acknowledgement: this work is licensed under a creative commons attribution 3.0 license all authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no competing interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: history: this study follows all ethical practices during writing. received: 2 february 2016/ revised: 10 march 2016/ accepted: 14 march 2016/ published: 18 march 2016 publisher: asian online journal publishing group http://creativecommons.org/licenses/by/3.0/ http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.1/502.1.40.50 https://orcid.org/orcid-search/quick-search?searchquery=ezeanyeji clement i. https://orcid.org/orcid-search/quick-search?searchquery=onwuteaka ifeoma. c. http://search.crossref.org/?q=10.20448/journal.502/2016.3.1/502.1.40.50 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.1/502.1.40.50 https://orcid.org/orcid-search/quick-search?searchquery=ezeanyeji clement i. https://orcid.org/orcid-search/quick-search?searchquery=onwuteaka ifeoma. c. http://search.crossref.org/?q=10.20448/journal.502/2016.3.1/502.1.40.50 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.1/502.1.40.50 https://orcid.org/orcid-search/quick-search?searchquery=ezeanyeji clement i. https://orcid.org/orcid-search/quick-search?searchquery=onwuteaka ifeoma. c. http://search.crossref.org/?q=10.20448/journal.502/2016.3.1/502.1.40.50 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502/2016.3.1/502.1.40.50 https://orcid.org/orcid-search/quick-search?searchquery=ezeanyeji clement i. https://orcid.org/orcid-search/quick-search?searchquery=onwuteaka ifeoma. c. http://search.crossref.org/?q=10.20448/journal.502/2016.3.1/502.1.40.50 economy, 2016, 3(1): 40-50 41 1. introduction an important dilemma in international finance is the exchange rate puzzle. this issue is important because exchange rate fluctuations are likely, in turn, to determine economic performance vis-à-vis firms’ performance among others. it is a dilemma because of its randomness, which lipsey and chrystal (1995) attribute to its responsiveness to news. the volatility and unpredictability of exchange rate is due to the confluence of the factors that affect it (anoruo et al., 2006; benita and lauterbach, 2007; hanias and curtis, 2008). as such, the issue of exchange rate sensitivity and determinacy is controversial and has been a subject of much debate. a large number of studies and articles addressed the issue both theoretically and empirically and found different results, which have fueled the debate further controversial. the traditional view is that fluctuations in exchange rates affect relative domestic and foreign prices, causing expenditures to shift between domestic and foreign goods (betts and kehoe, 2005; benita and lauterbach, 2007; khan et al., 2010). the new view is that relative prices are not much affected by exchange rate fluctuations in the short-run (cheong, 2004). in general, when a currency depreciates it will result in higher import prices if the country is an international price taker, while lower import prices result from appreciation. the potentially higher cost of imported inputs associated with exchange rate depreciation increases marginal costs and leads to higher price of domestically produced goods (kandil, 2004). further, import-competing firms might increase prices in response to foreign competitor price increases to improve profit margins. the extent of such price adjustment depends on a variety of factors such as market structure, the relative number of domestic and foreign firms in the market, the nature of government exchange rate policy and product substitutability (sekkat and mansour, 2000; fouquin et al., 2001). most nigerian manufacturing companies depend on imported inputs in the form of equipment, plant and machinery and other materials and given the fact that bulk of the country’s foreign earnings is from oil earnings which accounts for over 87.6 per cent of the foreign exchange earnings in 2010 (central bank of nigeria, 2010) thus revealing the extent of the vulnerability of these companies to swings in the exchange rate which is greatly affected by fluctuations in the oil price in the international market. mohammad (2010) notes that the risks associated with volatile exchange rates are major impediments for countries such as nigeria that attempt to develop through export expansion strategy and financial liberalization. besides, chong and tan (2008) hint that the impact of exchange rate volatility on economic fundamentals is substantially great if an economy does not provide possible tools in hedging currency risk in its market place which unfortunately, is the case in nigeria. furthermore, chong and tan (2008) argue that exchange rate volatility has a catalytic effect to various parties as well as countries. one of the most dramatic events in nigeria over the past two decades was the devaluation of the nigerian naira with the adoption of a structural adjustment programme (sap) in 1986. a cardinal objective of the sap was the restructuring of the production base of the economy with a positive bias for the production of agricultural exports. the foreign exchange reforms that facilitated a cumulative depreciation of the effective exchange rate were expected to increase the domestic prices of agricultural exports and therefore boost domestic production. significantly, this depreciation resulted in changes in the structure and volume of nigeria’s exports and imports. however, the volatility, frequency and instability of the exchange rate movements since the beginning of the floating exchange rate raise a concern about the impact of such movements on nigerian manufacturing companies. nigerian manufacturing sector has remained underdeveloped and is not showing significant growth despite the implementation of structural adjustment programme (sap). according to delude (1999) apart from objectives not realized, exchange rate policy and management under structural adjustment programme (sap) have left some issues unresolved and/or created some distortions in the economy, one of which is deindustrialization. a close look at the relative contribution of manufacturing production to gross domestic product (gdp) before and after sap shows that sap, indeed, triggered a shrinking of the manufacturing sector in nigeria. in 1980, manufacturing accounted for 8.4% of gross domestic product (gdp). this relative share rose to 9.9% in 1983, and was still 8.7% in 1986 (central bank of nigeria, 2010b). but, with the adoption of sap, the manufacturing sector’s relative share in gdp began to fall and reached a low of 5.29% in 1989 and fell further to 5% of the gdp in 1997 (cbn, 2010b). however, since enthronement of democracy in 1999, the contribution of the sector to gdp increased slightly to 9.6% in 2007 but fell to 7.6% in 2010 (cbn, 2010a). apart from structural rigidity, poor quality of labour force, high interest rate, corruption etc (delude, 1999) that is responsible for the poor performance of the sector, exchange rate volatility is also a major factor that affects its performance. 1.1. statement of the problem the year 2009 was overcast by the global financial and economic crisis, which was precipitated in august 2007 by the collapse of the sub-prime lending market in the united states. the crisis led to the crash of most other sectors and markets across europe with consequent effect on developing economies especially oil-export dependent countries like nigeria. the impact was aggravated by the reduction in crude oil production due to the persistent restiveness in the niger delta region. the spiral effect of the global economic crisis on nigerian economy continued in 2009 with the exorbitant lending rate mounting pressure on the stock market as a result of massive borrowed fund in the market. the rush by stock investors to liquidate their investment to repay their loans in order to avoid the excessive lending rate caused the nigerian stock market to crash. this decline was also driven by concerns over unrealistically high valuations in practically all sectors. regulatory intervention in the equities market only served to dent investor confidence further, especially among institutional investors, as the measures failed to address the fundamental issues. the effect of the global economic meltdown on nigerian exchange rate was phenomenon as the naira exchange rate vis-à-vis the dollar rose astronomically from about n120/$ to more than n180/$ (about 50% increase) between 2008 and 2009. this is attributable to the sharp drop in foreign earnings of nigeria as a result of the persistent fall of crude oil price, which plunged from an all time high of us$147 per barrel in july 2007 to a low of us$45 per barrel economy, 2016, 3(1): 40-50 42 in december 2008. it is evident from the foregoing that the recent global economic crisis has further revealed that nigerian economy is excessively exposed to external shocks. although various factors have been adduced to nigeria’s poor economic performance, the major problem has been the economy’s continued excessive reliance on the fortunes of the ever unstable oil market for foreign exchange thereby causing frequent volatility in the country’s exchange rate. the renewed emphasis on the production of alternatives to fossil-fuel energy, such as solar, wind and bio energy in the advanced economies would reduce oil demand and further weaken nigeria’s foreign earnings. thus, in the absence of concerted efforts to shore-up and widen the revenue base, there will be reduction in crude oil revenue, excess crude oil receipts savings and foreign exchange earnings in the coming years. this will spell doom for the manufacturing companies in the country who rely on foreign exchange for the purchase of most of their inputs. the fact that crude oil is an exhaustible asset makes it unreliable for sustainable development of the nigerian economy (utomi, 2004). the continued unimpressive performance of the nigerian manufacturing sector and the vulnerability of the external sector thus dictate the urgent need for a reappraisal of the thrust and contents of the development policies and commitments to their implementation. indeed, the need for a change in the policy focus and a shift in the industrialization strategy is imperative, if nigerian economy is to be returned to the path of sustainable growth and external viability. this raises the question of the sensitivity of nigerian manufacturing companies to exchange rate fluctuation, which is the essence of this study. 1.2. objectives of the study the broad objective of this study is to analyse nigeria’s exchange rate. the specific objectives of the study are as follows: 1. to examine exchange rate volatility in nigeria; 2. to investigate the impact of exchange rate fluctuation on nigerian manufacturing sector; 3. to evaluate the effect of macroeconomic factors on the nigerian exchange rate. 1.3. research questions the research questions that would be examined in the course of the study are as follows: 1. how volatile has the exchange rate of nigeria been over the years? 2. to what extent is the nigerian manufacturing sector sensitive to exchange rate fluctuations? 3. what are the macroeconomic factors that are responsible for the exchange rate fluctuations in nigeria? 1.4. research hypotheses hypothesis 1: h0: that nigeria’s exchange rate fluctuation does not significantly affect her manufacturing sector. h1: that nigeria’s exchange rate fluctuations significantly affect her manufacturing sector. hypothesis 2: h0: nigerian manufacturing sector is not sensitive to exchange rate fluctuations. h1: nigerian manufacturing sector is sensitive to exchange rate fluctuations. hypothesis 3: h0: that nigeria’s exchange rate is not significantly determined by her macroeconomic factors. h1: that nigeria’s exchange rate is significantly determined by her macroeconomic factors. 2. theoretical framework for exchange rate determination exchange rates are prices of one currency in terms of another. in a more formal sense, exchange rate indicates the international value of money in terms of purchasing power, and changes in exchange rate indicates changes in this value. in a free foreign exchange market, exchange rates are determined by supply and demand, like other free market prices, exchange rates could be determined under three conditions: a. under freely floating rates. b. under conditions when governments intervene at certain points, to prevent wider fluctuations in exchange rates. c. under a gold standard. it is expected that within the relevant range, demand curves for foreign exchange are downward slopping, so that in the absence of intervention the exchange rate tends to move towards equilibrium at the intersection of the demand and supply curves. figure-2.1. quantity of foreign exchange source: author’s computation economy, 2016, 3(1): 40-50 43 figure-2.2. quantity of foreign exchange source: author’s computation figure 2.1 and 2.2 show the market determination of exchange rates under freely floating rates and conditions of government intervention, respectively. if d is the demand curve and s is the supply curve. in figure 2.1 the equilibrium exchange rate is at x1. if the demand curve shifts to d1 the equilibrium exchange rate would rise farther to x2 and if the supply curve should then shift to s1 the equilibrium exchange rate would rise farther to x3. in figure 2.2 illustrates the situation when there is government intervention. if d and s are the demand and supply curves, there is no need for government action because the equilibrium rate is close to but not below the lower intervention point. if the demand curve shifts to d1, the exchange rate rises but there is no need for government action. if however, the supply curve then shifts from s to s1, government action occurs otherwise the equilibrium rate would rise above the upper intervention level. government can supply foreign exchange such that the supply curve shifts to sii so that the equilibrium rate is at but not above the upper intervention level. the purpose of government intervention is to prevent temporary factors for causing shifts in demand and supply curves which in turn cause fluctuations in exchange rates which may be detrimental to activities of those engage in foreign trade and investment. in the main, flexible rates were expected to isolate a country from monetary disturbances originating abroad and to help reconcile countries divergent rates of monetary growth. the case for exchange rate flexibility was initially built on a belief that various countries cannot, for long maintain the same inflation rate because of the undesirable but unavoidable tendency for governments to mismanage their currencies to various degrees. differential rates adjustment and flexible exchange rates were seen to provide the least inconvenient form of adjustment. another major argument for flexible rates was that they would make it possible for national authorities to achieve more stable rates of economic growth. 2.2. approaches to exchange rate fluctuation the exchange rate, which is the price of a domestic currency in terms of other currencies, is usually determined in principle by the interplay of supply and demand in a free-market environment. in practice, however, no currency is allowed to float freely by the monetary authorities. between the fixed and floating systems of exchange rate management are other regimes such as the managed and dual exchange rate regimes. uncertainty in exchange rates which immediately followed the collapse of the bretton woods system (alaba, 2003) may be decomposed into two components. the first reflects systematic movement of the exchange rate and the second, exchange volatility (darby et al., 1999). however hanias and curtis (2008) noted that exchange rate like some other macroeconomic variables demonstrates chaotic elements making it difficult if not impossible to predict. there are two primary approaches of analysing the foreign exchange market: technical analysis and fundamental analysis. there is a debate on which of these two approaches is more effective in analysing exchange rate movements. while the proponents of technical analysis argue that forces of demand and supply are the determinants of exchange rate movements, fundamental analysts opine that macroeconomic indicators, asset market and political considerations are the determinants of exchange rate movements. lipsey and chrystal (1995) note that fluctuation in the exchange rate is as a result of changes in demand and supply in the foreign exchange market. they opine that there are a number of factors (some of which are transitory and some are persistent) that cause shifts in demand and supply that lead to changes in exchange rate. some of the factors mentioned are: a rise in the domestic price of exports, a rise in the foreign price of imports, change in price levels, capital movements and structural changes. macdonald (1997) examined the determinants of real exchange rates in a ‘long-run’ setting investigating the influence of fundamental factor such as: productivity and terms of trade, in addition to fiscal balances, net foreign assets and real interest rates. the study findings revealed that fundamentals do have an important, and significant, bearing on the determination of both long-run and short-run exchange rates. in an empirical analysis of bilateral exchange rates between the us and other industrialized countries, engel (1999)shows directly that almost all real exchange rate fluctuations are attributable to fluctuations in the international relative prices of traded goods. this result is at least consistent with the fact that real and nominal exchange rate changes are highly correlated, since real shocks to the relative price of non-traded to traded goods do not seem to matter. however, while the variability of the real exchange rate is far greater than that of the relative price of nontraded to traded goods across countries, there is also a very high simultaneous correlation between the two (betts and kehoe, 2005). economy, 2016, 3(1): 40-50 44 2.2. empirical review although, exchange rate volatility affects macroeconomic fundamentals (chong and tan, 2008), the sensitivity of manufacturing companies to exchange rate variations is expectedly high if they operate with an international supply chain and/or in an international market. the responsiveness of manufacturing companies/sector to exchange rate risk has been investigated extensively in the literature with various findings and assertions made. some of these findings are reviewed below. according to allayannis and ofek (1997) exchange rate variations affect manufacturing companies as its affects their expected future cash flows and therefore their value, by changing the home currency value of their foreign revenues (and costs as the case may be) and the terms of competition in the international market. however, their empirical analysis revealed that the exchange rate exposure of manufacturing companies can be reduced significantly through extensive use of foreign currency derivatives and other hedging instruments. mahidhar (2006) argues that sharp and persistent variations in exchange rate will not only create discrepancies in cost and revenue models of companies that operate in the international market thereby resulting in operational and strategic risks, it also creates risk exposures across the supply chains and could as well change the competitive landscape. he noted that companies that are exposed to exchange rate risk are advised to adopt operational hedging strategies. dekle and ryoo (2002) developed a model of an exporting firm that experiences fluctuating exchange rates and shocks to its cash flow. the firm uses its cash flow and borrows from the financial markets to produce for export later in the period. they noted that exchange rate and shocks to cash flows are correlated, but the correlation could be positive or negative. if, for example, they are negatively correlated, then the firm will suffer from low cash flows when its exchange rate is depreciated. that is, the firm’s production will be constrained exactly at the time when its export opportunities are greatest. this provides the rationale for the firm to hedge against shocks to its cash flow. dekle and ryoo (2002) related nominal exchange rates to export volumes at the firm level and finds that export volumes are strongly affected by changes in exchange rates. as in earlier work, they too found that prices are sticky in the buyer’s currency. in their model of exports, the strong response of export volumes to exchange rate fluctuations arises not because of changes in the buyer’s currency prices, but because of a loosening of financing constraints, either through the direct beneficial effect of exchange rate shocks on cash flows, or through hedging activities. dominguez and tesar (2006) used firmand industry-level stock returns to test for the presence of exchange rate exposure in eight countries and found that there was a significant amount of exposure to a range of different exchange rates noting that the firms affected by movements in the exchange rate and the direction of exposure depends on the specific exchange rate and varies over time. they therefore, postulated that exchange rate exposure may be linked to a number of firmand industry-level characteristics. their findings also revealed that exposure is more prevalent in small(rather than largeor medium-) sized firms and in firms that engaged in international activities (measured by multinational status, holdings of international assets and foreign sales). sekkat and mansour (2000) investigated sectoral sensitivity to exchange rate fluctuations in europe and found that the most important sectors to the european economy (that is, food, paper products, chemicals, metals, machinery, electrical products and transport equipment) react differently to exchange rate changes on the side of exports and on the side of imports. their results revealed that these sectors have, in general, a high level of sensitivity in their export as well as in their import except for transport equipments. the determinant of sectoral sensitivity to exchange rate fluctuations identified in sekkat and mansour (2000) study was market structure. fouquin et al. (2001) also studied the impact of the euro/dollar fluctuations on the european manufacturing industries and found that the most sensitive sectors to exchange rate fluctuations are energy, food, paper products, machinery, electrical products for imports and energy, machinery and transport equipment for exports. they identified concentration on the supply side and dynamics on the demand side to be the determinants of exchange rate sensitivity. cheong (2004) investigated the possible effect of risk in exchange rates on import trade in the uk using a dynamic modelling approach and found that uncertainty in exchange rates negatively affects international trade in the case of the uk and, more importantly, the effect is statistically significant. kiptui et al. (2005) examined the extent of exchange rate pass-through in kenya in order to gauge the country’s vulnerability to external shocks noting that exchange rate movements are transmitted to domestic prices through prices of imported consumption goods, prices of imported intermediate goods (through production cost-channel) and domestic goods priced in foreign currency. their study revealed that exchange rate changes account for about 70% of import price changes and 76% of the variation in import prices and they also observed that there was declining competitive pressure overtime as manufacturing output price increase outpace world export prices. 3. methodological issues and sources of data this study considers the time series properties of the variables used. the first step is to determine the order of integration of the variables; that is, we test whether they are stationary in their levels or whether they have to be differenced once or more before they become stationary. augmented dickey-fuller (adf) test shall be used to carry out test for unit roots. the calculated values of these statistic tests are compared with their critical values. if h0 were accepted, for instance, a straightforward estimation of the equations in levels would yield misleading results. therefore, we have to examine if their first difference is stationary or not. however, if h0 is rejected for all the series, it implies that there is a possibility that the variables in levels might have a co-integrated or equilibrium relationship. further consideration is given to the time series properties of the variables used in the equations. this is necessary because if the variables in question are non-stationary, then the estimated models will yield misleading economy, 2016, 3(1): 40-50 45 values of adjusted r 2 , t-statistic and f-statistic and hence the inference will not be valid (hoque, 1993). statistically speaking, a time series is said to be stationary if its mean, variance and covariance are all invariant with respect to time. such a series is denoted by i(0), that is, integrated of order zero. a time series requiring first-order differencing to achieve stationary is said to be i(1). if all the variables in the equations are i(1), then, it is generally true that any linear combination of these variables will also be i(1). however, if there is a linear combination, which is i(0), then, the concerned variables are said to be co-integrated. on the other hand, if the variables are i(1), but not co-integrated, least square (ls) will give misleading results (hoque and al-mutari, 1996). therefore, it becomes imperative, in a study involving macro time series data to test for unit roots and co-integration before a structural relationship is estimated and reported for potential use. annual data coverage of thirty-four years (1980 – 2014) was used for the empirical analysis in this study. the data were collected on macroeconomic variables: exchange rate, interest rate, inflation rate, balance of payment (bop) and gross domestic product (gdp). however, the investigation of the sensitivity of nigerian manufacturing sector to exchange rate fluctuations is restricted to period between 1980 and 2014. other data collected include: manufacturing index of ordinary shares listed on the nigerian stock exchange, average manufacturing capacity utilisation rates, average official exchange rate of naira vis-à-vis us dollar and nominal effective exchange rate indices. the secondary and time-series data were collected from publications of central bank of nigeria (cbn) such as statistical bulletin, cbn annual report and statement of accounts for the years under review. 3.1. models specification the main focus of this study is to investigate the sensitivity of nigerian manufacturing sector to exchange rate fluctuations and to identify the determinants of exchange rate in nigeria. therefore, the model formulation was designed to capture this study focus. three multiple regression models shall be used in the estimation. the first regression model shall seek to investigate the sensitivity of nigerian manufacturing sector share index to exchange rate fluctuations. this is a follow up on previous studies that have examined the impact of exchange rate sensitivity on turkish companies’ stock returns, effect of exchange rate fluctuations on stock returns of u.s. multinationals (choi and prasad, 1995) sensitivity of s&p 500 non-financial firm’s stock return to exchange rate exposure (allayannis and ofek, 1997) relationships between exchange rate and stock prices in vietnam (chong and tan, 2008). the second model seeks to investigate the effect of exchange rate fluctuations on manufacturing capacity utilisation rate, which is a better measure of the performance of manufacturing companies than their share returns that is subject to speculation. the estimation period shall be restricted to the period between 1980 and 2014, that is, upto when data was available. the third model seeks to identify the determinants of exchange rate in nigeria with data spanning from 1980 to 2014. thus, the model specifications are as follows: model i: this is symbolically expressed as mis=f (exr, neer, rgdp)……………………………………………….……………………………………..3.1 mathematical presentation of the model: mist= β0 + β1exrt + β2neert + β3rgdpt + μ……………………………...……………………………………3.2 adopting a log-linear specification, taking the natural logarithm both sides of the equation and assuming linearity among the variables give. lmist =β0 + β1 exrt + β2neert + β3lrgdpt+μ …….……………...………………………………………….3.3 note that log a= b0 where: lmis= manufacturing index of ordinary shares listed on the nigerian stock exchange for current year exr =average official exchange rate of naira vis-à-vis us dollar neer =nominal effective exchange rate indices for nigeria lrgdp = real gross domestic product for previous year µ= stochastic or error term. β1β3= regression coefficients. β0 = intercept of the function (constant term) t= time (1980 to 2014) model ii: this is symbolically expressed as mcu=f (exr, neer, rgdp)………………………………...………………………………………………….3.4 mathematical presentation of the model: mcut= β0 + β1exrt + β2neert + β3rgdpt + μ…………………….……………………………………………3.5 adopting a log-linear specification, taking the natural logarithm both sides of the equation and assuming linearity among the variables give. lmcut =β0 + β1 exrt + β2neert + β3lrgdpt+μ …….…….……………………………………………………3.6 note that log a= b0 where: mcu = manufacturing capacity utilisation rate for current year exr = average official exchange rate of naira vis-à-vis us dollar neer = nominal effective exchange rate indices for nigeria rgdp = real gross domestic product for previous year μ= stochastic or error term. β1β3= regression coefficients. β0 = intercept of the function (constant term) economy, 2016, 3(1): 40-50 46 t= time (1980 to 2014) model iii: this is symbolically expressed as exr=f (int, inf, bop, rgdp)…………………………...……………………………………………………..3.7 mathematical presentation of the model: exrt= β0 + β1intt + β2inft + β3bopt + β4rgdpt + μ………………..………………………………………….3.8 adopting a log-linear specification, taking the natural logarithm both sides of the equation and assuming linearity among the variables give. exrt =β0 + β1 intt + β2inft + β3lbopt+ β4lrgdpt +μ …….……….…………………………………………3.9 note that log a= b0 where: exr = average official exchange rate of naira vis-à-vis us dollar int = interest rate for current year inf = inflation rate for current year bop = balance of payment surplus/deficit for current year rgdp = real gross domestic product for previous year μ= stochastic or error term. β1β3= regression coefficients. β0 intercept of the function (constant term) t -time (1980 to 2014) 4. data presentation and analysis of result as stated in the previous section, the estimated regression results are based on the johansen cointegration technique and the ecm regressions. these results are presented and discussed in this section. the procedure involves the investigation and determination of the time series properties of all variables included in the regression model. the appropriate test here is the unit root test which in this case is based on the augmented dickey-fuller (adf) test which provides the framework for the determination of the order of integration of each time series and consequently the (non-) stationarity of same. as a necessary but not sufficient condition for cointegration, each of the variables must be integrated of the same order, where the order of integration must be greater than zero. the equations were estimated using the e-views 8.1 output econometric software. the empirical results obtained from these analyses are presented and discussed in this section. 4.1.unit roots test result in this study, the augmented dickey fuller (adf) unit roots tests were employed to test for the time series properties of the model variables. the null hypothesis is that the variable under investigation has a unit root against the alternative. the decision rule is to reject the null hypothesis if the adf statistic value exceeds the critical value at a chosen level of significance (in absolute term). these results are presented in table 1 below. table-1. augmented dickey-fuller (adf) test for model 1, 2 and 3 respectively. model 1 variables adf-statistic critical value order of integration 1% 5% 10% model 1 lmis -4.374515 -3.646342 -2.954021 -2.615817 1 exr -5.444451 -3.646342 -2.954021 -2.615817 1 neer -4.199887 -3.646342 -2.954021 -2.615817 1 lrgdp -4.954321 -3.646342 -2.954021 -2.615817 1 model 2 lmcu -4.318123 -3.646342 -2.954021 -2.615817 1 exr -5.444451 -3.646342 -2.954021 -2.615817 1 neer -4.199887 -3.646342 -2.954021 -2.615817 1 lrgdp -4.954321 -3.646342 -2.954021 -2.615817 1 model 3 exr -5.444451 -3.646342 -2.954021 -2.615817 1 int -8.202138 -3.646342 -2.954021 -2.615817 1 inf -5.567472 -3.653730 -2.957110 -2.617434 1 lbop -6.924274 -3.646342 -2.954021 -2.615817 1 lrgdp -4.954321 -3.646342 -2.954021 -2.615817 1 source: author’s computation (e-view 8.1 output). the results of the unit root tests presented in table 1 above suggest that all the variables are one (1) in the models 1, 2, and 3 respectively as confirmed by a test on the difference of the variables. that is, the autoregressive distributed lag (adl) functions of the variables are of one (1) series respectively. this, as noted earlier, is done to assess the possibility of co-integration in the data and to ensure consistency in subsequent stationary econometric modelling. economy, 2016, 3(1): 40-50 47 4.2. johansen co-integration test a necessary but not sufficient condition for co-integrating test is that each of the variables be integrated of the same order. the johansen co-integration test uses two statistics tests namely; the trace test and the likelihood eigenvalue test. the first row in each of the table test the hypotheses of no co-integrating relation, the second row test the hypothesis of one co-integrating relation and so on, against the alternative of full rank of co-integration. the results are presented in table 2 below. table-2. co-integration for trace statistic test (model 1, 2 and 3 respectively) hypothesized no. of ce(s) eigenvalue trace statistic critical value 0.05 prob.** model 1 none* 0.825918 139.8027 47.85613 0.0000 at most 1* 0.736129 85.60756 29.79707 0.0000 at most 2* 0.556175 44.30644 15.49471 0.0000 at most 3* 0.460393 19.12435 3.841466 0.0000 model 2 none* 0.837482 130.7382 47.85613 0.0000 at most 1* 0.672447 74.41221 29.79707 0.0000 at most 2* 0.512881 39.81290 15.49471 0.0000 at most 3* 0.431663 17.51624 3.841466 0.0000 model 3 none* 0.860712 203.3413 69.81889 0.0000 at most 1* 0.800845 142.2337 47.85613 0.0000 at most 2* 0.717290 92.20993 29.79707 0.0000 at most 3* 0.627902 53.04664 15.49471 0.0000 at most 4* 0.514503 22.40006 3.841466 0.0000 source: author’s computation (e-view 8.1 output) in the model one and two above, the results of the co-integration test are reported here. the trace-statistic value is shown to be greater than the critical values at both 1% and 5% levels, thus indicating 4 co-integrating equation at both 1% and 5% levels respectively and model three indicating 5 co-integrating equation at both 1% and 5% level. the existences of co – integration suggest that there is a long – run relationship between the variables under consideration. having established co– integration among the variables, we moved on to the ecm which will help us to see the short –run dynamics of the model. ecm will enable us determine the speed of adjustment from short – run to long – run equilibrium. table-3.the result of error correction model (ecm) for model 1, 2, and 3 respectively dependent variable: lmis method: least squares date:11/24/15time: 08:16 sample (adjusted): 1980 2014 included observations 43 model 1 variable coefficient std. error t-statistic prob. c exr neer lrgdp ecm(-1) -5.051680 0.001690 0.007649 1.269119 -0.710254 0.467350 0.002788 0.001738 0.071707 0.135248 -10.80921 0.606264 4.399731 17.69867 -5.251484 0.0000 0.5491 0.0001 0.0000 0.0000 r-squared: 0.993183; f-statistic: 1056.344; prob(f-statistic): 0.000000; adjusted r-squared: 0.992243; durbinwatson stat: 1.752160 model 2 c exr neer lrgdp ecm(-1) 4.360039 0.005715 0.001310 -0.128757 -0.669314 0.210435 0.001257 0.000785 0.032267 0.137068 20.71914 4.546132 1.668508 -3.990352 -4.883067 0.0000 0.0001 0.1060 0.0004 0.0000 r-squared: 0.813089; f-statistic: 31.53861; prob(f-statistic): 0.000000; adjusted r-squared: 0.787309; durbinwatson stat: 1.716392 model 3 c int inf lbop lrgdp ecm(-1) -124.3552 -0.481253 -0.631065 0.909174 25.69297 -0.731774 16.37984 0.867068 0.192085 1.474333 1.911899 0.132207 -7.591966 -0.555035 -3.285336 0.616668 13.43846 -5.535077 0.0000 0.5833 0.0027 0.5424 0.0000 0.0000 r-squared: 0.941161; f-statistic: 89.57454; prob(f-statistic): 0.000000; adjusted r-squared: 0.930654; durbinwatson stat: 1.644626 source: author’s computation (using e-view 8.1 output). economy, 2016, 3(1): 40-50 48 4.3. interpretation of result analysis of regression coefficients: model 1:  exchange rate (exr) has a coefficient of 0.001690. this implies that a unit increase in exr will bring about an increase in the manufacturing index of ordinary shares listed on the nigerian stock exchange for current year by 0.169 units. and it is also significant at 5% level for the period under review.  nominal effective exchange rate indices (neer) is seen to have a coefficient of 0.007649. this shows that a unit change in neer will increase the manufacturing index of ordinary shares listed on the nigerian stock exchange for current year by 0.76 units. and it is also significant at 5% level for the period under review.  real gross domestic product (lrgdp) has a coefficient of 1.269119, which implies that a unit increase in real gross domestic product will result to an increase of the manufacturing index of ordinary shares listed on the nigerian stock exchange for current year by 126.9 units and significant at 5% level for the period under review.  the coefficient of the constant is -5.051680, implying that when all other independent variables are held constant; the value of the dependent variable (lmis) will be 505.168%. and it is also significant at 5% level for the period under review. model 2:  exchange rate (exr) has a coefficient of 0.005715. this implies that a unit increase in exr will bring about an increase in the manufacturing capacity utilization rate for current year by 0.57 units. and it is also significant at 5% level for the period under review.  nominal effective exchange rate indices (neer) is seen to have a coefficient of 0.001310. this shows that a unit increase in neer will about an increase the manufacturing capacity utilisation rate for current year by 0.131 units. and it is also significant at 5% level for the period under review.  real gross domestic product (lrgdp) has a coefficient of -0.128757, which implies that a unit increase in lrgdp will result to a decrease of manufacturing capacity utilisation rate for current year by 12.8757% units. and it is also significant at 5% level for the period under review.  the coefficient of the constant is 4.360039, implying that when all other independent variables are held constant; the value of the dependent variable (lmcu) will be 436.0%. and it is also significant at 5% level for the period under review. model 3:  interest rate (int) has a coefficient of -0.481253. this implies that a unit decrease in interest rate will bring about a decrease in the exchange rate by -48.1 units. and it is also insignificant at 5% level for the period under review.  inflation rate (inf) is seen to have a coefficient of -0.631065. this shows that a unit change in inflation rate will decrease the exchange rate by -63.1 units. and it is also significant at 5% level for the period under review.  balance of payment (lbop) has a coefficient of 0.909174, which implies that a unit increase in balance of payment will result to an increase in the exchange rate by 90.9 units. and it is also significant at 5% level for the period under review.  real gross domestic product (lrgdp) has a coefficient of 25.69297, which implies that a unit increase in real domestic product will result to an increase of the exchange rate by 2569.297 units. and it is also significant at 5% level for the period under review.  the coefficient of the constant is -124.3552, implying that when all other independent variables are held constant; the value of the dependent variable (exr) will be 12435.5%. and it is also significant at 5% level for the period under review. the statistical significance of the parameter estimate can be verified by standard error test; the adjusted r squared and durbin watson statistics.  for the models, when compared half of each coefficient with its standard error, it was found that the standard errors are less than half of the values of the coefficients of the variables. this shows that the estimated values are all statistically significant.  from the results of our regression r 2 for models are 0.993183, 0.813089 and 0.941161 respectively. this shows that almost 99.3%, 81.3% and 94.1% of the changes in the dependent variables were captured by the independent variables in both models, respectively.  the value of durbin watson is 1.7, 1.7 and 1.6 respectively in the models. by implication, there is evidence of positive serial correlation among the explanatory variables in the models.  the coefficient of error correction mechanism (ecm) is negative. this is in line with economic and econometrics expectations. the error correction mechanism corrects 71.0%, 66.9% and 73.1% respectively of the total error that occurs in the models. 5. conclusion and recommendations in this study, attempt was made to examine exchange rate sensitivity and its determinants with special focus on the nigerian manufacturing sector. in essence, the study sought to answer the questions: (1) how volatile has the exchange rate of nigeria been over the years? (2) to what extent is the nigerian manufacturing sector sensitive to exchange rate fluctuations?, and (3) what are the macroeconomic factors that are responsible for the exchange rate fluctuations in nigeria? the empirical analysis revealed that post-sap era has witnessed persistent increase and volatility in the exchanges rates. therefore, it can be said that the exchange rates of nigeria in post-sap has been characterized by economy, 2016, 3(1): 40-50 49 uncertainty. apart from objectives not realized, exchange rate policy and management under sap have left some issues unresolved and/or created some distortions in the economy. the econometric results show that the nigerian manufacturing sector is not sensitive to exchange rate fluctuations in the long-run. although a short-run relationship was found between the manufacturing index of ordinary shares listed on the nigerian stock exchange and the exchange rate, the same cannot be said of manufacturing capacity utilisation rate. furthermore, the major determinants of exchange rates of nigeria identified in the study are inflation rate and gross domestic product. but contrary to theoretical underpinning, interest rate and balance of payments were insignificant in the determination of exchange rate in the country. one clear conclusion which emerged from the above analysis is that parallel market exchange rate seems a more important driver of activities in the nigerian economy. proper management of exchange rate, to forestall costly distortions, constitutes an important pillar in enhancing the performance of the manufacturing sector in nigeria. it is important that monetary authorities ensure transparency in determining exchange rate process such that various economic distortions associated with exchange rate may be minimized. perhaps the most important contribution of this study to the literature is to suggest that exchange rate volatility is not a serious source of worry for nigerian manufacturers. the study also confirms the lingering controversy in the literature that the direction of effects of exchange rate volatility remains controversial as in the literature. based on the findings of this study, the following recommendations are hereby suggested: 1. the monetary authorities should maintain stability of the exchange rates through proper management so as to encourage local production. when there is no uncertainty in the foreign exchange market and undue risk, the confidence of foreign investors and the exporters would be boosted and this will consequently stimulate productivity in the manufacturing sector. 2. the monetary authorities must endeavour to force the interest rate down and continue to advocate for priority lending to the manufacturing firms. there have been massive closure of manufacturing firms in the country in recent times due to the high cost of lending; lack of long-term fund and the poor state of infrastructural facilities especially the epileptic power supply. 3. the government must continue to discourage importation in order to maintain exchange rate stability. import substitution strategy should be vigorously pursued by the government while zero tolerance is enforced on illegal importation. 4. lastly, foreign exchange should be made available to manufacturing firms so that they could source for raw materials. furthermore, the short supply of foreign exchange in the country has been found to be as a result of the country’s over-dependence on oil as the major source of foreign exchange earnings. to solve this problem, alternative sources of foreign exchange should be sought through a concrete export diversification programme. references alaba, o.b., 2003. exchange rate uncertainty and foreign direct investment in nigeria. in: wider conference on sharing global prosperity. helsinki, finland: wider. allayannis, g. and e. ofek, 1997. exchange rate exposure, hedging and the use of foreign currency derivatives. department of finance, new york university 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for heinrich boll foundation oil conference. available www.boell.de/downloads/oelkonferenz/the_curse_of_oil_pat_utomi.pdf [accessed accessed 02/05/09]. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. http://www.boell.de/downloads/oelkonferenz/the_curse_of_oil_pat_utomi.pdf 25 © 2019 by the authors; licensee asian online journal publishing group economy vol. 6, no. 1, 25-33, 2019 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2019.61.25.33 © 2019 by the authors; licensee asian online journal publishing group impact of remuneration on motivation: a study of acwell engineering (pvt) ltd sri lanka thiththalapitige natasha manieshifonseka lovely professional university, mittal school of business, phagwara, punjab, india. abstract remuneration appears to be a consequential factor which sways the performance and motivation of the employees of an organization. there are variegated kinds of remuneration policies in disparate organizations. this research anatomizes the remuneration methods and policy of acwell engineering (pvt) ltd and how it is influencing the motivation of the employees, and it empirically studies the association between these two variables. remuneration can be pigeonholed into two parts that is financial and financial remuneration. in addition chi square, spearman’s correlation, pearson’s rank correlation, econometric modeling and paired samples t test has been used for the empirical analyses. according to the empirical analysis it has been divulged that employee’s motivation of acwell engineering (pvt) ltd is dependent upon the remuneration methods. this research is hinge on both primary and secondary data. questionnaire which is powered by google forms is being used as a primary data collection method. however the other data are secondary data. according to the research it has been divulged that since employee’s motivation is swayed by remuneration methods. acwell engineering (pvt) ltd has to improvise its remuneration policy and procedures without removing the current remuneration methods. keywords: remuneration, motivation, attendance allowance, over time payment, net salary, basic pay. jel classification: m21. citation | thiththalapitige natasha manieshifonseka (2019). impact of remuneration on motivation: a study of acwell engineering (pvt) ltd sri lanka. economy, 6(1): 25-33. history: received: 26 april 2019 revised: 5 june 2019 accepted: 10 july 2019 published: 16 september 2019 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. competing interests: the author declares that there are no conflicts of interests regarding the publication of this paper. transparency: the author confirms that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ...................................................................................................................................................................................... 26 2. review of literature ........................................................................................................................................................................ 26 3. need of the study............................................................................................................................................................................. 27 4. problem formulation ...................................................................................................................................................................... 27 5. objectives of the research............................................................................................................................................................. 27 6. research methodology ................................................................................................................................................................... 28 7. data analysis .................................................................................................................................................................................... 28 8. conclusion and recommendations ............................................................................................................................................... 31 references .............................................................................................................................................................................................. 32 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2019.61.25.33&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ http://asianonlinejournals.com/index.php/economy/article/view/1000 https://orcid.org/0000-0002-1586-8932 http://asianonlinejournals.com/index.php/economy/article/view/1000 https://orcid.org/0000-0002-1586-8932 http://asianonlinejournals.com/index.php/economy/article/view/1000 https://orcid.org/0000-0002-1586-8932 economy, 2019, 6(1): 25-33 26 © 2019 by the authors; licensee asian online journal publishing group contribution of this paper to the literature the contribution of this paper is based on the results proven with the econometrics models, statistical tests and hypotheses. since most of the other studies were based on the food company’s this research is focused on a construction firm named acwell engineering (pvt) ltd sri lanka, in order to figure out how much the remuneration policies and methods are affecting the motivation and the performance of the employees in the construction field. despite of the secondary data primary data are also done a significant role in the study. through the questionnaire it has been divulged about how much the employees are satisfied with the current remuneration methods and what are they expecting further. in addition to that through the econometric models , paired sample ttests, chisquare and correlations revealed out the validity of the hypothesis formed and the importance of the remuneration methods in worker’s salary. moreover the results which were obtained from this research can be used for future remuneration policy making process in order to maintain a proper remuneration policy and procedures. 1. introduction remuneration means the overall compensation benefits conferred by an executive, but that might include not only the basic salary but also options like monthly/yearly/seasonal bonuses, expense accounts and other forms of compensation. in addition the amount of the remuneration depends upon the various factors. it includes, how much employees are valuable to the company, the job type – this include which type of job the employees is employed with such as full time job or a part time job, nature of the job – this defines which the nature of the employee’s job is. such as salaried, hourly paid, commission, basic pay, tipped positions. etc. remuneration seems to be the mainspring motivation of the employees. most of the people believe that the senior executives get more remuneration than the others. nowadays managing human resources seems to be the huge task due to the company profit and competitive environment. remuneration seems to be the tool which we use to increase production to gain attraction form the employees and strength. and it will increase the public image of the company and the employees turn over. there are various methods of remuneration. it is not only including the monetary rewards but also on-monetary rewards as well. as an example for some jobs they give just the salary and the bonus. but in some other jobs they provide non-monetary benefits along with the monetary benefits. some people get commissions to especially in sales jobs. there is another type of remuneration that is called as deferred compensation – which is known as the employees earnings sets aside and they can be redeemed at a later date. moreover some of the benefits can come under the health insurance also. like gym memberships, providing mobile devices, tabs, cars. in addition to that some company’s provide medical benefits to the disables person such as workers compensation. this is specially or the employees who have being disabled during the employment. moreover there are few more categories as well. remuneration policy includes both the financial and non-financial rewards. therefore it is being categorized into two parts as financial and non-financial. as an organization acwell engineering also follows the same procedure in order to attract the employees. financial rewards include both the direct and indirect rewards. and non-financial methods include both job and environment. financial rewards are usually known to be the monetary rewards, while the non-financial rewards refer to the rewards which include nonmonetary rewards. it is known to be the salary which comes to the employees hand without adding any extra benefits. in acwell engineering the basic pay may varies from one position to another. it may vary from the persons experience as well. there are employees who are for probation period, they are getting a different basic pay. concerning about the allowances it again includes overtime shifts. overtime is the payment which the laborers get when they work additional more than the usual working hours. overtime will not be paid for executive staff; it is paid for non-executive staff only. usually overtime payment depends upon how much time they work over time. moreover the overtime payment per hour may vary from one cite to another. currently they are managing 4 cites namely mulathiv, mulankavil, naiwala, pillekandura and they are expecting few more cites to undertake. further acwell engineering is providing food allowances and attendance allowances too. food allowances are usually given for the daily meals of the employees. in addition to that incentives include both the bonuses and the commissions. bonus means a sum of money which has been added to the employees’ wages as a reward for their work performance. but most of the times bonus is paid on festivals like sinhala and tamil new year and ramadan. but paying a bonus for employees is not a must; it may depend upon the profit of the company. moreover no one can ask for the bonus. so far acwell engineering is not that comfortable with the bonuses and commissions. indirect financial benefits – non financial benefits are the benefits which are known as the non-monetary benefits. it includes holidays and insurance. in acwell engineering the employees can get five days off and the employees have to work 25 days per month. since the construction firms include so many risky works they offer an insurance named workers compensation for the laborers. non-financial benefits include recognition, performance feedback, good hr policies and safe and secure environment. i have gathered information about these benefits by conducting a random structured interview, for that i have taken a sample of 5 new employees who worked in another company before joining to acwell and currently working at the head office. i have chosen five new employees because i want to know about the comparison of the remuneration policy of acwell with the other firms. 2. review of literature there are various researches done by various researchers in order to figure out the impact of remuneration on motivation. gerhart et al. (1995) have stated that response followed by a reward and it is more likely to recur in the future. moreover schlosser (2001) has defined that using a fast food organization example, if there are lack of secure employment and the good wages in fast food organization, the managers use more team spirit in order to motivate the employees. further, it has been defined that the employees work just in order to enhance their profits and that can be considered as the reason for organizations to facilitate them more remuneration policies and methods to the employees. and then again it will increase the productivity of the employees too. the same has been studies by jenny and neil (2004). economy, 2019, 6(1): 25-33 27 © 2019 by the authors; licensee asian online journal publishing group armstrong had described about the effectiveness of remuneration as a means of motivations. sometimes it motivated employees, contribution systems only takes place when the rewards of them are worthy. moreover each and every employee understands the financial rewards and benefits about the organization. they also know about the skills and competences of the system as well. milan (2002) has proven that the overall remuneration system will always enhance the motivation of the employees who are already working in the organization but also increase the performance of the employees who are not working enthusiastically in the organization. moreover jenny and neil (2004) has proved that remuneration is also very useful in terms of enhancing their self-confidence of the employees and also enhance the standard of living of the employees. moreover he added that whenever the increment in the salary they can enhanced their prestige and honor. in addition to that they have proven that remuneration can be used as a managerial tool in order to motivate the employees. durant et al. (2006) shows that the entire employee should get a general compensation for their honest efforts and abilities. but according to them there are different things which are to be clarified before providing the compensation. those are workers qualification, general economic climate, and specific business conditions, cost of living of the employees, and the qualifications and the productivity of employees and the firm. in addition perry, durant et al. (2006) has been proved that the managers have to adopt good remuneration policies in order to increase the performance of the employees. in addition to that aswathappa (2007) asserted that a behavior which is known to be a rewarding experience is likely to be repeated. further armstrong defined that the monetary motivation tool is mostly influencing the employees towards their work. moreover according to mathis and jackson (2008) says that the understanding of motivation is more important in the point of the organization. according to them better understanding of the nature of motivation is important for the firms. moreover mathis and jackson (2008) has defined that remuneration is kind of different from the motivation and it is mostly related with the hertzberg’s hygiene factors. moreover according to them there are various things which includes in the remuneration methods are salary, bonuses, fringe benefits, etc. van zyl et al. (2010) has proven that there is a positive relationship between the labor productivity and the employee’s remuneration and it is proven by shawn (2011) as well. at the same time van zyl et al. (2010) also proven that when the gaps between employee remuneration is regularly proliferating, then it would ultimately enhance the gap and convert the positive relationship between employees’ performance and remuneration into negatives. according to the various hr experts, creation of effective rewarding system motivates more employees and it is known to be the motivation to the managers as well. moreover the study of chapman and kelliher (2011) proven that employees motivation usually doesn’t come from amount you pay from the organization, but also the better understanding of the individuals. according to the shawn (2011) has stated that it is necessary to have appropriate rewards in order to satisfy and motivate the employees. zaman (2011) has stated that human resource basis for an organizations are operating in a dynamic and competitive business environment they need to develop strategies to acquire and retain the competent workforce. olaoye et al. (2013) had studied about the impact of reward on employee performance in selected manufacturing companies in ibadan, oya state, nigeria. hameed et al. (2014) have studied about impact of compensation on employee performance an empirical evidence of banking sector of pakistan ; according to the study it has been revealed that compensation has a positive impact on employee performance. in addition to that edirisooriya (2014) studied about impact of extrinsic rewards and intrinsic rewards on employee performance and he had proved that there is a positive relationship between extrinsic and intrinsic rewards and employee performance through empirical analysis moreover babagana and dungus (2015) have done their study about effects of staff remuneration on the performance of ramat polytechnic maiduguri students for 19952011 in borno state, and they have proved that there is a strong positive relationship between staff remuneration and employee performance. 3. need of the study the topic of this study is, the impact of remuneration on motivation: a study of acwell engineering (pvt) ltd .this measures out the relationship between employee motivation and various remuneration methods used by the acwell engineering (pvt) ltd. this research will help to figure out up to which extent the organizations should implement remuneration methods and various recommendations in order to improve the remuneration policy of acwell engineering (pvt) ltd. nevertheless there is are research gaps between 1995 to 2001, 2011 to 2012, 2007 to 2010, 2002 to 2004, 2005 to 2006 and after 2015 no researches are found on this topic. 4. problem formulation remuneration seems to be a huge role of an organization. it overall affects both employee performance and employee motivation. each and every organization use to have a separate remuneration policies in order to attract the employee attention. acwell engineering (pvt) ltd also has a remuneration policy which is affecting the motivation and enthusiasm of the employees. this study conducts the research about how remuneration policy of acwell engineering (pvt) ltd affects the employees’ motivation. are the employees satisfied with the current remuneration policy? and what are their suggestions towards it? 5. objectives of the research • to study how the remuneration affects employee motivation in the acwell engineering (pvt) ltd. • to determine the correlation empirically between remuneration and employee motivation based on different motivational theories. • to understand the remuneration policies and procedures used by acwell engineering (pvt) ltd to motivate the employees. • suggestions regarding new remuneration strategies. economy, 2019, 6(1): 25-33 28 © 2019 by the authors; licensee asian online journal publishing group 6. research methodology each and every research contains a methodology. it defines the way the researcher has adopted to carry out the researches. the research design used over here is a quantitative research design. there are variables like net salary, ot payment, attendance allowance, motivation methods and remuneration. net salary, ot payment, attendance allowance are quantitative variables, while the motivation methods and remuneration are taken as qualitative variables and it is being measured by both 3 point and 5 point likert scale using the questionnaire. the research methodology adopted over here is mean, median, mode, variance, chi square and spearman’s rank correlation method, pearson’s correlation method, paired sample t test and econometrics modeling. before applying the tests assumptions for that particular test should be fulfilled. through calculating the skewness , kurtosis and the variance by dividing it with the standard error leads to find out whether the data is approximately normally distributed or not. in the paired sample test it figures out if there is a significant effectiveness before and after implementations. moreover in this research it analyses the correlation between the remuneration and employee motivation. the correlation is analyzed through the spss, ms excel and it is calculated by scaling the responses from the questionnaire provided. spearman’s rank correlation is used when the data is not normally distributed, and when the data is normally distributed pearson correlation is used. the sample size of the questionnaire is 50. the questionnaire is powered by google forms. simple random sampling is used as the sampling technique. 20 respondents from the head office, 15 from sub-contractors, 15 from administrative staff of 4 cites. some of the data are being graphically analyzed using different types of graphs like pie charts and bar graphs. in some cases various types of remunerations and its effectiveness is calculated by using the econometrics models, paired sample t test and correlation analysis. through the correlation it figures out that whether the variables are having a positive or negative impact. there are various types of data collection. those are primary data and secondary data. primary data is the data which a researcher gained by themselves. secondary data is the data which is not collected by them. in this research both the types of data are being used. as a primary method questionnaire is used. as secondary data books, internet, newspapers, previous researchers and reports are being used as well. 7. data analysis 7.1. data analysis of the questionnaire (primary data) from 50 responses 56% of them were from males and 44% were from females. one reason for that is mainly construction industry is mostly male dominated in the south asian region. but in acwell engineering (pvt) ltd it seems to be quiet similar because there is just a 12% gap between them. highest percentage – 62% says that remuneration means making the employees/ labors to work with morale and enthusiasm in order to achieve the organizational objectives. the second highest percentage is 32%. it means that 32 percent says that remuneration means job satisfaction. rest 6% is divided with both other two responses. 3 % says that remuneration means making the employees/ labors to work very hard, and the other 3% says that remuneration means coming to the job very early and going home very late. 92% of responses say that motivation affects the employees/ laborers performance and the rest 8% says that it doesn’t. according to the responses the highest percentage represents as 30%. it means employee recognition. most of the people believe that employee recognition is the best way of motivating the employees. the second highest percentage is 24%, it means making a quality environment. 24% of people say that making a quality environment is the best way of motivation. the others represent 18%, 16%. and the least percentage represents 10%, 10 percent of the people believe that through making flexible working hours is the best way of motivating employees. in addition to that 2 percent says that motivation includes all the ways mentioned over here. 63.3 percent believe that lack of basic pay is the reason for lack of motivation. 26.5% say that poor working environment is the next reason. 10.2 percent says that lack of leadership is the reason for lack of motivation. there is one thing that should be considered that nobody has responded for sexual harassments. most of south asian countries do have sexual harassments in the offices, but if it is hundred present true then it is a good image for acwell engineering (pvt) ltd, but most of the times women do not openly say these kind of stuff. according to the responses 38.8% says that remuneration or rewards means providing monetary rewards to employees. 30.6% believe that remuneration means motivating the employees. 18.4 %says that remuneration means anything that is intended to attract workers attention to work more. the rest 12.2 percent says that remuneration means appreciation of the performance. out of 50 respondents 86 percent of them are aware about the remuneration policy in the organization. rest 14 percent have no idea about that. “pay increases, increase the motivation and the performance of the employees”, out of 50 respondents 84 percent says that there is are some guidelines which are followed in acwell engineering (pvt) ltd when compensating the employees. but 16 percent said no. “poor remuneration of employees reduce their work performance”. for the above statement 38.8% are strongly agreed, 14.3% are agreed, 12, 2% are neutral, 32.7 percent are disagreeing, 2% are strongly disagreeing. “pay increase, increase the motivation and the performance of the employees”. according to the above statement 28.6% strongly agrees it. 18.4% agrees, 14.3% are neutral, 36.7% are disagreeing, 2% are strongly disagreeing for the statement. out of 50 respondents 46 percent are satisfied with the remuneration policy of acwell engineering (pvt) ltd, but 54 percent are not satisfied with it. more than 20 respondents are saying that salary is important. more than 10 respondents are saying that salary is least important. and nearly 14 respondents have said that salary is the most important. nearly 7 respondents believed that yearly bonus is the least important, more than 20 respondents believe that yearly bonus is important. but nearly 20 respondents say that yearly bonus is the most important. 10 respondents believe that economy, 2019, 6(1): 25-33 29 © 2019 by the authors; licensee asian online journal publishing group profit sharing is the least important. more than 25 respondents say that profit sharing is important. more than 10 respondents say that profit sharing is the most important. more than 5 respondents say that leave with pay is the least important, while more than 20 respondents believe that leave with pay is important but nearly 20 respondents say that leave with pay is the most important. according to the data out of 50 respondents 20 said that appraisal is important, 28 said that quality of work life is important and 17 said that prestige is important. moreover 20 out of 50 respondents said that appraisal is the most important, while other 14 believe in that quality of work is the most important. moreover 23 other respondents said that prestige is the most important. 9 respondents said that appraisal is the least important while 8 respondents say that quality of work is the least important. 8 people said that quality of work life is the least important. and 10 said that prestige is the least important. 7.2. data analysis of the secondary data collected since all the assumptions for linear regression analysis are met then regression analysis can be formed as followed: table-1. model summary 1. model r r square adjusted r square std. error of the estimate durbin-watson 1 .964a .930 .924 650.678 2.553 according to the table 1 it shows that the value of r square is 0.930, which measure the proportion of the variance in the net salary that is predictable from the ot hours. table-2. anovab. model sum of squares degree of freedom mean square f sig. 1. regression residual total 7.260e7 1 7.260e7 171.476 .000a 5503965.517 13 423381.963 7.810e7 14 according to the table 2 it shows that the p value of the test is 0.00 but alpha is 0.05. since the p-value is less than alpha the null hypothesis will be rejected. therefore i can say that there is a statistical linear relationship between net salary and ot hours. table-3. model summery 2 model unstandardized coefficients standardized coefficients t sig. collinearity statistics b std. error beta tolerance vif 1. (constant) ot 4049.569 4.170 624.805 6.481 .000 1.000 .318 .964 13.095 .000 1.000 since the vif value is less than 10 multicolinearity is not detected. = ɑ + ß + ui = 4049.5 + 625.43 + ui according to the above results taken from the table 3 it shows that the net salary is dependent upon the ot hours. depicts the (independent variable) as ot, while the (dependent variable) depicts the net salary. the value of r square is 0.92, which means 92% and other 8%, depicts all the other unexplained factors which influence the changes of the net salary of employees. the explained 92% implies that the changes of the net salary are mostly because of the ot hours and payments. the autonomous net salary (ɑ) means the salary at which the ot hours are zero. it is 4049.5. represents the regression coefficient, which implies up to which extent the net salary will change with respect to the ot hours. since there is a positive correlation between the two variables it implies that when the ot hours are increasing by 1 hour, the net salary will increase by 625.43 sri lankan rupees. as the same goes with the other side, when the ot hours are decreasing by 1 hour then it will decrease the net salary by 625.43 sri lankan rupees. according to the econometrics model literally it depicts that when the ot hours are changing by one hour it will change the net salary by 625.43 sri lankan rupees. (the stochastic term) represents the all the other factors which affects the changes of the net salary of employees. since ot payment is done most of the times i have taken it to check whether it is doing a significant impact on worker salary or not. therefore in order to check it paired sample t test has been used. : there is no statistically significance difference between without ot and after ot payment of the workers. 𝐻1: there is a statistically significance difference between without ot and after ot payment for the workers. economy, 2019, 6(1): 25-33 30 © 2019 by the authors; licensee asian online journal publishing group table-4. paired samples test. paired samples t test paired differences t df sig. (2tailed) mean std. deviation std. error mean 95% confidence interval of the difference lower upper pair salary without 1 ot salary with ot 1.890 e3 546.155 141.017 2192.45 1 1587.54 9 13.40 3 14 .000 according to the results from table 4, the pvalue is 0.00 and the alpha is 0.05. therefore null hypothesis will be rejected. which means that there is a statistically significance difference between with and without. ot payment is in worker’s salary. therefore i can conclude that as a remuneration method ot is playing a significant role in acwell engineering (pvt) ltd. workers net salary and the role of attendance allowance. according to acwell engineering (pvt) ltd attendance allowances play a huge role in the worker’s salary. since attendance allowance contains quantitative data it is taken into the research in order to make sure whether the financial remuneration methods are plying a significant role in the worker’s salary or not. table-5. paired samples test. paired samples t test paired differences t df sig. (2tailed) mean std. deviation std. error mean 95% confidence interval of the difference lower upper pair net salary with allowance – net salary without allowance 950.0 00 263.523 83.333 761.487 1138.51 3 11.40 0 9 .000 𝐻0: there is no statistically significance difference between without attendance allowance and after attendance allowance of the workers net salary. 𝐻1: there is a statistically significance difference between without attendance allowance and after attendance allowance for the workers net salary. since all the assumptions are met for the paired sample t test, according to the results shown in the table 5 it shows that the p value is 0.00 and the value of alpha is 0.05. so the p value is less than alpha. therefore the null hypothesis will be rejected. it means that there is a statistically significance difference between with attendance allowance and without attendance allowance. therefore i can conclude that attendance allowance make a significance difference in the workers net salary. table-6. correlations. correlations net salary with and without allowance net salary with allowance pearson correlation sig. (2-tailed) n 1 .703* .023 10 10 allowance pearson correlation sig. (2-tailed) .703* 1 .023 n 10 10 *. correlation is significant at the 0.05 level (2-tailed). 𝐻0: there is no statistically significance association between attendance allowance and the workers net salary. 𝐻1: there is a statistically significance association between attendance allowance and the workers net salary. according to the correlation analysis mentioned in the table 6 p value is 0.023. and the value of alpha is 0.05. so the p value is less than alpha then the null hypothesis will be rejected. therefore it signifies that there is statistically significance association between attendance allowances and the worker’s salary. the correlation between these two variables is very high. it is 0.703. it implies that whenever the attendance allowances are increasing the workers net salary is also increasing and whenever the attendance allowances are creasing the workers net salary will also decrease. therefore it reveals that attendance allowance is having a positive impact on workers salary. 7.3. empirical analysis of the responses of the questionnaire before checking the chi square test and spearman’s rank correlation the assumptions had to be checked. the values got by dividing skewness and kurtosis are divided by the standard error the values do not lie under the range of +1.96. , the data is not approximately normally distributed. economy, 2019, 6(1): 25-33 31 © 2019 by the authors; licensee asian online journal publishing group table-7. chi-square tests. test statistics remuneration methods motivation chi-square 12.640a 35.280b df 5 1 asymp. sig. .027 .000 𝐻0: motivation is independent of remuneration methods. 𝐻1: motivation is not independent of remuneration methods. in the above table 7 had given the p value as 0.00 and alpha is 0.05. so the p value is less than alpha. therefore the null hypothesis will be rejected, which, means that motivation of the employees is dependent upon the remuneration methods in acwell engineering (pvt) ltd. table-8. nonparametric correlations spearman's rho remuneration methods correlation coefficient remuneration motivation sig. (2-tailed) n 1.000 .212 . .140 50 50 motivation correlation coefficient sig. (2-tailed) n .212 1.000 .140 . 50 50 spearman’s rank order correlation which mentioned in table 8 is used in order to figure out the association between the remuneration methods and the motivation of the employees. 𝐻0: there is no negative association between the remuneration methods and motivation of the employees. 𝐻1: there is a negative association between the remuneration methods and motivation of the employees. in the table 8, the p value of the test is 0.140, but alpha is 0.05. so the p value is greater than alpha. therefore the null hypothesis will be accepted, which means that there is a positive association between the remuneration methods and employee motivation in acwell engineering (pvt) ltd. so it has been figured out that there is a positive impact on remuneration on motivation of the employees in acwell engineering (pvt) ltd. 8. conclusion and recommendations according to the questionnaire almost all the respondents have submitted their responses for all the questions except one. concerning about the staff of acwell engineering (pvt) ltd most of them have suggested to increase their basic pay. some of the employees has suggested to increase the quality of the environment in the office premises. moreover some employees has suggested to have a flexible working hours. according to the interview they have suggested that they should have proper working hours like 8 to straight 5. not more than that. concerning about the questionnaire still there are few more people who are not aware about the remuneration policy of acwell engineering further according to the data analysis it has been revealed that irrespective of other remuneration methods ot payment is playing a significant role in the workers payment. furthermore more than half a percent of people are not satisfied with the current remuneration policy of acwell engineering moreover most of the employees are disagree with the statement “pay increases, increases the motivation and the performance of the employees.” but at the same time most of the people believed that motivation affects the performance of the employees. according to the data it shows that 86 percent of people are aware about the remuneration policy of acwell engineering, but only 84 percent were known about the guidelines. it is contra dictionary. most of the staff of acwell engineering said that they need more employee recognition at the work place. concerning about the responses it has been revealed that nobody hasn’t face any sexual harassments throughout their work hours. remuneration can be monetary or non-monetary, methods, but in acwell engineering most of the employees prefer monetary benefits than the non-monetary ones. and most of the employees believed that remuneration is affecting the performance of the employees directly. furthermore most of the employees prefer leave with pay and yearly bonus as their financial remuneration. among the employees they prefer prestige as their non-financial remuneration method. according to the empirical data analysis from the responses it has been shown that remuneration methods and motivation of the employees are dependent among each other moreover the correlation analysis shows that there is a low positive correlation between the remuneration methods and the employee motivation. which means that when then remuneration methods are increasing enough it will increase the motivation of the employees, while when the remuneration methods are decreeing it will decrease the employee motivation too. overall it defines that there is a positive impact of remuneration on motivation in acwell engineering (pvt) ltd. acwell engineering (pvt) ltd seems to be a leader in the construction industry in sri lanka. in this research it analyses about how the various remuneration methods in the remuneration policy of acwell engineering are affecting the motivation of the employees and the workers. remuneration methods can be either financial or non-financial. concerning about the responses taken out from the questionnaire, it clearly shows that most of the people are more interested in monetary benefits than non-monetary benefits. but at the same time some people are concerned with non-monetary benefits like employee recognition. after doing this study recently i have got to know that employees are highly affected through the remuneration methods. they are looking for it. according to the questionnaire the employees and the staff of acwell engineering strongly believe that motivation is affecting the employee performance and poor remuneration methods will reduce the employee and workers motivation. moreover according to the econometrics analysis it is proven that ot hours and ot economy, 2019, 6(1): 25-33 32 © 2019 by the authors; licensee asian online journal publishing group payments is playing a significance role in the remuneration methods which the acwell engineering (pvt) ltd has adopted. moreover it has proved using paired sample t test also. after concerning about the responses of the questionnaire it has been revealed that the motivation of the employees/ workers in acwell engineering is dependent upon the remuneration methods. but the main problem found out in the overall study is most of the people are not satisfied with the current remuneration policy of acwell engineering. the suggestions for this are mentioned in the recommendation chapter. according to the correlation analysis it shows a low positive correlation between the remuneration methods and the employee motivation. the degree of association of these variables are low, but it is having a positive impact on employee motivation ;whenever the remuneration methods are increasing the motivation will be increased ,and respectively when the remuneration methods are decreasing then the motivation will also be decreased. in fact there might be some other factors which will increase the motivation. or else some people might not be aware about the remuneration methods or remuneration policy, or else some of the answers which the people were looking for night not be included in the choices in the questionnaire. in the questionnaire 30 present of the people believe that employee recognition is the best remuneration method which will enhance the motivation of the employees. so it is known to be a non-financial remuneration method. but in the same questionnaire they are proving some contradicting results. in another question they wanted an increase in basic pay as well. so if we combine these two results it clearly shows that they are concerning about both the financial and non-financial remuneration methods. in addition to that nearly half of the respondents believe that prestige of the employees/ workers are the most important method of non-financial remuneration. irrespective of that some other employees believe that leave with pay is the most important financial remuneration method out of others. but from the organizational point of view it is not that fair enough to pay salary on leave. nevertheless from the employees’ side it is a good benefit. it would be much fair enough if the employees are in a financial hardship. but for that the organization has to first identify the reasons and find out the reasons thoroughly. moreover since attendance allowance seems to be a quantitative / monetary remuneration method i have analyzed the effectiveness of attendance allowance on the employee’s salary. after applying the paired sample t test it clearly proved that there is a statistically significance difference between the salary of the employees with and without the attendance allowance. in addition to that since the data is approximately normally distributed the pearson’s correlation method is used. through the test it has found that there is a high correlation between attendance allowances and the salary of the employee. this means that when the attendance allowance is increasing then the salary of the workers will also be increased, and when the attendance allowance is decreasing then the salary of the worker will also be decreased. since more than half of the employees are not satisfied with the current remuneration policy of acwell engineering (pvt) ltd. it is better to concern about non-financial remuneration methods in order to improve the motivation of the employees in acwell engineering. after concerning about all the information and the data i would like to suggest some ideas in order to increase the motivation of the employees through various remuneration methods in acwell engineering (pvt) ltd. acwell engineering (pvt) ltd has to concern more about the remuneration policy since the employees are not satisfied with it. moreover the degree of association between remuneration methods and employee motivation is quiet low. that might be a reason for dissatisfaction of the remuneration policy. but according to the responses more of the acwell engineering (pvt) ltd employees are expecting on-monetary remuneration methods. so from the company point of view it is easier since the non-monetary methods don’t cost at all. more of the employees are concerned with flexible working hours like 8 to 5. in addition to that some of the employees need more recognition inside the organization. further some of them are requesting for a quality environment. in addition to that some of the employees are requesting a feedback procedure from the employer, so that the employees can perform more in the organization. but they prefer a direct feedback procedure. according to my opinion i would like to suggest that the company should improvise some non-monetary remuneration methods in the quantitative analysis it has been proven that attendance allowance and ot payment is doing a significance role in the worker’s salary. therefore i would recommend that these allowances should not be cut in the future also. and they should implement new beneficial schemes which are having a significant impact on the worker’s salary. concerning about the monetary benefits most of the employees are expecting an increase in the basic pay and more pensionable schemes, respecting authorities of acwell engineering (pvt) ltd should concern about this as well. in addition none of the employees in acwell engineering (pvt) ltd has been affected with sexual harassments. this is a very good positive aspect and a good image for the organization too. moreover since some of the employees are not aware about the remuneration policy. moreover some of the employees are answered as na in the suggestion field, so then again it might be a reason for non-awareness about the remuneration policy. respective authorities should make aware the employees about the remuneration policy after employing them in the organization and they should implement new schemes which will enhance welfare of the employees. moreover it is better if they could enhance the working environment, flexible working hours, employee’s recognition and basic pay because motivation of the employees will directly affecting the productivity of the organization. references aswathappa, k., 2007. human resources and personal management. 4th edn., new delhi: tata – mcgraw hill. babagana, a. and b. dungus, 2015. staff remuneration and the performance of ramat polytechnic maiduguri students from 1995 to 2011. european journal of research and reflection in management sciences, 3(5): 1-10. chapman, j. and c. kelliher, 2011. the influences on reward mix: reward consultants' oerspectives. british journal of industrial relations, 33(2): 121-139. durant, r.f., r. kramer, j.l. perry, d. mesch and l. paarlberg, 2006. motivating employees in a new governance era: the performance paradigm revisited. public administration review, 66(4): 505-514.available at: https://doi.org/10.1111/j.15406210.2006.00611.x. edirisooriya, w.a., 2014. impact of rewards on employee performance: with special reference to electri co. reshaping management and economic thinking through integrating eco-friendly and ethical practices proceedings of the 3rd international conference on management and economics. faculty of management and finance, university of ruhuna, sri lanka. gerhart, b., h.b. minkoff and r.n. olsen, 1995. employee compensation: theory, practice, and evidence. ithaca, ny : cornell university, school of industrial and labour relations, centre for advanced human resources studies. economy, 2019, 6(1): 25-33 33 © 2019 by the authors; licensee asian online journal publishing group hameed, a., m.k. ramzan, g. ali and m. arslan, 2014. impact of compensation on employee performance (empirical evidence from banking sector of pakistan). international journal of business and social science, 2(2): 27-32. jenny, w. and r. neil, 2004. ocr business studies as: new edition. england: oxford university press. pp: 172-183. mathis, r.l. and j.h. jackson, 2008. human resource management. 12th edn., south-western: thomson. pp: 592. milan, k., 2002. management consulting. a guide to the profession. 4th edn., new delhi: bookwell publishers. pp: 196-198. olaoye, b.o., m.a. adeyemi and a.s. sajuyigbe, 2013. impact of job satisfaction dimensions on job performance in a small and medium enterprise in badan, south western, nigeria. international journal of arts and commerce, 2(2): 31-45. schlosser, e., 2001. fast food nation: the dark side of the all american meal. united states: agribusiness, houghton mifflin harcourt publishers. pp: 571-574. shawn, m.c., 2011. turnover prediction using attitudes towards benefits, pay, and pay satisfaction. baltic journal of management, 32: 196200. van zyl, l.e., e. deacon and s. rothmann, 2010. towards happiness: experiences of work-role fit, meaningfulness and work engagement of industrial/organisational psychologists in south africa. sa journal of industrial psychology, 36(1): 1-10.available at: https://doi.org/10.4102/sajip.v36i1.890. zaman, k., 2011. impact of tangible and intangible rewards on organizational commitment: evidence from the textile sector in pakistan. american journal of industrial and business and management, 5: 327334. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. 10 © 2023 by the authors; licensee asian online journal publishing group economy vol. 10, no. 1, 10-18, 2023 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/economy.v10i1.4703 © 2023 by the authors; licensee asian online journal publishing group foreign exchange fluctuations on the performance of agricultural export in nigeria udoh, francis sylvanus1 inim, victor edet2 ityav, doofan lynda3 ( corresponding author) 1department of business administration, nile university of nigeria, abuja, nigeria. email: slyosly79@gmail.com 2department of accounting, nile university of nigeria, abuja, nigeria. email: victor.inim@nileuniversity.edu.ng 3department of business administration, nasarawa state university, keffi, nigeria. email: lityav@ymail.com abstract the study examines the effect of foreign exchange fluctuation on the performance of agricultural export in nigeria. despite the emphasis place on foreign exchange, the agricultural export in nigeria is still not performing well. time frame was from 1986 to 2021 and the adopted research design was ex post facto, in which the tool of analysis employed was the ardl, ecm method, cointegration and unit root test as finding revealed that foreign exchange fluctuation on the performance of agricultural volume and value added has negative and insignificant effect in nigeria. while foreign exchange fluctuation on the performance of agricultural capacity utilization has a positive and significant impact. giving this finding, recommendations are that nigerian government should moderate and regulate the rate of exchange activities in order to make certain that it brings about better performance in the agricultural sector. also, she should strongly attempt to make better the stand of the economy internationally with other nations of the world in order to expand the market for nigerian agricultural exports. finally, the government should change the focus of its policy in direction to the external agricultural sector and making sure that it adds in the most favourably way to output performance. as an intentional policy, the government should give support to rural area agriculture by which investors in distinct communities and commodities should be encourage to set up agricultural industries, which will be solely on local raw materials comprising equipment and machines. keywords: capacity utilisation and value added, foreign exchange rate, output. jel classification: b27; q13; q14; q17. citation | sylvanus, u. f., edet, i. v., & lynda, i. d. (2023). foreign exchange fluctuations on the performance of agricultural export in nigeria. economy, 10(1), 10–18. 10.20448/economy.v10i1.4703 history: received: 8 april 2022 revised: 15 february 2023 accepted: 22 march 2023 published: 30 may 2023 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. authors’ contributions: all authors contributed equally to the conception and design of the study. competing interests: the authors declare that they have no conflict of interest. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study followed all ethical practices during writing. contents 1. introduction ...................................................................................................................................................................................... 11 2. theoretical framework .................................................................................................................................................................. 12 3. methodology ..................................................................................................................................................................................... 13 4. data analysis and results .............................................................................................................................................................. 14 5. discussion of findings .................................................................................................................................................................... 17 6. conclusion and recommendation ................................................................................................................................................ 17 references .............................................................................................................................................................................................. 17 mailto:slyosly79@gmail.com mailto:victor.inim@nileuniversity.edu.ng mailto:lityav@ymail.com https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v10i1.4703 https://orcid.org/0000-0002-2141-8751 https://orcid.org/0000-0001-7895-2114 https://orcid.org/0000-0002-7489-9210 economy, 2023, 10(1): 10-18 11 © 2023 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study concentrated on the overall effect of foreign exchange fluctuation and agricultural export. however, none of these studies used output, capacity utilization and value added to measure agricultural export. also, the study window is from 1986 to 2021. based on these identifications, the study contributes to literature. 1. introduction the rapidly increasing global economy in today’s world with a constantly changing technology and the laws of trade internationally, has affected the way exchange rate plays its role in valuing farm equipment and production. for many years, the role of exchange rates as an integral part of agricultural economics was overlooked (kristinek & anderson, 2002). it was schuh (1974) in his work titled the role of exchange rates in agricultural trade that brought this topic to bare. his evidence in support of the idea is that the drop in agricultural exports due to their relative expense in other nations was caused by the overvalued dollar. his view was that while many variables affect agriculture, the exchange rate plays a role in all aspects of agriculture (kristinek & anderson, 2002). nigeria got her independence in 1960 and during this period, agriculture played a dominant role in her economy, but it was soon taken for granted because the government gave it a very little support. this little support provided by government for agricultural development was concentrated on export crops like cocoa, groundnut, palm produce, rubber and cotton as self-sufficiency in food production seemed not to pose any problem worthy of public attention (fmoaward, 2018). the agriculture in nigeria started witnessing some problems and these issues were clearly evident from rising food prices, increasing food supply short-fall and declining foreign exchange earnings from agricultural exports. however, not much rational concern was shown because the problems were thought to be the temporary effects of a series of crises which eventually culminated in the civil war (1967 – 70) (fmoaward, 2018). after 1960, from 1970 to 1979, the agricultural situation worsened in nigeria as a result of rising food import bills, widening food supply-demand gaps and sharp decrease in government revenue from agriculture, in foreign exchange earnings from agricultural exports. the situation was further compounded by the residual effects of the civil war, severe droughts in some parts of the country, government fiscal and monetary policies and above all, an “oil boom” which created serious distortions in the economy and accelerated the rate of migration of labour from agriculture (fmoaward, 2018). as stated by abolagba, onyekwere, agbonkpolor, and umar (2010) between 1970 and 1974, agricultural exports as a percentage of total exports fell from about 43 percent to slightly over 7 percent. export of agricultural produce in the mid 1970s to the mid 1980s in nigeria witnessed a sharp decrease by 17 percent. abolagba et al. (2010) emphasized the fact that nigeria has lost its role as one of the world’s leading exporters of agricultural commodities. according to faostat (2017) in 1961, nigeria exported 197,000 tonnes of cocoa beans. in 1970, it went up to 304,000 tonnes and gradually went down to 153,000 tonnes in 1980. however, this number rose up to a staggering 485,000 tonnes in 2006, and unfortunately decreased to 248,000 tonnes in 2014. natural rubber was exported to the tune of 58,000 tonnes in 1961 and subsequently increased to 147,000 tones in 1990 and in 2014 151,000 tonnes faostat (2017). one of the important factor of world trade is exchange rate, which has received much notice in the circumstances of world imbalances. the subject of exchange rate fluctuation came to be a topical issue in nigeria because it is the goal of every economy to have a stable rate of exchange with its trading partners (slowe, 2013). in nigeria, this aim was not achieved not minding the way the government went on underestimating the naira and okayed the structural adjustment programme (sap) in 1986. not achieving this success, placed the nigerian agricultural export under participating in a constant exchange rate fluctuation. the major goal of sap was the reorganizing of the production base of the economy with a positive inclination for the production of agricultural export. the foreign exchange reforms that facilitated a cumulative depreciation of the effective exchange rate were expected to increase the domestic prices of agricultural exports and hence boost domestic production (slowe, 2013). a serious impediment on economy development is fluctuation, which makes investment riskier and more problematic. potential investors will invest in a foreign location only if the expected returns are high enough to cover for the currency risk (gerardo & felipe, 2002). on this note, if foreign exchange is properly curtailed or kept low to agriculture, it will help agriculture export in nigeria perform better and contribute to her gross domestic product gdp of the economy. despite the improvement of agricultural products in nigeria, the performance of agricultural export is below expectation as a result of high exchange rate. the major problem however, is that the floating exchange rate from its inception, frequency and instability of the exchange rate movements and fluctuation has raise concerns over the effect of such movements on the performance of trade flows of agricultural export. it is on this basis that the work examines foreign exchange fluctuation on the performance of agricultural export in nigeria. previous studies such as adekunle, tiamiyu, odugbemi, and ndukwe (2019) who investigated from 1981 to 2016 how the dynamics of real exchange rate affect performance of agriculture in nigeria using the nonlinear autoregressive distributed lag (nardl) method found a negative relationship between both variables. also, akinbode and ojo (2018) who determined the effect of exchange rate volatility on nigeria’s agricultural export performance using annual data from 1980-2015, employed generalized autoregressive conditional heteroscedasticity (garch-1,1) model which was used to generate the exchange rate volatility series and subsequently incorporated into the autoregressive distributed lag (ardl) model for determining factors affecting agricultural exports (cocoa and rubber), found an insignificant effect between both variables. however, none of these studies used output, capacity utilisation and value added to measure agricultural export. also, the study window is from 1986 to 2021. based on these identifications, the study fills a research gap. the main purpose of this work was to examine the effect of foreign exchange fluctuation on the performance of agricultural export in nigeria. other related purposes are: to evaluate the effect of foreign exchange fluctuation on the performance of agricultural export volume in nigeria: to examine the effect of foreign exchange fluctuation on economy, 2023, 10(1): 10-18 12 © 2023 by the authors; licensee asian online journal publishing group the performance of agricultural export capacity utilization in nigeria and to determine the effect of foreign exchange fluctuation on the performance of agricultural export value added in nigeria. the hypotheses of the study are stated in null forms and tested from the purposes of the work: ho1: foreign exchange fluctuation has no significant effect on the performance of agricultural export volume in nigeria ho1: foreign exchange fluctuation has no significant effect on the performance of agricultural export capacity utilization in nigeria ho1: foreign exchange fluctuation has no significant effect on the performance of agricultural export value added in nigeria 1.1. concept of foreign exchange when the currency of a country is giving out for the currency of another country at any rate is known as exchange rate. the external value of each currency is reflected in the country’s economic conditions in general and the purchasing power of the currency relative to that of other currencies in particular (ani, ugwunta, & okanya, 2013). in other word, for international traders with a given price, the major source of uncertainty is the exchange rate at which they can translate their sales revenue in foreign currency into local currency (adubi & okunmaadewa, 2009). 1.2. concept of agricultural export export of agricultural products are better motivation made available by various governments on products intended for other country market to support increased in global or other economy trading. in accordance, export agriculture refers to money granted by the state which are subject to chance on export performance. they may take the form of, for example, cash payments, disposal of government stocks at below-market prices, subsidies financed by producers or processors as a result of government actions such as assessments, marketing subsidies, transportation and freight subsidies, and subsidies for commodities contingent on their incorporation in exported products (ftis, 2019). 1.3. concept of performance taticchi, balachandran, botarelli, and cagnazzo (2008) stated that firm performance is the value, which is produced as a result of a certain activity. each firm is established in order to fulfil specific purposes. when all performance factors are effectively utilised, turn out worth gets larger or astronomical than the expected worth, thus making the firms to survive or live longer. competitive markets and the dynamics very likely become better of their performance so as to grow their profits and market value of the firm. the production process since the mid1980s have been controlled by the firm. in this aspect, firms became aware of that keeping up with continuously changing conditions is possible only by understanding firm performance, and they aimed for healthy growth (taticchi et al., 2008). 1.4. empirical review shuabiu, usman, and çavuşoğlu (2021) examines nexus among competitively valued exchange rates, price level, and growth performance in the turkish economy; new insight from the global value chains (gvcs) is investigated using annual data from 1980 to 2020 within the framework of the ardl bound test, bayer and hanck cointegration (bhc) test, and ecm. it was revealed that the relationship among the variables used induced economic performance and external trade competitiveness both in the short and long run. due to a lack of data, adekunle et al. (2019) looked into the potential asymmetric impact of real exchange rate changes on agricultural performance in nigeria from 1981 to 2016. they decided to use the nonlinear autoregressive distributed lag (nardl) approach. the ardl unit root test was used to establish the use of both stationary and nonstationary variables. after accounting for several additional factors, the limits test for co-integration indicates that there is no long-term relationship between the variables. results indicated that the study's key foundations were that it found both positive and negative relationships between the two variables. using annual data from 1980 to 2015, akinbode and ojo (2018) analyze the impact of exchange rate fluctuation on nigeria's agricultural export performance. to identify factors influencing agricultural exports, the autoregressive distributed lag (ardl) model was utilized to produce the exchange rate volatility series using the generalized autoregressive conditional heteroscedasticity (garch-1,1) model (cocoa and rubber). the bounds test demonstrated a long-term link among the variables. this indicates that neither the long-term nor the short-term volatility of the currency rate has any beneficial effects on export. 2. theoretical framework 2.1. clarks’ neoclassical theory the clarks (1973) model, which assesses the relationship between exchange rate volatility and trade flows, is the theoretical framework that best fits this study. it is predicated on a competitive company without market power that produces just one commodity and sells it exclusively to one overseas market without importing any intermediate inputs. since it is assumed that there are no hedging options, such as through advance sales of the foreign currency export sales, the company converts the revenues of its exports at the current exchange rate, which varies in an unpredictable manner. furthermore, because it is expensive to change the scale of production, the firm decides on its output before the exchange rate is realized. as a result, it is unable to adjust its output in response to favorable or unfavorable changes in the profitability of its exports caused by changes in the exchange rate. in this case, the exchange rate is the sole cause of the firm's profit unpredictability, and risk has a negative impact on the firm's managers, thereby reduced output and hence lower exports occur as a result of increased exchange rate volatility without a corresponding change in average level, reducing risk exposure. similarly, koren and szeidl (2003), states that exchange rate volatility should have an impact on trade volumes due to the exchange rate's correlation with other macroeconomic variables. economy, 2023, 10(1): 10-18 13 © 2023 by the authors; licensee asian online journal publishing group 3. methodology ex-post facto was the adopted research design, because the events the researcher is studying had already taken place. this design can also be applicable for studies geared toward ascertaining the cause-effect association between the independent and dependent variables (onwumere, onodugo, & ibe, 2013). evaluating the cause – effect relationships is the significant point of this study; hence, the data are time series, gotten from central bank of nigeria (cbn) statistical bulletins and nbs, where inflation and interest rate are introduced as control variables covering the period 1986 2021. the annualised secondary data was analysed using the autoregressive distributed lag (ardl) and error correction mechanism (ecm), as well as employing the co-integration method to test for the long-run effect among the series. in other words, the underlining postulation is that all variables are integrated of order 1 or i (1). 3.1. model specification giving the theoretical review, the econometric model employed in this study to examine the effect of foreign exchange fluctuation on the performance of agricultural export in nigeria will be formulated following the study of umaru, sa'idu, and musa (2013) and karimi and husyin (2015) with modification by including real exchange rate, agricultural export volume, agricultural export capacity utilisation and agricultural value added to the contribution to gdp. thus, the model for this study was specified as: 𝐴𝑉𝐶 = 𝑓(𝑅𝐹𝐸, 𝐼𝑁𝐹, 𝐼𝑁𝑇) (1) 𝐴𝐺𝐶𝑈 = 𝑓(𝑅𝐹𝐸, 𝐼𝑁𝐹, 𝐼𝑁𝑇) (2) 𝐴𝐺𝑉𝐴 = 𝑓(𝑅𝐹𝐸, 𝐼𝑁𝐹, 𝐼𝑁𝑇) (3) equation 1, 2 and 3 above presents the dependent variable agricultural export proxy by agricultural volume, agricultural capacity utilization and agricultural value added as a function of the independent variable, given as real foreign exchange and control variables of inflation rate and interest rate. where: avc = agricultural volume (output). agcu = agricultural capacity utilization. agva = agricultural value added. rfe = real foreign exchange. inf = inflation rate (control variable). int = interest rate (control variable). incorporating our effect of foreign exchange fluctuation on agricultural export performance relationship into the unrestricted ardl model framework so as to obtain the conditional (restricted) ardl steady-state model (which was accomplished by applying ordinary least square (ols) methods to estimate the general ardl model), of the form: 𝛥𝐴𝑉𝐶𝑡 = 𝛼0 + ∑ 𝛼1 𝑖 𝑚 𝑖=1 𝛥𝐴𝑉𝐶𝑡−𝑖 + ∑ 𝛼2 𝑖 𝑛 𝑗=0 𝛥𝑅𝐹𝐸𝑡−𝑗 + ∑ 𝛼3 𝑖 𝑜 𝑘=0 𝛥𝐼𝑁𝐹𝑡−𝑘 + ∑ 𝛼4 𝑖 𝑃 𝑚=0 𝛥𝐼𝑁𝑇𝑡−𝑘 + 𝜆1𝐴𝑉𝐶𝑡−1 + 𝜆2𝑅𝐹𝐸𝑡−1 + 𝜆3𝐼𝑁𝐹𝑡−1 + 𝜆4𝐼𝑁𝑇𝑡−1 + 휀𝑡 (4) 𝛥𝐴𝐺𝐶𝑈𝑡 = 𝛼0 + ∑ 𝛼1 𝑖𝑚 𝑖=1 𝛥𝐴𝐺𝐶𝑈𝑡−𝑖 + ∑ 𝛼2 𝑖𝑛 𝑗=0 𝛥𝑅𝐹𝐸𝑡−𝑗 + ∑ 𝛼3 𝑖𝑜 𝑘=0 𝛥𝐼𝑁𝐹𝑡−𝑘 + ∑ 𝛼4 𝑖𝑃 𝑚=0 𝛥𝐼𝑁𝑇𝑡−𝑘 + 𝜆1𝐴𝐺𝐶𝑈𝑡−1 + 𝜆2𝑅𝐹𝐸𝑡−1 + 𝜆3𝐼𝑁𝐹𝑡−1 + 𝜆4𝐼𝑁𝑇𝑡−1 + 휀𝑡 (5) 𝛥𝐴𝐺𝑉𝐴𝑡 = 𝛼0 + ∑ 𝛼1 𝑖 𝑚 𝑖=1 𝛥𝐴𝐺𝑉𝐴𝑡−𝑖 + ∑ 𝛼2 𝑖 𝑛 𝑗=0 𝛥𝑅𝐹𝐸𝑡−𝑗 + ∑ 𝛼3 𝑖 𝑜 𝑘=0 𝛥𝐼𝑁𝐹𝑡−𝑘 + ∑ 𝛼4 𝑖 𝑃 𝑚=0 𝛥𝐼𝑁𝑇𝑡−𝑘 + 𝜆1𝐴𝐺𝑉𝐴𝑡−1 + 𝜆2𝑅𝐹𝐸𝑡−1 + 𝜆3𝐼𝑁𝐹𝑡−1 + 𝜆4𝐼𝑁𝑇𝑡−1 + 휀𝑡 (6) 1 4 − = long run multipliers. k = belonging to identified best lags orders of the variables entering ardl-ecm. 1 4 − = coefficients of short run dynamics. t = time.  = first difference operator. 0 = intercept or drift operator. t = error term. following position of menike (2016) the relationship between foreign exchange fluctuations and agricultural exports is specified as: 𝛥𝐴𝑉𝐶𝑡 = 𝛼0 + ∑ 𝛼1 𝑖 𝑚 𝑖=1 𝛥𝐴𝑉𝐶𝑡−𝑖 + ∑ 𝛼2 𝑖 𝑛 𝑗=0 𝛥𝑅𝐹𝐸𝑡−𝑗 + ∑ 𝛼3 𝑖 𝑜 𝑘=0 𝛥𝐼𝑁𝐹𝑡−𝑘 + ∑ 𝛼4 𝑖 𝑝 𝑚=0 𝛥𝐼𝑁𝑇𝑡−𝑘 + 𝛿𝑒𝑐𝑡𝑡−1 + 휀𝑡 (7) 𝛥𝐴𝐺𝐶𝑈𝑡 = 𝛼0 + ∑ 𝛼1 𝑖 𝑚 𝑖=1 𝛥𝐴𝐺𝐶𝑈𝑡−𝑖 + ∑ 𝛼2 𝑖 𝑛 𝑗=0 𝛥𝑅𝐹𝐸𝑡−𝑗 + ∑ 𝛼3 𝑖 𝑜 𝑘=0 𝛥𝐼𝑁𝐹𝑡−𝑘 + ∑ 𝛼4 𝑖 𝑝 𝑚=0 𝛥𝐼𝑁𝑇𝑡−𝑘 + 𝛿𝑒𝑐𝑡𝑡−1 + 휀𝑡 (8) economy, 2023, 10(1): 10-18 14 © 2023 by the authors; licensee asian online journal publishing group 𝛥𝐴𝐺𝑉𝐴𝑡 = 𝛼0 + ∑ 𝛼1 𝑖 𝑚 𝑖=1 𝛥𝐴𝐺𝑉𝐴𝑡−𝑖 + ∑ 𝛼2 𝑖 𝑛 𝑗=0 𝛥𝑅𝐹𝐸𝑡−𝑗 + ∑ 𝛼3 𝑖 𝑜 𝑘=0 𝛥𝐼𝑁𝐹𝑡−𝑘 + ∑ 𝛼4 𝑖 𝑝 𝑚=0 𝛥𝐼𝑁𝑇𝑡−𝑘 + 𝛿𝑒𝑐𝑡𝑡−1 + 휀𝑡 (9) equations 4 to 9 above presents the logged dependent variable agricultural export proxy by agricultural volume, agricultural capacity utilization and agricultural value added as a function of the independent variable, given as real foreign exchange and control variables of inflation rate and interest rate. 4. data analysis and results 4.1. testing for unit root data from time series are generally described by a stochastic pattern that can be eliminated by differentiation. therefore, the unit root is a test of the non-stationary or stationary existence of the data employed in this description. this is to find out whether there is a spurious or nonsensical relationship between foreign exchange fluctuation and performance of agricultural export in nigeria. thus, as shown in table 1, the study employed augmented dickeyfuller (adf) techniques to test and verify the series unit root property and model stability. table 1. unit root of 1st and 0 order test result of the variables. variable adf test statistics adf critical value order of integration avc -6.978246 -4.309824 i (1) agcu -3.508251 -3.207094 i (1) agva -5.840353 -4.252879 i (1) int -4.204566 -3.580623 i (1) inf -3.707572 -3.562882 i (0) rfe -3.477945 -3.204699 i (0) note: the tests include intercept and trend. from table 1 it could be observed that the results from adf showed that four of the variables (which are avc, agcu, agva and int) are integrated at order one; while two of the variables (which are inf and rfe) are integrated at order zero. the variables which were found to be stationary at first difference, have their adf test statistics as: -6.978246, -3.508251, -5.840353, -4.204566; and they were found to be greater than the critical values of: -4.309824 (at 1%); 3.207094 (at 10%); -4.252879 (at 1%); -3.580623 (at 5%) respectively. 4.2. co-integration test (bound test approach) results if there is equilibrium relationship or a long term in variables, it means that they are co-integrated. to avoid false or fake regression situations there must be a pre-test. table 2 presents the summary results of ardl bounds test for co-integration for the three models (agricultural volume model, agricultural capacity utilization model; and for agricultural value-added model) using akaike information criterion (aic) recommended lags. table 2. bound test-co-integration results of lower (i(0)) and upper bound (i(1)). avc-model f-statistic 3.642942 decision significance 5% i (0) 2.39 co-integrated i (1) 3.38 agcu-model f-statistic 3.793283 co-integrated significance 10% i (0) 2.39 i (1) 3.38 agva-model f-statistic 15.31406 co-integrated significance 5% i (0) 2.39 i (1) 3.38 note: ** significant at 5%. foreign currency rates and avc have a long-run or equilibrium relationship, according to the co-integration test result from table 2. this was shown by the f-statistic value of 3.642942, which at the 5% level of significance was found to be greater than the lower (i(0)) and upper bound (i(1)) critical values of 2.39 and 3.38, respectively. the f-statistic value of 3.793283, which is greater than the lower (i(0)) and upper bound (i(1)) critical values of 2.39 and 3.38, respectively, and also at the 5% significant level, revealed the existence of a co-integrating connection between foreign exchange rates and agcu. finally, the f-statistic value of 15.31406 is greater than the lower (i(0)) and upper bound (i(1)) critical values of 2.39 and 3.38 respectively at the 5% significant level, providing evidence of a co-integrating relationship between foreign exchange rates and agva. the analysis consequently comes to the conclusion that the independent and dependent variables have a long-term, or equilibrium, connection in nigeria during the time period under consideration; as a result, the study moves forward using error correction models. 4.3. model estimation and results evaluation the study has established that there is a co-integrating connection between foreign exchange fluctuation and performance of agricultural export in nigeria; as such, the study moves to calculate the long-run models and error correction. the ardl-ecm result examines in what manner the ardl model changes to the long-run equilibrium. the study utilised a general-to-specific modelling approach to derive a satisfactory reduced short-run dynamic policy captured in table 3, 4, and 5. hypothesis one: foreign exchange fluctuation and performance of agricultural export volume in nigeria. economy, 2023, 10(1): 10-18 15 © 2023 by the authors; licensee asian online journal publishing group the ect(-1) depicts adjustment of the speed to bring back the long run in the activity model coming after an interruption. the coefficient of the estimated ect(-1) equals -0.5601 puts forward a prompt speed of adjustment back to the long-run equilibrium. the coefficient is appropriately signed and to a greater degree significant at the 1 percent significance level. this hugely significant ect is emphasised fact of the existence of a stable long-term relationship. table 3. auto-regressive distributive lag regression result. dependent variable: d(avc) ardl error correction regression variable coefficient std. error t-statistic prob. d(avc(-1)) -0.7055 0.184346 -3.82706 0.0123 d(rfe) 9.164678 1.482621 6.181402 0.0016 d(rfe(-1)) -0.98868 1.094113 -0.90363 0.4076 d(rfe(-2)) 4.472565 1.236556 3.616953 0.0153 d(inf) 9.212627 2.723365 3.38281 0.0196 d(inf(-1)) -11.9096 2.45619 -4.8488 0.0047 d(inf(-2)) 7.366478 2.241361 3.28661 0.0218 d(int) -14.3228 3.202153 -4.47287 0.0066 d(int(-1)) 21.32017 3.551261 6.003549 0.0018 d(int(-2)) 21.43774 3.505539 6.115392 0.0017 cointeq(-1)* -0.560133 0.087799 -6.379758 0.0014 r-squared 0.841708 mean dependent var 0.85 adjusted r-squared 0.611466 s.d. dependent var 2.836829 f-statistics (and p-value) 9.768266 (0.00002) akaike info criterion 4.257852 durbin-watson stat 2.007263 schwarz criterion 5.066691 note: * p < 0.1. the coefficient of determination (r-square) indicates that the model was reasonably fit in prediction. it showed that 84.17% changes in avc were unanimously owed to rfe, inf and int, while 15.83% not included variations was represented as the error term. the overall importance of regression model, which is the f-statistic reveal a significant result as examined. the value of the f-statistic captures it at 9.76 and its associated value of 0.000002 at 5% level was found to be significant. it is further proof in the result that among the variables, there is absence of autocorrelation as proven by durbin watson (dw) statistic of 2.00. it showed that the data can be depended upon and are impartial. hypothesis two: foreign exchange fluctuation and performance of agricultural export capacity utilization in nigeria. table 4. ardl regression result. dependent variable: d(agcu) ardl error correction regression variable coefficient std. error t-statistic prob. d(agcu(-1)) -0.45659 0.094461 -4.83358 0.0013 d(rfe) -6.02e-05 0.000361 -0.16661 0.8718 d(rfe(-1)) 0.002052 0.000488 4.204631 0.003 d(rfe(-2)) -0.00069 0.000517 -1.33548 0.2185 d(rfe(-3)) 0.001405 0.000497 2.827868 0.0222 d(inf) -0.0029 0.000633 -4.5786 0.0018 d(inf(-1)) 0.00344 0.000834 4.12341 0.0033 d(inf(-2)) 0.003392 0.000708 4.793683 0.0014 d(inf(-3)) 0.003382 0.000742 4.556027 0.0019 d(int) 85.12271 17.93108 4.747215 0.0015 d(int(-1)) 45.25082 10.14136 4.462009 0.0021 d(int(-2)) 37.72435 12.42301 3.03665 0.0161 d(int(-3)) 30.40713 10.16939 2.990065 0.0173 cointeq(-1) -0.38839 0.056976 -6.81672 0.0001 r-squared 0.930433 mean dependent var -0.03316 adjusted r-squared 0.845958 standard deviation dependent var 4.213092 f-statistics (and p-value) 8.2556 (0.000) akaike info criterion 4.142062 durbin-watson stat 2.22199 schwarz criterion 4.966539 the error correction model (ecm) parameter is negative, less than unity and significant at 5% level as expected. the ecm is an error correction term in the model to restore back equilibrium, and validates that there exists a long run equilibrium relationship among the variables. the value of the ecm is 38.83%, meaning that the system corrects (or adjusts to) equilibrium in the following year at speed of 38.83% which is good. to show the elucidatory capacity of the model and the reliability of the estimates, the coefficient of determination (r-square) was deployed. it indicates how the model was in a sensible way fit in forecasting. it emphasized that 93.04 percent alterations to agcu were collectively due to rfe, inf and int, at the same time 6.96% represents the white noise. to determine the whole importance of the regression model in the same extent, the f-statistic was used to evaluate it and was revealed that the results are significant. 8.25 captures the value of the f-statistic and its affiliated probability value of 0.000 having been discovered to be significant at 5% level. the durbin watson (dw) statistic of 2.22 in the model emphasized that there is absence of autocorrelation between the independent and dependent economy, 2023, 10(1): 10-18 16 © 2023 by the authors; licensee asian online journal publishing group variables (as it fell within the acceptable range of 1.5 and 2.4). this proves that unbiased estimates can be depended on to make decision on policy. hypothesis three: foreign exchange fluctuation and performance of agricultural export value added in nigeria. the lagged error correction term (ect(-1)) was considerably statistically significant at 5% less than unity and negative, as expected. the coefficient revealed that once the system is out of equilibrium, it will require an average (high) speed of 34.68% for it to return to a state of long-run equilibrium. the calculated model is reasonably good at making predictions, according to the coefficient of determination (r-square), which was used to assess the goodness of fit of the model. it revealed that rfe, inf, and int together were responsible for 98.53 percent of changes in agva, whereas the error term was able to explain for 1.47 percent of unaccounted fluctuations. in addition, the full model is likewise significant at the 5% level, according to the f-statistic value of 10.233 and its associated probability value of 0.000. the durbin watson (dw) statistic of 2.29 from the model also showed that the variables did not exhibit any autocorrelation. this demonstrated that the estimations were objective and could be trusted for making policy judgments as well. table 5. ardl error correction regression. dependent variable: d(agva) ardl error correction regression variable coefficient std. error t-statistic prob. d(agva(-1)) 1.037668 0.086699 11.96858 0.0013 d(agva(-2)) 0.035936 0.056903 0.631519 0.5725 d(agva(-3)) -2.63654 0.20328 -12.97 0.001 d(ref) 29.08825 1.894067 15.35756 0.0006 d(ref(-1)) -16.9905 1.243886 -13.6592 0.0008 d(ref(-2)) 12.38867 0.987773 12.54202 0.0011 d(inf) 27.31271 2.244818 12.167 0.0012 d(inf(-1)) -29.02 3.057898 -9.49018 0.0025 d(inf(-2)) -25.5089 2.359674 -10.8104 0.0017 d(inf(-3)) -44.9569 2.767935 -16.242 0.0005 d(int) 9.28747 2.710911 3.425958 0.0417 d(int(-1)) 34.74633 2.701423 12.86223 0.001 d(int(-2)) -4.44554 3.163681 -1.40518 0.2546 d(int(-3)) -45.0603 3.766716 -11.9628 0.0013 cointeq(-1) -0.34682 0.019339 -17.9331 0.0004 r-squared 0.985399 mean dependent var 0.125625 adjusted r-squared 0.949709 s.d. dependent var 5.336756 f-statistics (and p-value) 10.233 (0.000) akaike info criterion 3.366169 durbin-watson stat 2.29617 schwarz criterion 4.419666 4.4. statistical test of hypotheses h01: foreign exchange fluctuation has no significant effect on the performance of agricultural export volume in nigeria. table 6. wald test results on foreign exchange fluctuation and performance of agricultural export volume in nigeria. test statistic value df probability f-statistic 1.280560 (9, 5) 0.4122 chi-square 11.52504 9 0.2414 the wald-test in table 6 indicated that the calculated f-value for the relationship between foreign exchange fluctuation and the performance of agricultural export volume in nigeria is 1.280560, and its probability value is 0.4122. for the reason that the probability value is greater than 0.05 at 5% level of significance, it means it falls in the region of acceptance and as a consequence, hypothesis one in a null form (h01) was accepted. the result emphasizes that foreign exchange fluctuation has no significant effect on the performance of agricultural export volume in nigeria. h02: foreign exchange fluctuation has no significant effect on the performance of agricultural export capacity utilization in nigeria. table 7. wald test results on foreign exchange fluctuation and performance of agricultural export capacity utilization in nigeria. test statistic value df probability f-statistic 12.25883 (7, 5) 0.00255 chi-square 14.25369 5 0.00293 the wald-test in table 7, indicated that the calculated f-statistic value for the relationship between foreign exchange fluctuation and the performance of agricultural export capacity utilization in nigeria was found to be 12.25883 and its probability value was 0.0025. for the reason that the probability value is less than 0.05 or 5% level of significance (and fell in the rejection region), hypothesis 2 in the null (h02) was rejected. the study concludes, foreign exchange fluctuation has a positive and significant effect on the performance of agricultural export capacity utilization in nigeria. h03: foreign exchange fluctuation has no significant effect on the performance of agricultural export value added in nigeria. economy, 2023, 10(1): 10-18 17 © 2023 by the authors; licensee asian online journal publishing group above all, the wald-test in table 8, the indicated that the f-value for the relationship between foreign exchange fluctuation and the performance of agricultural export value added in nigeria was found to be 7.160760; with an associated probability value of 0.0657. since the probability value is greater than 0.05 or 5percent level of significance, the third null hypothesis (h03) was accepted. the study thus concludes that foreign exchange fluctuation has no significant effect on the performance of agricultural export value added in nigeria. table 8. wald test results on foreign exchange fluctuation and the performance of agricultural export value added in nigeria. test statistic value df probability f-statistic 7.160760 (8, 5) 0.0657 chi-square 85.92912 5 0.0000 5. discussion of findings that foreign exchange fluctuation was seen to have insignificant effect on the performance of agricultural export volume in nigeria. this is in agreement with the results of akinbode and ojo (2018) whose findings revealed the volatility of exchange rate does not affect export significantly in the long and short-run. this may be to a limited extent ascribed to the inelastic qualities of agricultural commodities’ supply most importantly in the short run. it was also exposed that there exists insignificant relationship among agricultural export and gdp, world prices, exchange rate and inflation. the findings further agreed with omojimite (2014) whose study showed that foreign exchange fluctuations through spread of interest rate was found to have no positive and significant effect on agricultural output in nigeria. furthermore, discovery from the analysis shows that foreign exchange fluctuation has a significant effect on the performance of agricultural export capacity utilization in nigeria. it showed that the significant fundamentals were real exchange rate, real appreciation and depreciation (after some lags), has significant effect on agricultural export capacity utilization in nigeria (after some lags) in the short run. this aligned with the findings of shuabiu et al. (2021) whose study showed that there is a relationship among between the variables. foreign exchange fluctuation has no positive effect on the performance of agricultural export value added in nigeria. the implication of this findings is that, unstable exchange rates impacted ineffectively on performance of agricultural export value added in nigeria. this is in agreement with brownson, vincent, emmanuel, and etim (2012) whose study showed that in both long run and short run, real exports, real external reserves, inflation, and external debt have insignificant negative effects on agricultural productivity, whereas industrial capacity utilization and nominal exchange rate promote agricultural productivity in nigeria. the study is in line with the clarks (1973) theory, which views exchange rate and trade flows as a perfect way for firms to earn foreign currency. 6. conclusion and recommendation empirical result disclosed no effect between foreign exchange fluctuation and agricultural volume, which is the output sector in nigeria in the long run. the study also concluded that foreign exchange fluctuation does not cause agricultural volume to increase or perform well, which would have led to corresponding increase in agricultural output at 5% level of significance. also, the second null hypotheses revealed that foreign exchange fluctuation has no negative and insignificant effect on the performance of agricultural capacity utilization in nigeria. based on the findings it is established that foreign exchange fluctuation impact on agricultural capacity utilization as its optimum capacity utilization causes foreign exchange to increase in nigeria within the period of reviewed. finally, the study concludes that foreign exchange fluctuation does not affect value added in nigeria. with this, the study concludes that foreign exchange fluctuation does not cause agricultural value added to contribute to the gdp of the economy and that foreign exchange does not influence agricultural sector value added to grow and conclude that their relationship is insignificant and negatively related. based on these conclusions, the study recommends that nigerian government should moderate and regulate the rate of exchange activities in order to make certain that it brings about better performance in the agricultural sector. also, she should strongly attempt to make better the stand of the economy internationally with other nations of the world in order to expand the market for nigerian agricultural exports. finally, the government should change the focus of its policy in direction to the external agricultural sector and making sure that it adds in the most favourably way to output performance. as an intentional policy, the government should give support to rural area agriculture by which investors in distinct communities and commodities should be encourage to set up agricultural industries, which will be solely on local raw materials comprising equipment and machines. hence, this will increase and advanced the market capacity utilization and value added locally. references abolagba, e. o., onyekwere, n. c., agbonkpolor, b. n., & umar, h. y. 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(2013). exchange rate fluctuation and export performance in nigeria a project submitted in partial fulfilment of the requirement for the award of bachelor of science (b.sc.) degree in economics. department of economics faculty of management and social sciences caritas university, emene, enugu state. taticchi, p., balachandran, k. r., botarelli, m., & cagnazzo, l. (2008). performance measurement management for small and medium enterprises: an integrated approach. journal of applied management accounting research, 6(2), 57-72. umaru, a., sa'idu, b. m., & musa, s. (2013). an empirical analysis of exchange rate volatility on export trade in a developing economy. journal of emerging trends in economics and management sciences, 4(1), 42-53. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. https://doi.org/10.2307/1239342 https://doi.org/10.3390/jrfm14110528 11 © 2020 by the authors; licensee asian online journal publishing group economy vol. 7, no. 1, 11-18, 2020 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2020.71.11.18 © 2019 by the authors; licensee asian online journal publishing group food security in urban households: the role of women in an asian context c.w.kalansooriya1 w. g. v.gunasekara2 p. g. s. a. jayarathne3 ( corresponding author) 1department of economics, university of sri jayewardenepura, sri lanka. 2department of business economics, university of sri jayewardenepura, sri lanka. 3department of marketing management, university of sri jayewardenepura, sri lanka. abstract assuring food security is one of the challenges in low and middle-income countries with their rapid urbanization. the role of women has been identified as a key to food security in rural societies, however, yet to make conclusions in an urban setting. hence this study tries to analyse the role of women in urban households while addressing the context-specific social and cultural differences of women’s role in asia. the study uses data from sri lanka household income and expenditure survey-2016 and estimates the impact of women's role using the ordinary least square (ols) method. the relative status of food security of each household is measured using the household dietary diversity score (hdds). the study finds a higher level of food security is associated with a higher level of female education. similarly, households are more food secure when women are more responsible for household income. further, it reveals that the economic burden on women being the single income earner has not affected on changing the level of food security in their households. keywords: food security, urban households, women’s role, asia, dietary diversity. jel classification: i30; o10. citation | c.w.kalansooriya; w. g. v.gunasekara; p. g. s. a. jayarathne (2020). food security in urban households: the role of women in an asian context. economy, 7(1): 11-18. history: received: 16 january 2020 revised: 21 february 2020 accepted: 31 march 2020 published: 27 april 2020 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group acknowledgement: all authors contributed to the conception and design of the study. funding: the authors wish to acknowledge that this paper was made possible by the support and guidance given by the “australia awards fellowships program for sri lanka – 2018,” which was funded by the department of foreign affairs and trade, australia, and co-hosted by monash university, australia and the university of sri jayewardenepura, sri lanka. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ...................................................................................................................................................................................... 12 2. literature review ............................................................................................................................................................................ 12 3. methodology ..................................................................................................................................................................................... 13 4. results ................................................................................................................................................................................................ 14 4. discussion and conclusion ............................................................................................................................................................. 16 references .............................................................................................................................................................................................. 17 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2020.71.11.18&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ https://www.asianonlinejournals.com/index.php/economy/article/view/1545 https://orcid.org/0000-0002-4328-1450 https://orcid.org/0000-0003-4993-4712 https://orcid.org/0000-0003-4750-2182 https://www.asianonlinejournals.com/index.php/economy/article/view/1545 https://orcid.org/0000-0002-4328-1450 https://orcid.org/0000-0003-4993-4712 https://orcid.org/0000-0003-4750-2182 https://www.asianonlinejournals.com/index.php/economy/article/view/1545 https://orcid.org/0000-0002-4328-1450 https://orcid.org/0000-0003-4993-4712 https://orcid.org/0000-0003-4750-2182 https://www.asianonlinejournals.com/index.php/economy/article/view/1545 https://orcid.org/0000-0002-4328-1450 https://orcid.org/0000-0003-4993-4712 https://orcid.org/0000-0003-4750-2182 https://www.asianonlinejournals.com/index.php/economy/article/view/1545 https://orcid.org/0000-0002-4328-1450 https://orcid.org/0000-0003-4993-4712 https://orcid.org/0000-0003-4750-2182 economy, 2020, 7(1): 11-18 12 © 2020 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study adds empirical evidence to the literature on the role of women in urban societies using data from an asian context. 1. introduction as the world continues to urbanize, sustainable development challenges will be increasingly concentrated in cities, particularly in the lower-middle-income countries where the pace of urbanization is fastest (un, 2014). food security is considered as one such challenge that raised with rapid urban growth and increased urban poverty. urban food security problems would be worse than those in rural areas (chatterjeea, butchera, wicka, desutter, & harmonb, 2016) since, unlike in the rural sector, the existence of a safety net, such as rural agriculture, cannot be seen in most urban areas. rising prices of shelter, transport and healthcare facilities further exacerbate the pressure on the livelihood of the urban dwellers, making them difficult to afford sufficient food (cohen & garrett, 2010; poulsen, mcnab, clayton, & neff, 2015). as a result, hunger, obesity, malnutrition and unhealthy diets coexist in urban areas and affect the poor community (fao, 2019). it is widely identified that women play an important role in ensuring food security at the household level in rural areas due to their multiple roles within households as food producers, processors and preparers (adb, 2014; ibnouf, 2011; quisumbing & smith, 2007; smith & haddad, 2000). although the urban sector is not prominent for food-producing, the role women play in assuring food security is still more important to explore because most of the urban women engage in paid jobs and they face a trade-off between income-earning and undertaking their household duties (gupta, 2006). this is particularly crucial in the asian context since most of the household food preparation duties are culturally assign for women (quisumbing, brown, feldstein, haddad, & peña, 1995). given this context, this study tries to analyse the role of urban women in assuring household food security by exploring the context of south asia. this study contributes to the literature in two ways. first, it adds context-specific evidence to the prevailing discussion on the role of women in assuring food security in urban households as it explores an asian context. secondly, the study uses a large sample of a well-structured survey and the food security is figured using more reliable information on actual food consumption of households. hence it provides concrete evidence on the impact made by urban women in achieving their household food security. sri lanka serves as a case study for achieving the study objective, since addressing the issues related to urban food security is essential as with increasing growth rate of the urban population in sri lanka (un, 2014). similarly, examining women, in particular, is vigorous because the role of women in the household may have been changed over the last decades as the statistics indicate that the participation of women in paid employment has been increased in sri lanka, particularly in the urban sector (cbsl, 2017). 2. literature review 2.1. the concept of food security food security is defined as a situation that exists when all people, at all times, have physical, social and economic access to sufficient safe and nutritious food that meets their dietary needs and food preferences for active and healthy life (fao, 2006). food security usually has four dimensions: availability, access, utilization and stability (fao, 2008). the availability of food refers to having sufficient quantities of food of appropriate quality, supplied through domestic production, imports, food stocks or food aid. food access encompasses income, expenditure and buying capacity of food by households or individuals. utilization refers to how nutritional food is consumed in order to make maximum use of it and the way the body makes the most of the various nutrients in the food. the fourth dimension states the stability of the other three dimensions over time. food security can be investigated at two levels: macro level and micro level. macro-level food security refers to global, national or regional level food security and mostly targets food availability aspects, while micro aspects focus on household or individual food acquirements and utilization. 2.2. food security in urban households in earlier times, poverty, food insecurity and malnutrition were viewed as rural problems, with relatively little attention given to such problems in cities. however, with rapid urban growth and increased urban poverty, food insecurity problems have been increasingly recognized as common to urban areas and sometimes urban food security problems are worse than those in rural areas (atkinson, 1995; braun, 1993; chatterjeea et al., 2016; escaler, teng, & caballero-anthony, 2010; levin et al., 1999; ruel, garrett, morris, maxwell, & oshauh, 1998). hunger, obesity, malnutrition and unhealthy diets all coexist in urban areas, affecting the poor and the affluent (fao, 2019). food security in urban areas is different from that in rural areas because, in the former, it is more interpreted as a matter of food purchase, which is strongly influenced by income, education and consumption patterns and the nature of decision making on food purchases, while in rural areas it is mainly related to food production or availability (floro & swain, 2013). as escaler et al. (2010) point out, unlike in the countryside, the urban environment is more vulnerable to the global food supply system and price fluctuations resulting from supply discontinuities. similarly, the empirical literature shows the difference between the determinants of food security in urban and rural sectors (frimpong & asuming-brempong, 2013). also evident is the rapid change in consumption patterns in urban areas compared to rural areas (floro & swain, 2013). because of increased income, there is a higher demand for more expensive sources of nutrients in the urban sector compared to the rural sector, while urban households are more vulnerable to variations in the international market and consumption variations due to changes in global economic event. furthermore, due to the pressure on households to earn more income and the availability of more economic opportunities in urban areas, there is a greater tendency for women to work outside the home, which may mean they have less time and more difficulty caring for their children (escaler et al., 2010). economy, 2020, 7(1): 11-18 13 © 2020 by the authors; licensee asian online journal publishing group 2.3. the role of women’s employment and income in household food security empirical studies from several countries, including kenya, malawi and mexico, found a positive relationship between women’s income and household nutrition and welfare (bhagowalia, menon, quisumbing, & soundararajan, 2010; djebbari, 2005; islam, braun, thorne-lyman, & ahmed, 2018; kennedy & peters, 1992; quisumbing et al., 1995; sraboni, malapit, quisumbing, & ahmed, 2014). in sri lanka, several researchers found that the mother’s income proportion had a significant positive impact on household calorie adequacy and relative calorie adequacy of children (rathnayake & weerahewa, 2003) and the level of food security (kalansooriya & chandrakumara, 2014) in the rural sector. as quisumbing et al. (1995) argue, increasing income generation activities, which translate into higher food expenditure and use of health and education facilities, can improve child nutrition. not only the amount of income but also the degree of control by women over family income impact directly on improving household food security and nutritional outcomes (kawarazuka & béné, 2010). this is because women tend to spend a significantly higher proportion of their income on food for the family than do men (quisumbing et al., 1995; ramachandran, 2008). although women’s income contributes to a positive change in household food security, there is also a downside to this. according to mitchodigni et al. (2017) women’s involvement in income-earning decreases the time available for household activities, including providing nutrition for children. gittinger et al. (1990) state that women often reduce the frequency of cooking and increase the amount of food cooked on each occasion to save time for activities that produce income. this, in turn, harms the nutritional status of the family, especially for small children who need more frequent feeding. engle (2000) argues that, although women’s income more positively relates with children’s nutrition than does men’s income, when women do not have the power to decide how to spend their income on children, wage work harms children’s nutritional status. 2.4. impact of women’s education on household food security scholars argue that the correct utilization of acquired food strongly depends on the knowledge and education of the person who manages food preparation in the household – a row that generally falls to women (mitchodigni et al., 2017). women with higher education are likely to provide varieties of food thereby increasing the household food security (mazidi & vatanparast, 2018; olumakaiye & ajayi, 2006). a higher level of mothers’ education is significantly associated with more expensive diets; either through purchasing more expensive calories from meat, fish, fruit and vegetables, or purchasing more food away from home (levin et al., 1999). a study by smith and haddad (2000) using a cross country regression of 63 developing countries, has found that woman’s education accounts for 43% of the total reduction in child malnutrition. quisumbing and meinzen-dick (2001) find that improving women’s education is probably the single most important policy instrument to reduce poverty. the investment in women’s education, more than any other factor, increases women’s capabilities, expands women’s opportunities, and empowers women to exercise their choices, greatly improving food security. ajaero (2017) finds that improvement in the educational status of women is crucial for maintaining food security even after natural disasters such as floods. the nutritional status of children in sri lanka is also found to be positively associated with their mother’s education level (ekanayake, weerahewa, & ariyawardana, 2003; gunasekera, 1999; rathnayake & weerahewa, 2003). 2.5. impact of women’s status on household food security women’s status can be defined as women’s decision-making power in the household relative to men (smith & haddad, 2000; smith, ramakrishnan, ndiye, haddad, & martorell, 2003). since intra-household decision power is delineated primarily based on household headship (gumede, 2009) an important measure used in food security literature to capture women’s status is whether or not the household is headed by a female. several studies have shown the direct link between female household headship and household food security, mostly in a positive direction: smith. et al. (2003) studying south asia, sub-saharan africa and latin-america, smith and haddad (2000) studying 63 developing countries, and schmeer (2005) on the philippines support such an argument. however, mallick and rafi (2010) reveal that there is no significant difference in food security levels between male-headed and female-headed households. indeed, some studies show that female-headed households are more vulnerable to food insecurity and non-income aspects of poverty (babatunde, omotesho, olorunsanya, & owotoki, 2008; doocy & lyles, 2017; felker-kantor & wood, 2012; kassie, ndiritu, & stage, 2014). the reasons are various. firstly, the female head who is the main income earner faces disadvantages in the labour market and many productive activities. secondly, the female head is also responsible for maintaining the household, including household chores and childcare in addition to working outside, and thus she is “activity burdened”. finally, the female household head faces a higher dependency ratio for being the single income earner in the household (mallick & rafi, 2010). 3. methodology the study uses data gathered from the household income and expenditure survey conducted in 2016 by the department of census and statistics of sri lanka. this survey uses a nationally representative sample and gathers data using two-stage stratified sampling method to cover households and individuals in urban, rural and estate sectors. further, this survey provides micro-data on demographic characteristics, education, health, individual-level income and household level expenditures of different categories. since our focus is only on the urban sector the study selected data of 3429 urban households in this survey. the study uses the household dietary diversity score (hdds), which developed by swindale and bilinski (2006) to measure the level of household food security. hdds provides a snapshot of the economic ability of a household to access a variety of foods and it captures the consumption of both macro-and micro-nutrients in line with standard definitions of both food and nutrition security. the hdds, which is constructed according to international guidelines consists of 12 food groups; cereals and other starchy food, roots and tubers, vegetables, fruits and nuts, meat, eggs, fish and seafood, pulses, milk and milk products, oil and fat, sugar and sugar products and other foods. economy, 2020, 7(1): 11-18 14 © 2020 by the authors; licensee asian online journal publishing group the construction of the hdds for each household involved a few steps. the hies survey provided detailed data of the quantities and expenditures of different food categories consumed weekly by each household. it was quite difficult to aggregate the quantities of different food categories since the measurement scales were varied within a category. for example, some foods had been recorded in grams while others in numbers. therefore, the expenditures for each food category were aggregated instead of quantities. with the assumption of the amount spent reflects the quality of the food consumed, an advantage of this approach was it was possible to take into account the quality of the good consumed. however, we assumed that the price variation across the urban sector was zero. to exclude the household size effect, per-capita expenditure was taken and the mean per-capita consumption expenditure of each food categories was calculated by adjusting for outliers. accordingly, values were assigned as one and zero for each household considering whether the consumption of a particular food category was above its mean value or not. finally, the hdds of each household was calculated by summing up the values obtained for all 12 food categories. accordingly, the maximum score that a household could obtain was 12 and it is the highest food security level that a household can obtain. it is important to note that the level of food security we have generated here is a relative measure as it determines by the sample itself. we used a multiple linear regression model with the hdds as the outcome variable to estimate the impact of women in food security. the share of female income in total household income, female education and the household headship, as a measure of female status, were included in the model as independent variables to represent the role of women. the model was controlled for other demographic factors, such as the age of the household head and the ethnic background. 4. results 4.1. descriptive measures a summary of the socio-demographic characteristics of the sample is given in table 1. accordingly, three fourth of households headed by males and the majority of the women in households educated up to gce o/l s. the female share of the household income is just below 25% of the total income. table-1. characteristics of the sample. socio-demographic factor % of household ethnicity sinhala 58.7 sri lankan tamil 19.6 indian tamil 0.8 sri lankan moors 19.6 other 1.3 household headship male headed 74 female headed 26 female education primary or no education 15.4 up to o/l 55.7 up to a/l 23.2 degree or above 5.7 mean age of the household head (years) 52.35 household size 4.08 total household income (rs) 63612 female share of household income 0.23 after adjusting for the outliers, table 2 shows the mean per capita consumption of each food groups and the percentage of household who reached the mean consumption level. less than 50% of households have reached the mean consumption for all food groups except for cereals and pulses. accordingly, the calculated household dietary diversity score (hdds) and the percentage of households which had each hdds are in table 3. the distribution approximately follows the shape of the normal distribution figure 1. the mean hdds for the whole sample is 5.73. table-2. mean per capita consumption expenditures. food category mean per capita expenditure (rs) % of household above the mean cereals and other starchy 313 54 roots and tubers 16 47 vegetables 88 47 fruits and nuts 37 46 meat 70 46 eggs 12 46 fish and sea food 180 48 pulses 34 50 milk and milk products 120 46 oil and fats 28 46 sugar 26 43 other products 321 46 economy, 2020, 7(1): 11-18 15 © 2020 by the authors; licensee asian online journal publishing group table-3. household dietary diversity score (hdds). hdds no of households % of households 0 42 1.22 1 148 4.32 2 253 7.38 3 372 10.85 4 429 12.51 5 398 11.61 6 420 12.25 7 406 11.84 8 411 11.99 9 291 8.49 10 171 4.99 11 72 2.10 12 16 0.47 3429 figure-1. distribution of hdds. 4.2. estimated model table 4 shows the correlation matrix for the independent variables. except for female income share and household headship, it does not show a considerable level of correlation between other variables. however, the vif values prove that the model has not been affected by the multicollinearity issue. therefore, all the independent variables were included in the model. table-4. correlation for independent variables. v a ri a b le s e th n ic it y a g e o f th e h o u se h o ld h e a d t o ta l h o u se h o ld in c o m e w o m e n 's e d u c a ti o n fe m a le s h a re o f h o u se h o ld i n c o m e fe m a le h o u se h o ld h e a d sh ip ethnicity 1 age of the household head -0.073 1 total household income -0.067 0.023 1 woman's education -0.212 -0.218 0.241 1 female share of household income -0.045 -0.052 -0.044 0.106 1 female household headship 0.037 0.129 -0.066 -0.164 0.528 1 using hdds as a dependent variable which measure the level of food security, the model was estimated, and table 5 shows the results. the estimated model is significant at 1% significance level. the result indicates a significant increase in the hdds with female income share and female education. when the female share of total household income increase households tends to increase their hdds by 0.855 points. similarly, compared with the households in which women have not educated or educated only up to grade 5, all other households with higher female education level reflect a higher level of hdds. it is important to note that the higher the level of education, the higher the impact on hdds. in particular, if women educated up to o/l, their hdds is higher by 0.84 points while if she educated up to a/l it is higher by 1.78 points. if she educated up to degree level, then their hdds is higher by 2.35 points. the results also show that the hdds of households in which females are headed by are lower, but the coefficient is not significant. 0 .1 .2 .3 .4 d en si ty 0 5 10 15 hdds economy, 2020, 7(1): 11-18 16 © 2020 by the authors; licensee asian online journal publishing group table-5. result of the estimated model. dependent variable : hdds variables coefficients ethnicity (reference group= sinhalese sri lankan tamil -0.324*** (0.117) indian tamil -0.083 (0.501) moors -0.541*** (0.118) others -0.193 (0.421) age of the household head 0.012*** (0.003) total household income 2.40e-06*** (4.43e-07) woman's education (reference group = primary or no education) up to gce o/l 0.844*** (0.132) up to gce a/l 1.778*** (0.157) degree or above 2.35*** (0.234) female income share 0.855*** (0.157) female status (reference = male headed households) -0.162 (0.122) constant 3.902*** (0.246) note: *** indicate significant at 1%. considering other variables, ethnic categories, age of the household head and household total income included in the model as control variables. all the other ethnic categories show a lower level of hdds compared to sinhalese, however, the coefficients are significant only for sri lankan tamils and moors. compared to sinhalese, the hdds of sri lankan tamils and moors are 0.32 points and 0.54 lower respectively. age of the household is also positively contributed to hdds, but only a small amount. when age increase by one year the hdds increase only by 0.01 points. hdds is positively affected by household income, but only marginally. 4. discussion and conclusion this study examines the role of women in ensuring food security in urban households in sri lanka. it uses data from 3429 urban households gathered by the department of censuses and statistics under household income and expenditure survey, 2016. the measurement variable which the study used for food security was hdds. the study reveals a positive relationship between female income share and household food security. with increasing female income share, households tend to be food secure, whereas they are food insecure at lower levels of female income or zero female income. this finding is in line with the findings of islam et al. (2018); sraboni et al. (2014); bhagowalia et al. (2010); djebbari (2005); quisumbing et al. (1995) and rathnayake and weerahewa (2003) who found that female income positively affects household food security. a woman with a higher share of household income means that she may economically strong and can produce a diverse diet for her household members. therefore, those household reflect a higher level of food security. this result challenge some findings of the literature that shows that women face a trade-off between their income-generating and caring roles (engle, 2000; levin et al., 1999; mitchodigni et al., 2017). it seems that even though women have to work longer hours, and have limited time for household chores such as food preparation, she can still manage her time to provide a diverse diet to her household members. this could be basically because they are culturally more responsible for looking after the food needs of the household. this study further questioned the findings of mitchodigni et al. (2017) and variyam, blaylock, lin, ralston, and smallwood (1999) who also found that household food security is negatively affected when women engage in economic activities. such contradictory findings may result from differences in the context, data sources used and the timing of the studies. women’s education has a positive influence on the diversity of the diet consumed by urban households. this may due to educated women paying more attention to preparing a nutritious diet in the household. women’s education was related to the consumption of nutritious food such as fruit, fish and milk products. in particular, the consumption of fruit and milk products in households gradually increased with the increasing education level of women. this is in line with the findings of authors such as mazidi and vatanparast (2018); olumakaiye and ajayi (2006) and rathnayake and weerahewa (2003) who found that women’s education has positive impacts on dietary quality. women’s status in this analysis was defined as the women’s power in the household in influencing and controlling household decisions. accordingly, women’s status is decided by taking into account whether the woman is the head of the household or not, assuming that she has a higher status when she is the head than those who not. however, women’s status in the household does not show any significant relationship with household food security, implying that female household headship is not a matter of food security at the household level. such findings match those of mallick and rafi (2010) and garrett and ruel (1999) who found no difference in food security between male-headed and female-headed households. however, this challenges the findings of scholars such as smith et al. (2003); smith and haddad (2000); schmeer (2005) which shows that women’s status is an important factor in household food security. also, it questions the researches of doocy and lyles (2017); kassie et al. (2014); economy, 2020, 7(1): 11-18 17 © 2020 by the authors; licensee asian online journal publishing group babatunde et al. (2008); levin et al. (1999) and kennedy and peters (1992) which show a significant difference in food security levels between maleand female-headed households. the findings reveal important policy directions to enhance food security at the household level in the urban sector. as the study reveals that households gain a higher level of food security when women are more economically strong and educated, policy actions should target in improving their economic ability and education. some of the self-employment which they can do while they are at home would be a better solution as it saves women's time for household duties while generating extra income. similarly, higher attention should be paid to improve education since women’s higher education generates positive impacts on household food security. education could help increase nutritional awareness of women, and thereby increase the nutritional quality of the diet consumed by household members. more importantly, education offers a window for women to obtain better employment, which enhances their ability to earn more income and thereby increase the food security of their households. references adb. 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(1999). mother's nutrition knowledge and children's dietary intakes. american journal of agricultural economics, 81(2), 373-384. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. 9 © 2022 by the authors; licensee asian online journal publishing group economy vol. 9, no. 1, 9-17, 2022 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/economy.v9i1.4104 © 2022 by the authors; licensee asian online journal publishing group education and livelihood in ghana: evidence from instrumental variable analysis samuel osei-gyebi kwame nkrumah university of science and technology, kumasi, ghana. email: kwakuoseigyebi@gmail.com tel: +234-80106629848 abstract the research verified if schooling makes any difference in the consumption expenditure and poverty status of individuals in ghana. using the recent round of the ghana living standards survey data, we quantified the difference that schooling makes in the livelihood of individuals through the method of instrumental variables (iv). we found that individuals who have completed some level of schooling experience a significant increase in their consumption expenditure relative to those who have not been to school at all. again, educated individuals who are poor had a significantly lower consumption expenditure compared to educated individuals who are non-poor. also, individuals with some level of schooling had a lower probability to be poor compared to those without any schooling. we suggest massive investment in educational infrastructure and a revision of the schooling curriculum to equip individuals with workable skills that can enable them to undertake livelihood activities to improve their welfare. keywords: ghana, consumption expenditure, schooling, livelihood, poverty, instrumental variables. jel classification: c12; e21; i26. citation | samuel osei-gyebi (2022). education and livelihood in ghana: evidence from instrumental variable analysis. economy, 9(1): 9-17. history: received: 4 april 2022 revised: 5 july 2022 accepted: 21 june 2022 published: 11 august 2022 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. competing interests: the author declares that there are no conflicts of interests regarding the publication of this paper. transparency: the author confirms that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study followed all ethical practices during writing. contents 1. introduction ...................................................................................................................................................................................... 10 2. literature review ............................................................................................................................................................................ 10 3. methodology ..................................................................................................................................................................................... 12 4. results ................................................................................................................................................................................................ 14 5. conclusion ......................................................................................................................................................................................... 16 references .............................................................................................................................................................................................. 16 mailto:kwakuoseigyebi@gmail.com https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v9i1.4104 https://orcid.org/0000-0003-1435-6334 economy, 2022, 9(1): 9-17 10 © 2022 by the authors; licensee asian online journal publishing group contribution of this paper to the literature we established the difference that schooling makes in the consumption expenditure of individuals in ghana and how this influences their livelihoods. we also analyzed the interplay of education and poverty on the consumption expenditure of individuals in ghana to provide a new perspective on the nexus of education and livelihood. 1. introduction every individual requires some resources to sustain life (adjei, 2010) and these livelihood assets are what people dwell on to make a living (oduro, mohren, pena-claros, kyereh, & arts, 2015). different individuals go through their livelihood activities in different places; some undertake their activities in their homes while others go outside of their homes (mahama & maharjan, 2018). livelihood issues are of great importance in combating poverty; hence the government of ghana has initiated the livelihood empowerment against poverty (leap) program as one of the key policy directives to address the vulnerability in the country (mahama & maharjan, 2018). education contributes to the enhancement of assets and a good foundation in education for that matter enhances one’s efforts of building human capital to earn a decent living (tangney, baumeister, & boone, 2004). again, education is potent in enabling peoples’ capabilities to be enhanced to achieve sustainable livelihoods. also, sen (1990) emphasizes that education serves both as a means to a better life and also an end in itself which makes it important for all individuals. however, despite the important role education plays in livelihood, there have been concerns about how education is being accessed and delivered (tangney et al., 2004). according to united nation international children’s emergency fund (united nations children’s fund (unicef), 2016) approximately 124 million adolescents and children lack the opportunity to attend and complete school. approximately 59 million primary students and 65 million adolescents in lower secondary levels are unable to complete school with more than 50% of this number living in sub-saharan africa. according to corcoran et al. (2020) no matter the efforts people put into learning, if the teaching and learning environment is not favorable, then the quality of education is a problem. even though the education system has experienced reforms and reviews over the years, their cumulative effects have not yielded the desired goals as significant issues still exist (pajibo & tamanja, 2017). corcoran et al. (2020) noted that ghana has inadequate schools, a low teacher-to-pupil ratio, and high illiteracy rates, especially in rural parts of the country. for example, the centers of ghana’s early childhood education (ece) are lacking in terms of major learning and teaching materials per the same report. another challenge has been the huge opportunity cost for some parents to allow their children to attend school because their children serve as a significant source of labor (debrah, 2013). this makes it difficult to convince most parents to enroll their children in school. the abundance of highly educated people undoubtedly is a prerequisite for socio-economic development. the effect of education on certain indicators has therefore received enormous attention across the globe. mention can be made of coelli and green (2012) which analyzed the effect of high school education on the welfare of young canadians while little, aboud, and lenachuru (2009) studied how education influences the livelihood of farmers in kenya. in ghana, sackey (2005) looked at how education affect the labor force participation and the fertility of women whereas peters, baker, dieckmann, leon, and collins (2010) examined the effect of education on the health-protecting behaviors of people. based on these studies and discussions, it is obvious that the direct link between education and livelihood in ghana has not been sufficiently highlighted in the literature. precisely, the effect of education has been examined on certain aspects of livelihood but not on a livelihood measure like the consumption expenditure of individuals in ghana. consumption forms a critical aspect of the individual’s livelihood and underscores the need to examine the direct effect of education on it. this will provide more insight into how the lives of ghanaians can be enhanced by improving the access and quality of education. the contribution of this study to literature is three-fold: first, we find out if ghanaians with some level of schooling significantly differ from those who have never been to school in terms of their consumption expenditure. to do this, we estimate the magnitude of the difference in consumption expenditure between individuals who have had some level of schooling and those who have not been to school at all. second, we estimate the effect of education on the consumption expenditure of poor individuals in ghana. this in particular allowed us to analyze the interplay of education and poverty on the consumption expenditure of individuals in ghana. third, we estimate the effect of education on the poverty status of individuals in ghana. this objective reveals further insight into the role of education in influencing the poverty status of ghanaians. the remainder of this paper is organized as follows. section two reviews the literature in addition to an overview of the educational system in ghana. the next section outlines the methodology adopted by the study whiles section four presents empirical results and its discussions. the paper is concluded in section five by presenting a summary of findings, conclusions, and some policy recommendations. 2. literature review 2.1. theoretical review endogenous growth models with emphasis on human capital are the theoretical basis for this study. endogenous growth models that stressed knowledge accumulation became necessary after classical growth theories failed to explain what determines the vast increase in income over time and the wide disparities between income levels of poor and rich countries. essentially, endogenous models of growth focused on explaining what determines technical progress (romer, 2012). for instance, aghion and howitt (2008) mentioned formal education as the first and foremost channel of knowledge accumulation. these models emphasized education because it is important for the development of human capital. the reason is that education has a progressive effect as individuals with some level of education can obtain an extra level of education which improves their human capital and makes them more productive. the lucas model for instance noted that an individual with human capital h(t) is as productive as two individuals with half each of h(t) (crockett, duffy, & izhakian, 2019). also, education has an externality effect as individuals from highly educated families are able to attain more education than those from economy, 2022, 9(1): 9-17 11 © 2022 by the authors; licensee asian online journal publishing group families that are less educated. this argument is extended to include the fact that individuals from highly educated neighborhoods are more likely to reach higher levels of education compared to those from other neighborhoods (heckman & karapakula, 2019). the increase in human capital and productivity of the individual enhances their capacity to secure a meaningful source of livelihood. it follows that the more years of schooling attained by an individual, the higher will be their consumption which enhances their livelihood (tran, tran, & nguyen, 2020). based on this, education is considered a gateway for individuals all over the world to obtain a sustainable source of income either through formal employment or self-employment. although the ascending rate of unemployment especially in developing countries may cause individuals not to secure a meaningful source of livelihood after several years of education, it is difficult to deny the wholistic improvement education brings to a person. education remains a catalyst for economic growth which further enhances the livelihood of individuals. education has been described as a defining factor for the difference between rich and poor countries as evidence shows that developed countries have more educated individuals than developing ones (lim, 2018). 2.2. empirical review the review of literature is done along two lines. we first consider studies that examined the effect of education on other indicators in jurisdictions other than ghana. the second part focused on studies that investigated education and livelihood in ghana. coelli and green (2012) found canadians who graduate from a high school reduce their receipt of welfare by 50% and this effect is much more noticeable in more deprived neighborhoods. tran et al. (2020) confirmed the positive effect of education on the consumption and negative effect on poverty in vietnam. a crucial aspect of their study showed that the positive effect of education is higher for relatively betteroff households which suggests a form of inequality. little et al. (2009) also noted the positive effect of education on the livelihood of pastoralists in kenya as it helps them reduce the risk of famine and increase their employability. sackey (2005) found positive effects of education on labor force participation and a negative effect on the fertility of women. peters et al. (2010) also found evidence that education enhances the health-protecting behaviors of people in ghana. another study is porter et al. (2011) which noted that inadequate transport infrastructure affects the livelihood of young ghanaians particularly by reducing their attendance and performance in school. essentially, the paper suggests that improvement in the transport infrastructure will enhance the education of young people in ghana. cameron and ananga (2015) also showed that saving groups improve the livelihood of rural households by helping them to pay for the education of their children. it further noted that households generate income from the loans that they source from the saving program. more recently, mabe, konja, addo, and awuni (2022) examined how the location and gender aspects of the leap program affect the education of children in ghana. their results indicate that social protection projects like the leap improve education for children of beneficiary households but this impact is higher for urban areas compared to rural areas. the general conclusion from the review of empirical studies is that education improves the livelihood of individuals through channels such as increased labor force participation, increased productivity, and incomes. it is also clear that an improvement in the livelihood of individuals improves the quality of education for their children. however, the direct effect of education on the consumption expenditure of individuals in ghana is yet to be studied. since livelihood improvement ends up with increased consumption, it is important to examine the direct effect of education on consumption expenditure in ghana. 2.3 overview of the ghanaian educational system education is widely accepted as one of the important means by which any country can improve the lives of its people. like most countries in sub-saharan africa (ssa), ghana is making a lot of efforts to improve education for its people. some of these initiatives include working towards the attainment of universal primary education for every child. ghana commenced free compulsory basic education (fcbe) in the middle of the 1990s to give every ghanaian child a free basic education. this initiative did not yield the expected results as there were still several ghanaians who did not have the privilege of basic education and most of them were from poor rural households (akyeampong, 2009). akyeampong (2009) further noted that one main problem that militated against the success of fcube was that the program did not provide much incentive for some children to give up whatever it is they were doing for school. apart from the fact that there were still costs incurred by parents, poor households were unable to allow their children to attend school and forgo their child labor. essentially, the program did little to eliminate the cost associated with primary education, especially for poor households in rural areas. before this, ghana had already experienced a mammoth number of its teachers who had left for nigeria due to the poor economic conditions between the late 1970s and the middle of the 1980s. this situation, coupled with insufficient and deteriorating infrastructure negatively affected the quality of education leading to a decline in primary enrollment in the late 1980s (world bank, 2004). the educational sector received a major boost with the introduction of the structural adjustment program (sap) and a huge investment worth about us$ 260 million between 1986 and to early 2000s (akyeampong, 2009). to further boost education by improving free compulsory education, the government of ghana in collaboration with its partners introduced the school feeding program which was to provide one healthy meal for children in public basic schools every day of school (akyeampong, 2009). . the program which encouraged the production and consumption of local foods encouraged more children to attend school because they would not have to worry about food anymore. according to adu-gyamfi, donkoh, and addo (2016), one phenomenon that has characterized the educational system in ghana is the pendulum of four years and three years duration of senior secondary education that accompany various changes in political power. this inconsistency in secondary education does not lead to the effective transfer of knowledge to the students and may lead to poor academic performance. the most recent initiative by the government of ghana to improve education in the country is the free senior high school program. this policy was introduced in fulfillment of article 25, section 1b of the 1992 constitution of ghana which states that; “secondary education in its different forms including technical and vocational education, shall be made generally available and accessible to all by every appropriate means, and in particular, by the progressive introduction of free education”. it is also in line with one of the goals of sustainable development economy, 2022, 9(1): 9-17 12 © 2022 by the authors; licensee asian online journal publishing group goals of the united nations (sdg-un) to provide free, equitable, and quality primary and secondary education to all boys and girls by the year 2030 (united nations development group (undp), 2016). this program has increased the number of students in second-cycle institutions and it’s widely regarded as a step in the right direction as far as providing accessible and quality education for all is concerned. there are still problems despite these initiatives and progress made as a country concerning education. problems include the huge infrastructural deficit, high pupil-to-teacher ratio, and the inability of most students to attain tertiary education. the student-to-teacher ratio of primary schools in ghana is 27.30 which is relatively high compared to countries like mauritius (17.94) and cuba (8.83) (majgaard & mingat, 2012). the inadequate infrastructure within the educational system is evident as most school children especially in the rural areas have to learn in deplorable structures which inhibit quality teaching and learning. in some rural communities, teachers have no option but to teach their students under trees and no one needs further explanations as to how that will affect students. the phenomenon of low tertiary completion is not surprising because of the many challenges that affect basic education in the country. the issue is uncommon in several countries in ssa as only 5% of students who begin primary school can complete tertiary education in the region (majgaard & mingat, 2012). the government of ghana needs to do more especially in rural areas and at the basic level if the country has any hopes of using education to transform its economy and improve the lives of its people. 3. methodology 3.1. data and description of variables the study employed cross-sectional data from the most recent round of the ghana living standard survey (glss). this round of glss was conducted in 2016/2017 and provides a wide range of information on 59,864 ghanaians. glss is the most widely used dataset as far as cross-sectional information on ghanaian households is concerned. the study, therefore, found it prudent to employ it since the aim was to estimate how education influences the livelihood of ghanaians. specifically, glss provides data on education and several other factors that influence the livelihood of households such as income, gender, location, size of household, and poverty status. the study used consumption expenditure as a measure of livelihood. chambers and conway (1992) defined livelihood as comprising the assets, capabilities, and activities that one requires for a living. essentially, individuals employ the resources at their disposal to earn a living and it is, therefore, prudent to measure their livelihood by their consumption expenditure. the main aim of livelihood strategies is to provide the necessities of life such as food, clothing, and shelter (gecho, ayele, lemma, & alemu, 2014). the majority of individuals in developing countries like ghana spend almost all their income in fulfillment of these basic needs and justify the use of total real consumption expenditure as a measure for their livelihood. education is measured as a binary variable of 0 and 1 respectively for individuals who have not attended school at all and those who have completed a given level of schooling. this allowed the study to find out how individuals with some level of schooling significantly differ from those who have not been to school at all. the years of schooling of the individual have been used by studies such as pons and gonzalo (2002) to estimate the effect of schooling but this study is unable to do the same due to limited information on the years of schooling as well on the course years completed. apart from education which is the main explanatory variable, the study controls for individual characteristics such as household size, poverty status, location, gender, and total gross income. location tells whether the individual resides in an urban or rural area whereas poverty status indicates whether an individual is non-poor or poor (gss, 2017). table 1 depicts significant differences in individual characteristics based on their poverty status. the income and consumption of poor individuals were significantly lower than those who are better off. for instance, much better-off individuals consume about 3 times more than poor individuals highlighting the vulnerability of poor individuals in ghana. poor individuals also tend to have a relatively larger household size and are much younger. this implies that poverty is prevalent among young adults in ghana, especially in the face of rising unemployment. the difference in course years completed by poor and non-poor individuals is small and it further shows the average course years completed by ghanaians is very small. essentially, this gives a snapshot of the state of education in ghana and the need for more efforts to improve it. table 1. individual characteristics based on their poverty status. variables non-poor poor whole sample mean sd mean sd mean sd consumption (ghs) 12,866.77 11,186.96 4,652.05 3,047.79 10,766.32 10,409.83 income (ghs) 33,186.5 174,681.8 8,197.1 26,606.1 26,799.1 151,693.4 household size 3.6 2.5 5.9 3.2 4.2 2.8 course years completed 2.4 1.2 2.2 1.3 2.3 1.3 age in years 45.2 15.7 20.7 18.5 24.9 20.3 gender (female) 1.33 0.47 1.55 0.49 1.52 0.49 location (rural) 1.46 0.49 1.67 0.47 1.63 0.48 observations 10,427 49,437 59,864 note: sd represents the standard deviation. table 2 describes the total real consumption expenditure of individuals based on their educational status. it also presents the two-sample t-test for the relationship between the consumption expenditure of individuals and their educational status. educated individuals were shown to consume more than those who are uneducated. essentially, individuals who have completed some level of schooling consume ghs 2,165.14 more than those who have never been to school. results of the two-sample t-test confirm that this difference in their consumption expenditure is significant at the 5% level of significance. this difference does not establish any causal effect between educated and uneducated individuals but points to the fact that education or schooling is an avenue for individuals to improve their livelihood through an increase in their consumption expenditure. economy, 2022, 9(1): 9-17 13 © 2022 by the authors; licensee asian online journal publishing group table 2. cross-tabulation of individual’s consumption by their educational status. educational status obs. mean (ghs) std. err. std. dev. [95% conf. interval] uneducated 3,357 9120.074 124.57 7217.514 8875.834 9364.314 educated 10,652 11285.14 108.32 11179.53 11072.81 11497.47 combined 14,009 10766.32 87.95 10409.83 10593.93 10938.72 diff. -2165.066 205.2358 -2567.356 -1762.777 two-sample t test h0: diff.=0 h1: diff.! =0 t=-10.549 df. = 14007 pr. (|t|>|t|) =0.000 3.2. instrumental variable estimation of the effect of education on livelihood following pons and gonzalo (2002), the iv model for the effect of education on the livelihood of individuals is given as; 𝐶𝑖 = 𝑎 + 𝑋𝑖𝛼 + 𝑆𝑖𝛽 + 휀𝑖 (1) 𝑆𝑖 = 𝑞 + 𝑍𝑖𝜌 + 𝑣𝑖 (2) equation 1 shows the total real consumption expenditure of individuals (𝐶𝑖) is explained by a vector of exogenous variables (𝑋𝑖) and (𝑆𝑖) which indicates if the individual has completed any form of schooling or not. (𝑆𝑖) is 1 if the individual has completed some level of education and 0 if he/she has not been to school at all. equation 2 presents the schooling equation in a reduced form in which 𝑍𝑖 is a vector of exogenous variables that influences the schooling decision so that 𝑋𝑖 is included in 𝑍𝑖 . a and q are intercepts of the two equations. indeed, the decision to attend school and complete a given course of study is not exogenous and therefore requires the use of relevant instruments. the reason is that estimating equation 1 by ols in the presence of correlation between ε and v leads to a biased estimate of β. the second objective was to find the effect of education on the consumption expenditure of poor individuals in ghana considering the relevance of poverty as far as livelihood issues are concerned. this requires the interaction of the schooling variable and the variable for poverty. the interacted variable will then be included in equation 1 as; 𝐶𝑖 = 𝑎 + 𝑋𝑖𝛼 + 𝑆𝑖𝛽 + (𝑆𝑖 ∗ 𝑃𝑆𝑖)𝜃 + 𝑒𝑖 (3) equation 3 expresses the consumption expenditure of poor individuals as a function of a vector of exogenous variables (𝑋𝑖) and (𝑆𝑖) which indicates if the individual has completed any form of schooling or not plus the interaction of the schooling variable and the variable for poverty. 𝜃 represents the effect of the interacted variable for schooling (𝑆𝑖) and poverty status (𝑃𝑆𝑖) of individuals in ghana. the endogeneity of schooling implies the interacted variable is also endogenous and the instrumental variable method was employed to find out how education impacts the consumption of poor ghanaians. 𝑒𝑖 is the error term, and the definition of other variables remained the same. to further delve into the effect of education in enhancing the livelihood of ghanaians, the third objective was to estimate the effect of schooling on the poverty status of individuals. this was done in an instrumental variable probit (iv probit) framework as the dependent variable was binary. following haji and legesse (2017) the study specifies the poverty status of the individuals as a function of their schooling and other significant variables as; pr(𝑃𝑆𝑖 ≠ 0|𝑋𝑖) = 𝛷(𝑋𝑖𝛽) (4) equation 4 expresses the poverty likelihood of individuals as a function of their schooling and other significant variables. 𝑃𝑆𝑖 is poverty status of the individual which is the dependent variable, φ is the cumulative standard normal and 𝑋𝑖 is a vector of explanatory variables which includes the instrumented variable for schooling (𝑆𝑖). the poverty status of the individual is a binary variable with a value of 1 representing poor and 0 for non-poor. the probit model, therefore, assumes how different the effect of education on the poor is from the non-poor. in this case, how likely is the poverty status of educated individuals to differ from those who are uneducated (wooldridge, 2019). information on the family background has been used as an instrument for schooling by several studies. pons and gonzalo (2002) for instance, used the education of parents and their occupation as part of instruments to estimate the effect of schooling on wages. this study follows in that direction and employs the educational level of the father and mother as instruments for the education of the individual. pons and gonzalo (2002) are one of many studies that have asserted the significance of parents’ education to the educational achievement of the individual. individuals whose parents have a higher level of education tend to have significantly longer years of schooling. the reverse is true for individuals whose parents have a low level of education significantly and have shorter years of schooling. 3.3. hausman’s test for endogeneity self-reported values associated with survey data make variables endogenous (wooldridge, 2019). again, the decision to attend school and complete a given level of study is also influenced by several factors. suspecting the possibility of endogeneity of the schooling variable is not enough. there is the need to ascertain if the variable is endogenous. verification of the schooling variable will inform the use of appropriate instruments through the method of instrumental variable estimation to obtain consistent and valid estimates (wooldridge, 2019). according to davidson and mackinnon (1993), an augmented regression needs to be run after performing a first auxiliary regression which specifies the schooling variable as a function of the instruments. this specification is given as; 𝑆𝑖 = 𝑘 + 𝛾𝑆𝑓 + 𝛿𝑆𝑚 + 𝑢𝑖 (5) equation 5 represents the represents the auxiliary regression and 𝑆𝑓 and 𝑆𝑚 represents the educational level of the individual’s father and mother respectively. k is the intercept, 𝑢𝑖 is the stochastic error term, and the definition of 𝑆𝑖 remained unchanged. equation 4 is estimated and its residuals are predicted and stored as 𝑆𝑖 ∗. 𝑆𝑖 ∗ is hence included as a regressor in the consumption function in equation 1 as; 𝐶𝑖 = 𝑎 + 𝑋𝑖𝛼 + 𝑆𝑖𝛽 + 𝜙𝑆𝑖 ∗+ 𝜔𝑖 (6) economy, 2022, 9(1): 9-17 14 © 2022 by the authors; licensee asian online journal publishing group equation 6 represents the augmented regression that contains the predicted residuals from equation 5. 𝜙 which is the co-efficient of the predicted residuals for equation 4 is therefore tested. the definition of other variables remains unchanged and 𝜔𝑖 is the stochastic error term for equation 5. rejecting the null hypothesis of exogeneity means the coefficient of 𝑆𝑖 ∗ is significantly different from zero. this means the variable correlates with the error term and hence employing the ordinary least square method will yield inconsistent results. this test is also done for the interacted variable for the third objective. 4. results 4.1. what difference does schooling make in the consumption expenditure of individuals in ghana? table 3 presents how the consumption of individuals with education differs from those without any formal education. it also contains results for various tests, particularly for the exogeneity of education. hausman’s test results imply the rejection of the null hypothesis which suggests that the education of the individual is exogenous. this means education is endogenous and justifies the use of instrumental variable estimation techniques to find out how the consumption of educated individuals significantly differs from those who have not had any education. table 3. effect of education on consumption of individuals in ghana. consumption expenditure ols reduced form iv schooling 1.37*** (0.171) 1.22*** (0.176) 33.32*** (5.954) income 0.009*** (0.004) 0.011*** (0.0005) 0.0102*** (0.001) household size 1.46*** (0.028) 1.52*** (0.029) 1.47*** (0.055) age in years 0.004 (0.0046) 0.014*** (0.0048) -0.067*** (0.015) poverty status (poor) -9.781*** (0.19) -9.349*** (0.199) -10.21*** (0.387) gender (female) -0.972*** (0.162) -1.012*** (0.165) 2.164*** (0.659) location (rural) -4.107*** (0.159) -3.627*** (0.165) -1.44** (0.564) intercept 8.326*** (0.276) 6.726*** (0.306) -15.146*** (4.371) observations 14,009 13,142 13,142 𝑅2 0.325 0.332 . test results hausman t-test on exogeneity n/a n/a (87.39) *** f-test statistic f (2, 28286) 59.62*** f (9, 13132) 727.12*** wald chi (7) 1825.29*** sargan’s identification test n/a n/a (20.65) *** notes: robust std. errors in parenthesis. *** represents 5 percentage significance levels. results from the ols and reduced form equations show that the effect of education on the consumption of individuals is undercast due to the presence of endogeneity. the iv results which correct for the problem of endogeneity show educated individuals consume 33.32 cedis more than those with no education. this confirms the theory of becker (1993) and empirical studies like (tran et al., 2020) which asserted the significance of education in enhancing the livelihood of individuals through an expansion in their consumption. indeed, estimating the effect of education in the presence of endogeneity leads to bias as the effect was undercast by about 32 cedis. results from table 3 also show that income significantly influences the consumption of individuals in ghana. a one cedi rise in the individual’s income increases the consumption of the individual by less than one cedi. this finding confirms the fundamental psychological law that states that a change in income increases consumption but not as much as the change in income. this implies consumption of individuals is less sensitive to changes in their income (sloman & wride, 2009). again, an additional increase in the size of an individual’s household increases his/her consumption by 1.47 cedis. age of the individual was found to significantly reduce the consumption of the individual whiles poor individuals experience a fall of 10.21 cedis in their consumption relative to those who are better-off. females were found to consume 2.164 cedis more than their male counterparts while individuals that reside in rural areas consume 1.44 cedis less than their counterparts in the urban areas, holding all other factors constant. 4.2. effect of schooling on the consumption expenditure of poor individuals in ghana it is hard to talk about livelihood, especially in developing countries like ghana without mentioning poverty. the poverty rate of ghana as of 2016 was 56.30% which is significant, especially in influencing the consumption expenditure of individuals (gss, 2017). the focus of this section is to find out how poverty influences the consumption expenditure of educated individuals in ghana. alternatively, how will education influence the consumption expenditure of poor individuals? because education was endogenous, interacting it with the poverty status of individuals makes the interacted variable also endogenous. hausman’s test for endogeneity of the interacted variable presented in table 4 confirmed the presence of endogeneity and justifies the need to employ instrumental variable estimation to estimate the effect of education on poor individuals. table 4 indicates that poverty hurts the consumption of individuals even if they are educated. educated individuals who are poor consume 39.65 cedis less than educated individuals who are non-poor. this negative effect substantiates the severity of poverty in ghana and the damage it does to the livelihood of individuals even if they have attained some level of schooling (world bank, 2019). economy, 2022, 9(1): 9-17 15 © 2022 by the authors; licensee asian online journal publishing group table 4. effect of education on the consumption expenditure of poor individuals in ghana. consumption expenditure ols reduced form iv schooling 2.132*** (0.198) 1.89*** (0.202) 38.92*** (6.16) schooling*poverty -2.938*** (0.388) -2.822*** (0.441) -39.65*** (6.155) income 0.0091*** (0.004) 0.011*** (0.0012) 0.0098*** (0.001) household size 1.46*** (0.028) 1.52*** (0.029) 1.57*** (0.056) age in years 0.0063 (0.0046) 0.016*** (0.0048) -0.028*** (0.010) poverty status (poor) -7.596*** (0.346) -7.24*** (0.366) -19.54*** (4.537) gender (female) -0.921*** (0.162) -0.964*** (0.165) 2.45*** (0.642) location (rural) -4.05** (0.159) -3.587*** (0.165) -1.095** (0.565) intercept 7.575*** (0.293) 6.081*** (0.320) -21.79*** (4.912) observations 14,009 13,142 13,142 𝑅2 0.328 0.335 . test results hausman t-test on exogeneity n/a n/a (119.86) *** f-test statistic/wald chi2 f (8, 14000) 852.6*** f (10, 13131) 661.4*** wald chi (8) 1820.29*** sargan’s identification test n/a n/a (11.40) *** notes: robust std. errors in parenthesis. *, ** & *** represents 10, 5 & 1 percentage significance levels. individuals with some years of schooling were also found to consume more than those who have not been to school at all. the significant difference in their consumption even increased from 33.32 cedis to 38.92 cedis which goes to affirm the role schooling plays in improving the livelihood of individuals. in the counterfactual sense, individuals who have never been to school would have consumed 38.92 cedis more if they have had some level of schooling. such an increase would have improved their livelihood. the effect of control variables remained the same. consumption expenditure remained less sensitive to changes in income, household size had a positive effect on consumption expenditure of individuals and poor individuals consume 19.54 cedis less relative to non-poor ones. females were shown to consume more than their male counterparts whiles individuals who dwell in rural areas were found to consume less than those in urban areas. 4.3. effect of schooling on the poverty status of ghanaians after establishing that poverty reduces consumption expenditure even for educated individuals, we went further to estimate the effect of schooling on the poverty status of individuals. the aim is to find out how education influences the poverty status of individuals in ghana. results of the wald test presented in table 5 show that the null hypothesis of exogeneity of the schooling is rejected at the 5% significance level. this implies that the schooling variable is endogenous and justifies the use of an instrumental variable to estimate the effect of schooling on poverty in ghana. table 5. effect of schooling on the poverty status of individuals in ghana. poverty status coef. marginal effects schooling -2.356*** (0.0439) 0.0025 (0.0143) household size 0.204 (0.2977) 0.083*** (0.0026) gender (female) -0.259*** (0.0403) -0.0103*** (0.0028) age in years 0.0061*** (0.00107) 0.000243*** (0.000075) location (rural) -0.112*** (0.0408) 0.0083*** (0.0033) consumption expenditure -0.151 (0.225) -0.0625*** (0.00036) constant 1.594*** (0.1044) n/a other statistics wald chi2 (7) 28746.58*** observation 13,902 corr. (education, poverty) 0.995 wald test of exogeneity 4.38** notes: robust std. errors in parenthesis. ** & *** represents 10, 5 percentage significance levels. according to table 5, individuals with some years of schooling are less likely to be poor compared to those who have not been to school at all. put differently, schooling reduces the likelihood of individuals being poor as it enhances their abilities to make a meaningful living. the marginal effect of household size on poverty status showed that individuals with a higher household size are 8.3% more likely to be poor. the simple explanation is that the income per head of a household reduces as its size increases and reduces the relative provision each member receives, holding all other factors constant. an economy, 2022, 9(1): 9-17 16 © 2022 by the authors; licensee asian online journal publishing group increase in household size also increases the dependency burden which increases the vulnerability of that household to poverty, assuming all other factors are fixed. compared to their male counterpart, females were shown to be less likely to be poor. their marginal effect confirms that females are 1.03% less likely to be poor compared to males in ghana. table 5 also revealed that individuals in rural areas of ghana were less likely to be poor relative to those in urban areas. its marginal effect was however contradictory as rural dwellers are 0.83% more likely to be poor. the results further showed that individuals with a higher consumption expenditure are 6.25% less likely to be poor. this means individuals with a higher level of consumption expenditure have the means to do so and are hence able to have a sustainable living which makes them less likely to be poor. 5. conclusion the purpose of this study was to verify if schooling makes any difference as far as the consumption expenditure and poverty status of individuals in ghana are concerned. in doing so, we quantified the magnitude of this difference through the method of instrumental variables (iv). the use of iv became important since schooling was found to be endogenous which means the use of ols will yield invalid and inconsistent estimates. the study also evaluated the effect of schooling on the consumption of poor individuals since poverty is considered paramount in livelihood issues, especially in developing countries. the influence of education on the poverty status of individuals was also investigated. using the education of individuals’ parents as instruments, we found a significant difference in the consumption expenditure of educated and uneducated individuals in ghana. essentially, individuals who have completed some level of schooling experience a significant increase in their consumption expenditure relative to those who have not been to school at all. as evidence of endogeneity, the results of ols underestimated the difference in consumption expenditure between these groups of individuals. again, educated individuals who are poor had a significantly lower consumption expenditure compared to educated individuals who are non-poor. the fall in consumption for the educated but poor significantly exceeds that of uneducated individuals. this evidence suggests the gravity of poverty on the livelihood of individuals even if they have had some level of schooling. it also suggests that putting individuals in schools is not enough but efforts must be made to adequately resource them to undertake livelihood activities. also, individuals with some level of schooling had a lower probability of poverty compared to those without any schooling. essentially, schooling to some extent empowers the individual with some skills and knowledge set that makes them less likely to be poor. finally, this paper recommends serious attention and investments in the ghanaian educational system especially at the lower level to increase enrollment. the schooling curriculum must be revised to equip individuals with some workable set of skills that can enable them to undertake livelihood activities to improve their welfare. this will help individuals to undertake start-up businesses and reduce the high rate of unemployment in the country. references adjei, r. s. 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(2019). report on agriculture and livelihood in africa. washington d.c: the world bank. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. http://www.unicef.org/media/50076/file/unicef_sowc_2016-eng.pdf 69 © 2020 by the authors; licensee asian online journal publishing group economy vol. 7, no. 1, 69-77, 2020 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2020.71.69.77 © 2020 by the authors; licensee asian online journal publishing group the influence of demographic factors on investment behaviour of individual investors: a case study of edo state, nigeria agbo, ezekiel1 abu, prince oshoke2 ( corresponding author) 1,2department of economics, faculty of social sciences, university of benin, benin city, edo, nigeria. abstract this study empirically examines the influence of demographic factors on investment behaviour of individual investors using edo state, nigeria as its case study. using the maximum likelihood method of estimation to estimate four multinomial logit equations, the results showed that educational level, occupation and marital status are the main demographic determinants of individual investors’ behaviour. also, age and gender have strong influences on individual investor’s risk preference. therefore, we recommend that it is pertinent that macroeconomic policies aimed at boosting investment should consider the expansionary effect of targeting civil servants and those in professional practice by providing them with investment incentives as these categories of persons have a much higher affinity for risk for investment purposes. keywords: demographic factors, individual investors’ behaviour, multinomial logit equations. jel classification: g11; a31; c38; c39; g02; c40; d7. citation | agbo, ezekiel; abu, prince oshoke (2020). the influence of demographic factors on investment behaviour of individual investors: a case study of edo state, nigeria. economy, 7(1): 6977. history: received: 7 april 2020 revised: 12 may 2020 accepted: 15 june 2020 published: 2 july 2020 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group acknowledgement: both authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ...................................................................................................................................................................................... 70 2. literature review ............................................................................................................................................................................ 70 3. data and estimation methodology .............................................................................................................................................. 72 4. presentation and analysis of empirical results ........................................................................................................................ 73 5. summary, recommendations and conclusions .......................................................................................................................... 75 references .............................................................................................................................................................................................. 76 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2020.71.69.77&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ https://www.asianonlinejournals.com/index.php/economy/article/view/1826 https://orcid.org/0000-0002-7088-1179 https://orcid.org/0000-0002-7799-0634 https://www.asianonlinejournals.com/index.php/economy/article/view/1826 https://orcid.org/0000-0002-7088-1179 https://orcid.org/0000-0002-7799-0634 https://www.asianonlinejournals.com/index.php/economy/article/view/1826 https://orcid.org/0000-0002-7088-1179 https://orcid.org/0000-0002-7799-0634 https://www.asianonlinejournals.com/index.php/economy/article/view/1826 https://orcid.org/0000-0002-7088-1179 https://orcid.org/0000-0002-7799-0634 economy, 2020, 7(1): 69-77 70 © 2020 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this paper helps in analyzing the factors which influence formation of intention to invest and further direct towards investment in the investment behaviour of retail investors. it provides solid preference to retail investors on portfolio selection and other risk preferences. it also provides a hybrid model which justifies the extent upon which demographic factors influences the investment patterns of individual investors giving a particular location. 1. introduction 1.1. background of the study this study analyzes the investment behavior of individual investors in edo state nigeria. investment behavior refers to how investors judge, predict, analyze and review the procedures for decision making, which includes investment psychology, information gathering, defining and understanding, research and analysis. it is the employment of funds with the aim of earning income or capital appreciation (pandey, 2001). economic theories of investment behaviour are largely based on the belief that individuals behave in a rational manner and that all existing information is embedded in the investment decision process. this assumption is the crux of the efficient market hypothesis (vijaya, 2016). but researchers questioning this assumption have uncovered evidence that rational behavior is not always as prevalent as we might believe. behavioral finance models attempts to understand and explain how human emotions influence investors in their decision-making process. furthermore, previous studies attempt to analyze the influence of demographic factors on the investment pattern of individual investors which has enhanced better understanding of why people manage investment in different ways, debondt and thaler (1995). this study examines the role of demographic factors as a differentiating and classifying factor of individual investors associated with their investment behaviour, the exposition to various investment avenues in their choice of portfolio selection and the level of information an individual investor has over his investments. this will enable financial advisors guide investors on the basis of their age, income, and risk tolerance. earlier literature focused on the relationship between risk tolerance and demographics variables. information on the nature of the relationship between demographic factors and individual investment behaviour will be of immense use to individual investors, financial experts, brokers and investment firms. given the complexity and importance of investment decisions to individuals and the economy, there exists a mirage of theories and procedures; the expected utility theory, efficient market hypothesis, modern portfolio theories, prospect theory and mental accounting. many studies on this aspect has judiciously made use of behavioural finance to analyze the behavioural pattern of investor’s behaviour and specifically generalized assertions based on the cognitive and heuristic factors that affect individual investment behaviour. there exist a close association between individual investor behaviour and their own investment methods and also, each individual investor is different, some are more risk averse than others, and some have more resources than others. these premises beg the questions over the relevance of traditional theories like the prospect theory, mental accounting, efficient market hypothesis and modern portfolio theories (kahneman & tversky, 1979; thaler, 1985; von neumann & morgenstern, 1944). individual investors are said to be influenced by some psychological biases. it is important to identify the most influential factors on investment behaviour. despite the growing interests in this important and relatively new stream popularly known as behavioural finance, there are yet scanty scientific researches in this field especially in nigeria. therefore, this study represents one of such attempt to fill this gap by investigating the demographic factors influencing individual investment behaviour. 1.2. research questions in other to attain the basic objectives of this study, the following research questions will be answered; i. to what extent do demographic factors impact on access to sufficient information by individual investors? ii. do demographic factors have any impact on the risk appetite of individual investors? iii. the degree of impact of demographic factor on the investment avenue selection by individual investors? iv. do demographic factors have any impact on the investment experience of individual investors? 1.3. objectives of the study the general objective of this study is to determine the impact of demographic factors on individual investor behaviour with emphasis on risk appetite, availability of information, portfolio selection and investment experience. the specific objectives of this study are: i. to assess the influence of demographic factors on the access to sufficient information by individual investors. ii. to ascertain the influence of demographic factors on the risk appetite of individual investors. iii. to establish the influence of demographic factors on the investment avenue selection by individual investors. iv. to evaluate the influence of demographic factors on the investment experience of individual investors. 2. literature review theories under behavioural finance seek to improve the standard theories of finance by introducing behavioural aspects to the investment decision making process. heuristic decision making process refers to rule of thumb which humans use to make decisions in complex, uncertain environments. most times investors make decision with lax collection of information and objectivity and this involves the mix of mental, environmental and emotional factors. some investors are overconfident of their ability to consistently time and beat the market, thus, they trade excessively, with trading costs denting profits (tomola, 2013). furthermore, these differences are most pronounced between single men and single women. barber and odean (2001) carried out a test on the prediction economy, 2020, 7(1): 69-77 71 © 2020 by the authors; licensee asian online journal publishing group that overconfident investors trade excessively by partitioning investors on gender. their analysis showed that men tend to be more confident traders than women and thus trade more volumes than women. consequently, their average returns are less than that of women. on the other hand, some investors place undue weight of decision making on the most available information. this leads to less return and sometimes poor results. this bias is the tendency for people to place greater importance on more recent data or experience. shiller and pound (1989) found that at the peak of the roaring 1980s japanese bull market, only 14 percent of japanese investors expected a crash and eventually after the crash, 32 percent said that they expected the crash. this illustrates the tendency for investors to become more optimistic when the market goes up and more pessimistic when it goes down and this tendency causes a good number of investors to consistently buy high and sell low. kahneman and tversky (1973) found that people usually forecast future uncertain events by focusing on recent history and pay less attention to the possibility that such short history could be generated by chance. shefrin and statman (1995) described what is known as the disposition effect where investors are disposed to selling the winners too early and to riding the losses too long. according to odean (1998b) the disposition effect is consistent with the notion that realizing profits allows one to maintain self-esteem while incurring losses. zoghalami and matoussi (2009) carried out a survey to identify the psychological biases that influences the investor behaviour using a multinomial logit model. the univariate and multivariate analyses showed that investors’ behaviour in tunisia was driven by various psychological factors such as precaution, under confidence, conservatism, under optimism and informational inferiority complex. chandra and kumar (2011) examined the extent to which psychological biases are responsible for individual investment behaviour using principle component analysis. the results revealed some psychological axes, such as conservatism, under confidence, prudence, precautious attitude and informational asymmetry which have an influence on investor decision making. le phuoc and doan (2011) investigated the behavioural factors influencing individual investors’ decisions at the ho chi minh stock exchange using factor analysis. the results show that five behavioural factors such as herding, market, prospect, overconfidence -gamble’s fallacy and anchoring -ability bias affect the investment decisions of individual investors. kahneman and tversky (1972) developed the prospect theories to discuss various states of mind that may influence an investor’s decision making process. regret theory deals with the emotional reaction people experience after realizing they've made an error in judgment. faced with the prospect of selling a stock, investors become emotionally affected by the price at which they purchased the stock. so, they avoid selling it as a way to avoid the regret of having made a bad investment, as well as the embarrassment of reporting a loss. some investors avoid the possibility of feeling this regret by following the conventional wisdom and buying only stocks that everyone else is buying, rationalizing their decision with "everyone else is doing it" (grable & lytton, 1999b). there is a tendency to place particular events into mental compartments and the difference between these compartments sometimes impacts behaviour more than the events themselves. this is known as mental accounting. an interesting example of mental accounting is best illustrated by the hesitation to sell an unprofitable investment that once had gigantic profits. during an economic boom and bull market, people get accustomed to healthy, albeit paper gains. when the market correction deflates investor's net worth, they're more hesitant to sell at the smaller profit margin. they create mental compartments for the gains they once had, causing them to wait for the return of that gainful period (thaler, 1999). more so, social environment influence people’s behavior by propelling conformity. social influence has an immense power on individual judgment. when people are confronted with the judgment of a large group of people, they tend to change their wrong answers. they simply think that all the other people could not be wrong. herd behavior may be the most generally recognized observation on financial markets in a psychological context. even completely rational people can participate in herd behavior when they take into account the judgments of others, and even if they know that everyone else is behaving in a herd-like manner. shiller, robert, and john (1989b) show that even if people read a lot, their attention and actions appear to be more stimulated by interpersonal communications. moreover, there are market factors which influence the behaviour of sentimental and rational investors in different ways. external factors such as market information, price fluctuations and stock trends influences investors’ decision making. more empirical studies show that investment avenues, functioning institutions, investors’ level of awareness, market conditions and demographic factors are among other factors that affect investors’ behavior. bhushan and medury (2013) examined the awareness level and investment behaviour of salaried individuals towards financial products. he found that individual investors are reasonably aware of investing their money in traditional and safe financial products whereas the awareness level of new age financial products among the population is low. geetha and vimala (2014) identified the popular perception of individual investors towards selected investment avenues and the predominant factors which influence individuals to go for savings. they found out that changes in demographic factor such as age, income, education, and occupation influence the investment avenue preference. acha (2012) examined the behaviour of teachers towards savings and investment and to understand the resultant economic behaviour and its implications. they employed chi square and regression analysis. they discovered that individual characteristics of teachers such as age, gender, marital status, lifestyle and family characteristics such as monthly family income, stage of family life cycle and upbringing status emerged as determinants of their savings and investment behaviour. jain and kushboo (2012) examined the association of demographic factors on investment choices using chi square test and the results show that the demographic profiles and personality type of the investors is closely associated with investment choices. investors with higher income group prefer to invest in real estate and females prefer to invest in old products. females were conservative while investing and males were aggressive. in the same vein, chakraborty (2012) analyzed the investment pattern, saving objective and preferences of individual investor’s for various investment options available in india. they employed chi -square, anova, and factor analysis. the result showed that saving objective is influenced by demographic factors such as age, occupation and the income level of investors. female investors tend to save more in a disciplined way than the male investors. it was concluded that women are risk averse indeed but save more than the male counterparts as the income level rises. bahl (2012) carried out a study on the investment behavior among the working women in punjab. they employed principal component analysis and discovered that working women invest their money in insurance plans. kumari and joseph (2014) investigated the influence of the financial literacy on individual investment decisions using chi square test. the found out that economy, 2020, 7(1): 69-77 72 © 2020 by the authors; licensee asian online journal publishing group apart from gender, there is a relationship between demographic factors and the level of financial literacy possessed by the respondents. chitra and sreedevi (2012) analyzed the influence of seven personality traits which includes emotional stability, extraversion, risk, return, agreeability, conscientiousness and reasoning on the choice of the investment pattern using chi square test. they found out that personality traits of the investors have impact decisions making and also influence the method of investment. the study also found that the influence of personality traits on the investment decision is more compared to that of demographic variables. the review of literature shows that age, gender, and income are strong determinants of investment decisions. the literature also revealed that men tend to be less risk averse in their choice of portfolio selection compared to the female folks. this research however addresses the issue of individual investment decision making as well as how demographic factors such as age, education, occupation, family size, wealth status and gender affect their individual investment decision making in benin metropolis of edo state, nigeria. 3. data and estimation methodology 3.1. data preliminary scanning of various secondary data sources preceded primary data collection. the primary data investigation proceeded on the framed objectives of the present study. the research instrument consisted of a structured questionnaire which was used to collect first hand responses from individual investors in edo state. this primary data has been put to further statistical analysis so as to find some useful information and generate inferences related to the objective of the study. the data was collected by the way of personal discussion for designing the questionnaires. questionnaires were sent to approximately 230 respondents on the basis of convenience sampling. the responses obtained from the exercise were coded and analyzed. questionnaires consisted of demographic information of individual respondent such as name, gender, age group, education, income group, occupation, family size. in line with the research topic, the study involves individual investors from selected areas in benin metropolis, edo state, nigeria. the selected areas are ugbowo, new benin, ring road, ikpoba hill, and sapele road. table-1.descriptions of variables variable code variable names descriptions age age of the respondents age is the most investigated demographic factor among all. it is largely accepted that the risk behaviour of an individual depends on his/her age. older individuals tend to be less risk tolerant than younger individuals, probably because older individuals have less time to meet their goals and objectives. dom where respondents are domiciled a home or residence of the respondent. the place he lives also influences his investment pattern. edu educational attainment of the respondents education refers to facts, skills and knowledge that have been learned. the level of education encourages an individual to assume higher level financial risk and investment opportunities. similarly, other studies found that the increased levels of education are associated with an increased level of investment fsiz family size of the respondents family size includes being single, married, divorced and married with children as well. family size influences the nature and the amount of investment ftyp family type of the respondents family type includes both nuclear and extended family. this also, to a significant extent influence the behavioural pattern of the individual investor gend gender of the respondents gender depicts both male and female. research shows that gender has greater influence on the investment pattern of individual investors iexp investment experience of the respondents investment experience explains how long an investor has been trading in a particular place and on a particular stock mast marital status of the respondents marital status implies whether an investor is married, single or divorced. it is believed that married investors are more averse to high financial risk because they have more financial commitments and a larger number of dependents thereby affecting their investment pattern. occ occupation of the respondents occupation refers to the principal activity which someone engages in to meet requirements for their livelihood (grable & lytton, 1999b; grable & lytton, 1999a). an investor may be working in the private sector or the public sector or be self-employed. inva investment avenue selection of the respondents this refers to the investment avenues available to the respondent and the investment choice of an individual investor. rel religion of the respondents religion is a particular system of faith and worship eg islam, christian, hindu e.t.c. religious believes influence investors performance rsid residence of the respondents residence depicts where an investor lives or resides. it could be rural or urban which also determine the investor’s choice of investment. rapp risk appetite of the respondents investors level of risk tolerance also affect his investment behaviour sinfo sufficient information available to the respondents sufficient information refers to the avenues of information an investor is exposed to. where and how his information sources educates him on a portfolio investment. wealth wealth status of the respondents wealth refers to riches, valuable material possessions. the wealth of an individual investor determines the level of investment and his behaviour towards diversification of portfolios. economy, 2020, 7(1): 69-77 73 © 2020 by the authors; licensee asian online journal publishing group 3.2. estimation methodology the estimation method used in this study involves the multinomial logit model which provides the opportunity to trace the effect of variables of different measurement scales on nominal scale dependent variables (brooks, 2008). the coefficients are interpreted as the log transformation of the odds ratio in favor of the dependent variable (brooks, 2006; gujarati, 2004). other attendant tests associated with the multinomial logit model are the pseudo r2 and the likelilhood ratio chi2 tests which test for the goodness of fit of the multinomial logit specification (brooks, 2006). the empirical model used can be specified as follows: where indicates that individual behaviour of the ith respondent is proxied by the availability of sufficient information, investment experience, portfolio investment selection preference and risk appetite of the ith respondent. on sufficient information, the availability of education to persons in younger generations tend to expose them to the ease of access to information unlike those of the older generations considering that education itself evolves over time as well. 4. presentation and analysis of empirical results the purpose of this section is to present the summary analysis of variables and estimated results of the multinomial logit models. univariate data was generated from the questionnaire upon which inferences were drawn for the multinomial logit equation. consequently, the multinomial logit models are estimated with the aid of the maximum likelihood method of estimation and the log-odds ratio are interpreted towards tracing the impact of demographic variables on of individual investor behaviour. table-2.descriptive summary of ages and family size of respondents. age famsiz mean 35.35 3.408284 std. dev. 9.693675 2.543465 median 34 3 variance 93.96734 6.469217 skewness 0.3861829 0.7243132 kurtosis 2.543977 2.776672 on the summary analysis of the ages and family size of the respondents, it is observed that the mean age is 35 years approximately while the standard deviation of the respondents’ ages stood at 9.69 years. the median age stood at 34 and the distribution of the ages appear roughly normal as the skewness stood at 0.39 approximately and the kurtosis stood at 2.54 approximately. the average family size is 3 persons while the standard deviation stood at 3 persons as well approximately. the distribution of the family size is also normal as the skewness measure stood at 0.72 approximately and the kurtosis stood at 2.78 approximately. 4.1. multivariate analysis of the effect of demographic factors on individual investors’ behaviour in this section the impact of demographic variables on investment behaviour is estimated in the table 3. according to the results for dependent variables are availed towards proxing investment behaviour. on commencing with investment avenue, the regression results show that the selected demographic variables do not have individual statistical significance as far as impacting on the investment avenue score of the respondents is concerned. however the overall fit is quite good given the r-square of 23.32% and an f-statistic of 1.92 which has corresponding probability value of 0.011 and signifies overall statistical significance at the 5% level. on investment experience, it is seen that the age, occupation of the respondent, level of education, religion, wealth and area domiciled have profound impacts on the investment experience of the respondent. older respondents tend to have lower scores on investment experience and this is buttressed by the negative impact coefficient of age which stands at -0.01 and it statistically significant at the 5% level. students tend to have higher investment experience scores significantly as the average score rose by significantly at the 5% level by 0.26 in the event that the respondent is a student. oddly graduates and non-graduates have statistically higher experience scores compared to other educational level categories but the former is higher of the two with an incremental coefficient of 0.23 while corresponding to the later is an incremental coefficient of 0.17. on the role of religion in boosting investment experience, it is seen that those who are traditional worshippers have statistically significant incremental coefficient of 0.46 at the 5% level. expectedly the poor have declining investment experience with the incremental coefficient corresponding to the poor being -0.80 but oddly it is also noticed that though the incremental coefficients corresponding to middle and upper class are statistically insignificant they are both negative suggesting that even respondents in the upper and middle class also record declining investment experience. economy, 2020, 7(1): 69-77 74 © 2020 by the authors; licensee asian online journal publishing group table-3.estimation of the impact of demographic variables on investment behavior. variables investment avenue score average investment experience score average risk appreciation score average sufficient information score age 0.0058889 (0.884) -0.0068436 (0.039)** 0.0709893 (0.084)* 0.0029575 (0.665) family size -0.283794 (0.135) 0.0090255 (0.558) 0.031547 (0.869) -0.0296202 (0.354) occupation civil service 0.247558 (0.771) 0.487772 (0.481) 0.4309967 (0.615) 0.3294126 (0.023)** professional -0.835623 (0.407) 0.0073239 (0.929) -0.9034317 (0.375) 0.5414113 (0.002)*** student 1.149127 (0.425) 0.2609866 (0.027)** 1.091467 (0.452) -0.0985877 (0.684) level of education graduate 0.3098806 (0.772) 0.2279279 (0.010)** -1.705027 (0.116) 0.7206735 (0.000)*** non-graduate 0.3136206 (0.783) 0.1721544 (0.065)* -2.314451 (0.045)** 0.8952685 (0.000)*** pgd -0.4258915 (0.725) 0.1229341 (0.214) -1.671154 (0.173) 0.4366116 (0.034)** undergraduate -0.3415789 (0.843) -0.062652 (0.656) -2.860398 (0.102) 0.8256724 (0.005)*** religion muslim 1.52553 (0.252) -0.0309057 (0.775) 0.9455773 (0.481) -0.2338419 (0.298) traditional -2.12368 (0.381) 0.4627366 (0.020)** -0.201613 (0.934) 0.0907639 (0.824) family type nuclear 0.4503012 (0.726) 0.1048985 (0.316) 0.0810123 (0.950) -0.1236719 (0.567) gender male -0.7716139 (0.156) 0.0609012 (0.170) -0.1712963 (0.754) 0.0532794 (0.561) marital status married -0.1323605 (0.905) 0.0042499 (0.962) 0.1816268 (0.871) 0.2580045 (0.169) single -1.170756 (0.359) -0.0757217 (0.466) 1.225243 (0.342) 0.1886892 (0.381) type of residence private 1.298355 (0.175) -0.000023 (1.000) 1.045269 (0.278) 0.3484334 (0.032)** public house 0.2354237 (0.852) 0.0873943 (0.396) 0.1750204 (0.891) 0.4896353 (0.023)** other public house 4.814284 (0.106) -0.2632284 (0.277) -1.91209 (0.523) 0.9468903 (0.060)* wealth middle class 1.298355 (0.202) -0.1251845 (0.115) 0.2703981 (0.783) 0.1398761 (0.394) poor 0.2354237 (0.234) -0.8069388 (0.001)*** 2.702752 (0.363) 0.3342726 (0.501) upper class 4.814284 (0.315) -0.0104996 (0.858) -1.178627 (0.106) 0.2485318 (0.042) domicile semi urban -1.463273 (0.600) -0.8025914 (0.001)*** 2.635205 (0.349) 0.3348713 (0.476) urban -0.474283 (0.868) -0.8226538 (0.001)*** 2.917259 (0.312) 0.5752249 (0.233) _cons 7.596091 (0.066)* 2.857784 (0.000)*** 3.892432 (0.348) 0.3005168 (0.664) summary measures and diagnostics r-square 0.2332 0.2406 0.1438 0.2537 adjusted r-square 0.1116 0.1202 0.0080 0.1353 f-stat 1.92 2.00 1.06 2.14 prob. f-stat 0.0113** 0.0075*** 0.3984 0.0036*** note: *indicates 10% statistical significance, **indicates 5% statistical significance, ***indicates 1% statistical significance, values in ( ) are probability values. older respondents though scoring low on investment experience have a greater affinity for risk taking as older respondents have their risk appreciation score rising incrementally by 0.07 significantly at the 10% level. nongraduates also appear to have a comparatively lower affinity for risk taking as their risk appreciation score declines by -2.31 significantly at the 5% level. all other variables record statistically insignificant impact on the degree of risk appreciation of the respondent. the fit of the risk appreciation score equation is quite low standing at 14.38% and the adjusted r-square being 0.8% and corroborating the poorness of the fit is the f-statistic which posts a value of 1.06 and a probability value of 0.3984. economy, 2020, 7(1): 69-77 75 © 2020 by the authors; licensee asian online journal publishing group while age and family size have no significant impact on the sufficient information score, it is observed that civil servants and professionals have their sufficient information scores rising by 0.33 and 0.54 respectively. the level of education of the respondents goes a long way in equipping the respondents with adequate information as the incremental coefficients for graduates stood at 0.72, for post graduate students 0.43 and for undergraduates 0.83 but as it turns out even non-graduates also have access to sufficient information with an incremental score of 0.90. of all the proxies of investment behaviour, the access to sufficient information responds to the type of residence of the respondent. the results show that respondents who reside in private residence have the sufficient information score rising incrementally by 0.35, while for those in public houses 0.49 and for those in other forms of public houses the figure stood at 0.95. the fit of the sufficient information score equation is quite sound as the f-test for overall significance posts a statistic of 2.14 and a probability value of 0.0036 which shows that the overall regression is significant at the 1% level. the r-square shows that 25.37% of the systematic variation in the sufficient information score is explained by the regressors and after adjusting for degree of freedom the adjusted rsquare shows that 13.53% is the explained variation. 4.2. implications of findings featuring prominently among the demographic factors with regards to its significant impact on individual investor behaviour are the educational level, the occupation and marital status of the respondents. it is clear that persons in the civil service according to the results have higher affinity for taking risks than persons in other occupations and these same category of persons, persons in the civil service, show more tendency to access information bordering on their investments. however these same persons, persons in the civil service as well as those in professional practice, have the tendency to record just moderate levels of experience in investing. providing some justification for this discovery are the findings of burman, dur, and van (2012) who are of the view that with an increase in the tenure of civil servants and as a result of their beliefs that their services are merit goods they tend to take on more risky stances and this could be reflected even in the investment behaviour of individual investors who turn out to be civil servants. the findings of this study as well as those of burman et al. (2012) fly in the face of those of tucker (1988) who concluded that persons in the civil service tend to be less motivated to take risks compared to entrepreneurs in the private sector. on the role of education in individual investor behaviour, this study arrives at the finding that education does not really matter as far as investment experience is concerned. this is due to the fact that both graduates and nongraduates do not differ in their limited investment experience. this shows that education does not really account significantly for suitable individual investor behaviour and this is due to the fact that educational attainment in this part of the world is only but a rationing mechanism for assigning jobs to school leavers and does not necessarily imply entrepreneurial advance (todaro & smith, 2009). finally it is seen that the marital status of persons also count towards the investment experience of the persons under consideration and this is anchored on the view of barber and odean (2001)that marriage has the effect of stifling beneficial individual investor behaviour and hence divorcees or single person are better poised to be active individual investors. 5. summary, recommendations and conclusions 5.1. summary this study investigates the role of demographic factors on individual investor behaviour in edo state nigeria with emphasis on these five areas vis-a-visugbowo, new benin, ring road, ikpoba hill, and sapele road and more specifically this study seeks to investigate the impact of demographic factors on the access to information by individual investors, risk appetite of individual investors, portfolio investment selection by individual investors and investment experience of individual investors. with these specific investor behaviors this study sets out a theoretical framework based on the role of demographic factors such as age, wealth, religion, occupation, family size, gender, marital status, education attainment, family type, residence of respondents and the area where respondents are domiciled. four multinomial logit equations are estimated to detect the role of these demographic factors on individual investor behavior to capture the four objectives. the results from the study showed that the educational level, the occupation and marital status of the respondents are the main determinants of the individual investor behaviour. the results agree that respondents in the civil service and in professional practice had more access to information and were willing to take up portfolios with high risk. on the role of education in individual investor behaviour, this study arrives at the finding that education does not really matter as far as investment experience is concerned as being a graduate does not distinguish them from non-graduates as they both have limited knowledge of investment. finally it is seen that the marital status of persons also count towards the investment experience of the persons under consideration as marriage has the effect of stifling beneficial individual investor behaviour and hence divorcees or single person are better poised to be active individual investors. 5.2. recommendations based on the findings the study, the following recommendations are made: i. civil servants and those in the professional practice are poised to be risk loving and this can be exploited by policy makers seeking to spur investment in nigeria by ensuring that civil servants are given further incentive to further encourage risk taking. civil servants should be given special attention while ensuring that their earnings provide a veritable source of capital for investing while the government sets out policies towards encouraging their investment via targeted subsidies, selective tax waivers and special interventions aimed at raising the capital base of investing civil servants. ii. curriculum and instructional reforms have to be embarked upon in nigeria universities to ensure that graduates have the necessary technical know-how necessary to spur them in their investment and enable them have profound knowledge of investments and investment procedures. this is to ensure that the education which graduates spend at least 4 years amassing does not amount to a waste and mere academic exercise with little or no potential towards wealth creation in the country. such reforms should include: economy, 2020, 7(1): 69-77 76 © 2020 by the authors; licensee asian online journal publishing group a. ensuring that the curriculum in nigerian universities are in tune with the realities of the nigerian business environment and society b. introducing and laying emphasis on pragmatic disciplines capable of raising the psychomotor abilities of graduates in addition to their cognitive abilities – this is necessary towards ensuring that graduate appreciate the practical aspects of their discipline and not become mere opportunistic academics. c. encouraging start-ups among young graduates by supplying them the necessary incentives such as finance and training towards enabling them become employers of labor and not seekers of scarce jobs. iii. while investor behaviour among married couples may be stunted due to the activities of raising a family, the synergistic effects of two business oriented home makers can be the difference. however in the case of single parents, divorcees or single persons effort should be made to ensure that they productively engaged towards availing investment opportunities since these category of persons are better poised to be active individual investors. iv. further research should be carried out on the nature of identifying the close relationship between demographic factors and investment behaviour of individual investors. the point is that this proposal, on the one hand, can help individuals to take different issues into considerations before taking investment decisions, and on the other hand, make investment advisors be more effective when offering different investment alternatives to individuals in order to ensure that its customers have positive impression about the investment experience and ultimately, to make its financial and investing techniques effective in practice. 5.3. conclusions the study concludes that demographic variables intervene in the investment style of investors. however, the profound significant variables are the occupations and marital status of investors, whilst education plays a poor role in spurring individual investment. the later conclusion is anchored on the fact that educational institutions in the country are fast becoming centers for educational attainment with dismal levels of human capital. it behooves the educational and macroeconomic policy makers to boost the human capital quality stemming from educational institutions across the country. it is also pertinent that macroeconomic policies aimed at boosting investment consider the expansionary effect of targeting civil servants and those in professional practice by providing them with investment incentives as these categories of persons have a much higher affinity for risk for investment purposes. references acha, a. 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(2016). an empirical analysis on behavioural pattern of indian individual equity investors. osmani university, hyderabad, telangana, india, 9(13), 45-52. von neumann, j., & morgenstern, o. (1944). theory of games and economic behaviour. princeton: princeton university press. zoghalami, f., & matoussi, h. (2009). a survey of tunisian investors. international research journal of finance and economics, 6(3), 66-81. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. 42 © 2020 by the authors; licensee asian online journal publishing group economy vol. 7, no. 1, 42-51, 2020 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2020.71.42.51 © 2020 by the authors; licensee asian online journal publishing group perceived challenges and strategies towards the attainments of sustainable development goal three (sdg 3): evidence from irewole and isokan local government areas of osun state, nigeria aransi, waliyi olayemi department of adult education, faculty of education, university of ibadan, ibadan, nigeria. abstract the study examined the perceived challenges and possible strategies towards the attainment of sustainable development goal three (sdg-3), evidenced from irewole and isokan local government areas of osun state, nigeria. an exploratory research design was adopted for the study. both qualitative and quantitative instruments were used. however, two-hundred and seventy (270) participants were sampled. descriptive statistics and thematic analysis were used to analyze quantitative and qualitative data respectively. the empirical outcomes indicated that the perceived challenges towards effective implementations and utilizations of core health and healthrelated projects include; inadequate provision of financial resources; weak personnel management capacity; inadequate involvement of members of the community during the planning stage of the projects; political instability; abandonment of the project; and inadequate utilization of modern technologies for effective management of the projects. in terms of possible strategies, the empirical outcomes revealed the need for bottom-up approach to developmental projects, regular training programs for community members, adequate monitoring and supervision of the projects during implementation, mobilization of financial resources, public campaigns and awareness, effective program evaluation, provision of modern technological equipment and mobilization of human resources by the host community. recommendation comprised reactivation of abandoned projects, mobilization of physical and financial resources and regular public enlightenment campaigns program to mention a few were suggested. keywords: challenges, strategies, health, sustainable development goal, government policy, implementation, attainments. jel classification: d62, d60, h4, i00, i18. citation | aransi, waliyi olayemi (2020). perceived challenges and strategies towards the attainments of sustainable development goal three (sdg 3): evidence from irewole and isokan local government areas of osun state, nigeria. economy, 7(1): 42-51. history: received: 17 february 2020 revised: 19 march 2020 accepted: 23 april 2020 published: 7 may 2020 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. competing interests: the author declares that there are no conflicts of interests regarding the publication of this paper. transparency: the author confirms that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ...................................................................................................................................................................................... 43 2. theoretical framework .................................................................................................................................................................. 44 3. methodology ..................................................................................................................................................................................... 45 4. empirical results ............................................................................................................................................................................. 46 5. conclusion ......................................................................................................................................................................................... 50 6. recommendations ............................................................................................................................................................................ 50 references .............................................................................................................................................................................................. 51 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2020.71.42.51&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ https://www.asianonlinejournals.com/index.php/economy/article/view/1604 https://orcid.org/0000-0002-6753-3990 https://www.asianonlinejournals.com/index.php/economy/article/view/1604 https://orcid.org/0000-0002-6753-3990 https://www.asianonlinejournals.com/index.php/economy/article/view/1604 https://orcid.org/0000-0002-6753-3990 economy, 2020, 7(1): 42-51 43 © 2020 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study contributes to the existing literature by identifying some of the perceived challenges militating against effective implementation and utilization of health and health-related developmental programs as well as suggesting workable strategies to be embraced by the concerned community stakeholders. 1. introduction 1.1. background to the study nigeria was among the one-hundred and eighty nine (189) countries from across the globe that endorsed and embraced the united nations millennium declaration in new york in september 2000, which consisted of eight (8) goals, eighteen (18) targets and forty-eight (48) indicators (united nations, 2003). these goals were enumerated and conceptualized in sequential order of eradicating extreme poverty and hunger; achieving universal primary education; promoting gender equality and empowering women; reducing child mortality rates; improving maternal health; combating hiv/aids, malaria, and other diseases; ensuring environmental sustainability and lastly developing a global partnership for development. however, it is clear to deduce that eradication of poverty and hunger as reiterated in goal one among citizenry could not be attained in isolation, this is due to the fact that three out of these goals were basically on health (goals four, five and six), while two out of the remaining ones embedded health components (goals one and seven) such as required volume of protein and vitamin, safe drinking water and sanitation exercise. this may be attributed to the vital role being played by health sector towards the attainment and sustenance of poverty eradication projects as contained in the peoples’ notion that ‘a healthy individual is a wealthy individual’. in the light of this, it was acknowledged that within the nigeria context neither extreme poverty and hunger eradication nor core health and health related goals were achieved as at the expiration period of the set goals in 2015 (mgds, 2015). following the expiration of the implementation timeline slated for millennium development goals (mdgs), the international community through the united nations in collaboration with the heads of states and governments of the one-hundred and ninety three (193) member nations, launched the sustainable development goals (sdgs) as a new development agenda. this agenda, also known as agenda 2030, was framed into seventeen (17) goals, one-hundred and sixty nine (169) targets and two-hundred and thirty (230) indicators (un, 2017). these goals are conceptualized and prioritized in the development agenda in hierarchical order of ending poverty; eradicating hunger; ensuring good health and well-being of the people; ensuring quality education for all; achieving gender equality; ensuring provision of clear water and sanitation; ensuring affordable modern energy for all; promoting decent work and economic growth; creating industry innovation and infrastructure; reducing inequalities both within and among countries; achieving sustainable cities and communities; ensuring sustainable consumption and production pattern; controlling adverse climate action; sustaining life below water; protecting life on land, promoting peace, justice and strong institutions and lastly strengthening global partnership (un, 2017). it is inferred from the document that only goal three of the agenda 2030 focused on health of the people as contrary to mdg in which goals four, five and six were basically on health while goals one and seven had health components. the goal three of the development agenda is aimed at ensuring healthy lives and promote well-being for all at all ages. this goal according to the business reporting on the sdgs (2016) was predicated on nine main targets. first, reduce the global maternal mortality ratio to less than 70 per 100,000 live births. second, end preventable deaths of new-born and children under 5 years of age, with all countries aiming to reduce neonatal mortality to at least as low as 12 per 1,000 live births and under-five mortality to at least as low as 25 per 1,000 live births. third, end the epidemics of aids, tuberculosis, malaria and neglected tropical diseases and combat hepatitis, water-borne diseases and other communicable diseases. fourth, reduce by one third premature mortality from noncommunicable diseases through prevention and treatment and promote mental health and well-being. fifth, strengthen the prevention and treatment of substance abuse, including narcotic drug abuse and harmful use of alcohol. sixth, by 2020, halve the number of global deaths and injuries from road traffic accidents. seventh, ensure universal access to sexual and reproductive health-care services, including for family planning, information and education, and the integration of reproductive health into national strategies and programs. eighth, achieve universal health coverage, including financial risk protection, access to quality essential health-care services and access to safe, effective, quality and affordable essential medicines and vaccines for all and lastly to substantially reduce the number of deaths and illnesses from hazardous chemicals and air, water and soil pollution and contamination. this buttressed the notion that good health is not only a predictor of growth but also a prominent component of the general well-being of the country’s population. this had made people to see health as a merit good universally, such that, a minimum of which should be entitled to by each and every individual regardless of the ability to pay. for instance, in health care markets, the equity issue has been manifested by widespread public subsidization or direct provision of health care to the general public irrespective of socio-economic status of the majority, as an individual needs some minimum amount of health human capital to survive. however, it was indicated that good health is an asset to the nation as it has both economic and non-economic values. mwabu (2007) acknowledged that there are large returns to health improvements in developing countries. this is because, consumption of health care, particularly preventive care, is often associated with positive externalities. for example, treatment of a patient with an infectious illness does not only benefit the person treated, but also other persons because they are protected from exposure to infection. similarly, immunization of an individual against a communicable disease protects other people from the disease. moreover, health improvements in developing nations like nigeria can be achieved through implementation of simple interventions such as dietary supplements, control of parasitic and droplet diseases like corona virus also known as covid 19, and pro-poor social expenditures among others. however, evidence from levels and trends in child mortality report (2015) revealed that 5.9 million children under 5 years died in 2015, with a global under-five mortality rate of 42.5 per 1000 live births. this was reported to be highest in sub-saharan africa including nigeria, in which 1 child in 12 dies before their fifth birthday, economy, 2020, 7(1): 42-51 44 © 2020 by the authors; licensee asian online journal publishing group followed by south-east asia where 1 in 19 dies before reaching 5 years. it was acknowledged that most of these deaths were from preventable diseases. also, the period between 2000 and 2015 witnessed a 46 per cent reduction in hiv incidence; a 17 per cent decline in the incidence of tuberculosis; a 41 per cent decrease in the incidence of malaria; and a 21 per cent drop in people requiring mass or individual treatment and care for neglected tropical diseases. the risk of dying between the ages of 30 and 70 from one of four main non-communicable diseases (ncds)-cardiovascular disease, cancer, diabetes or chronic respiratory disease-fell from 23 per cent to 19 per during that period. this was not rapid enough to meet the 2030 target. and that nearly 800,000 suicides occurred worldwide in 2015, with men about twice as likely to die by suicide as women. in 2013, around 1.25 million people died from road traffic injuries, an increase of 13 per cent since 2000. in 2012, household air pollution from cooking with unclean fuels and inefficient technologies led to an estimated 4.3 million deaths; another 3 million deaths were attributed to ambient air pollution from traffic, industrial sources, waste burning and residential fuel combustion. furthermore, the risk of acquiring infectious diseases varies greatly depending on socioeconomic status of the households in terms of poverty level, housing conditions and gender attributes-for example, in the case of hiv infection in women, and tuberculosis in men as well as environmental conditions. mortality could be caused by exposure to unsafe water, sanitation and hygiene. for instance, in 2012, 871 000 deaths (mostly from infectious diseases) were caused by the contamination of drinking water, bodies of water (such as rivers and reservoirs) and practices resulting from inadequate or inappropriate services. almost half (45%) of these deaths occurred in the african countries where 13% of the global population lived (who, 2015 and 2016). in 2014, there were 9.6 million new tuberculosis cases (133 per 100 000 population) and 1.5 million tuberculosis deaths, including 0.4 million deaths among hiv-positive people. therefore, the largest number of new tuberculosis cases occurred in the southeast asia region and western pacific region, estimated at 58% of new cases globally. africa carried the most severe burden, with 281 cases per 100 000 population (global tuberculosis report, 2015). in addition, in 2015, the malaria incidence rate was 91 per 1000 persons at risk, with an estimated 214 million cases and 438 000 deaths (more than two thirds of which occurred in children under 5 years of age). sub-saharan africa has the highest burden, with an incidence rate of 246 per 1000 persons at risk, accounting for roughly 90% of all cases and deaths globally (world malaria report, 2015). globally, an estimated figure of 422 million adults were living with diabetes in 2014, which was higher than 108 million in 1980. the global prevalence of diabetes has nearly doubled since 1980, rising from 4.7% to 8.5% in the adult population. this reflected an increase in associated risk factors such as being overweight or obese. over the past decade, diabetes prevalence has risen faster in lowand middleincome countries than in high-income countries. diabetes caused 1.5 million deaths in 2012. higher-than-optimal blood glucose caused an additional 2.2 million deaths, by increasing the risks of cardiovascular and other diseases. forty-three percent of these 3.7 million deaths occur before the age of 70 years. the percentage of deaths attributable to high blood glucose or diabetes that occurs prior to age 70 is higher in lowand middle-income countries than in high-income countries (international diabetes federation, 2017). however, different factors have been identified for being responsible for the failure of previous developmental programs including mdgs in the attainment of the enumerated goals within the time frame. some according to ajiye (2014) included insufficient human capacity needed for both formulation and implementation of the development programs, inadequate and unreliable data system, financial challenge and indiscipline and endemic corruption. akpama, bessong, and bessong (2017) averred that this would be partially hinged on the ineffective participation of adults during both formulation and implementation phases of the program. this is premised on the belief that adults who are well equipped with requisite basic knowledge, experiences and skills are expected to constitute the fulcrum around which the successful implementation of the developmental program depend. besides, prevalent of wide gap between the rich and the poor individuals (anigbogu & ndubuisi-okolo, 2019) high level of insecurity toward lives and developmental projects (ndubuisi-okolo & anigbuogu, 2019) poor governance and lack of political will (adekola, allen, adeloye, olawole-isaac, & adediran, 2017) gap in knowledge and awareness between people in rural and urban centers (ogbodo & okoro, 2015) and lack of reliable data, weak human capacity resources, high level of corruption and cultural diversity, lack of local participation and empowerment, and loss of focus on sustainability (ajiye, 2014). it is against this background that the study was designed to examine the perceived challenges and possible strategies towards the attainment of sdg 3 (health) programs, evidence from irewole and isokan local government areas of osun state, nigeria. 1.2. objective of the study the main objective of this study was to examine the perceived challenges and possible strategies towards the attainments of sustainable development goal 3 in osun state, nigeria. while, specific objectives are to; i. find out the challenges towards effective implementations of sdg 3 (good health) programs within the studied area. ii. suggest the possible strategies for effective implementation and utilization of sdg 3 (good health) programs in osun state. 1.3. research questions the following research questions guided the study. i. what are the perceived challenges towards effective implementations of sdg 3 (good health) programs within the studied area? ii. what are the possible strategies towards effective implementation and utilization of sdg 3 (good health) programs in osun state, nigeria? 2. theoretical framework 2.1. community-driven development theory the theory as a part of the world bank initiative, was postulated by international development association (ida). this initiative was to help the world’s poorest countries in reducing poverty by boosting economic growth, reducing inequalities, and improving people’s living conditions. ida’s work covers primary education, basic health economy, 2020, 7(1): 42-51 45 © 2020 by the authors; licensee asian online journal publishing group services, clean water and sanitation, agriculture, business climate improvements, infrastructure, and institutional reforms. the community driven development (cdd) theory is an approach that gives control of the development decisions and resources to community groups and stakeholders of the community. under this theory, poor communities are expected to receive funds from the concern bodies where in this case can be either government or non-governmental organizations, decide on their use, plan and execute the chosen local projects, and monitor the provision of services that result (international development association (ida), 2009). this indicated that poor people are often viewed as the target of poverty reduction efforts as put forward by this theory. community driven development (cdd) treats poor people and their institutions as assets and partners in development process. cdd holds the view that given clear rules of the game, in terms of access to appropriate support, poor men and women can effectively organize to provide goods and services that meet their priorities (alkire, 2001). in spite of this, the theory fails to take into cognizance some situational imposed constraints that could facilitate members of the community or society inability to access sound health care facilities when the need arise and thereby remain in poverty. 2.2. situational theory of poverty this was propounded by rodman (1963). this theory was a response to the culture of poverty theory. it views poverty as a reaction to situational constraints and not as an issue of culture. this is because, poverty results from imposed constraints like low income, lack of awareness, lack of empowerment, unemployment and illness. the theory holds that people are poor due to the fact that they find themselves in a situation of no resource and opportunities for them to advance their welfare. it lays emphasis on the structural conditions that lead to poverty. situational poverty differs from the culture of poverty theory because it does not assume the pre-existence of a subculture that makes the behavior of the poor to become coherent and solid. it implies that in the absence of this sub-culture, the poor can easily get out of poverty if imposed constraints are tackled and address by the concerned individuals in the helms of community’s’ affairs. 3. methodology 3.1. research design an exploratory research design was employed. this encouraged combination of qualitative and quantitative approaches to research instruments (creswell, 2014; mcmillan & schumacher, 2010; sogunro, 2015). the beauty of this design was that the strengths of one form of data collection would offset the weaknesses of the other form. hence, it provides ease triangulation of data sources, and consequently enhances the credibility of the findings (creswell. & plano, 2011). as a result, qualitative approach most especially key informant interview (kii) and participant’s observation technique were employed to solicit information on the perceived challenges and strategies towards sustainable development goal three attainment. quantitative segment comprised different items on the subject matter. all participants in the qualitative segment of the design were not involved in the quantitative component so as to avoid duplication of ideas. 3.2. population of the study the population of the study comprised all youths participating in different kind of empowerment programs spearheaded by the state government tagged ‘youth empowerments scheme (oyes)’. community stakeholders like high chiefs in palace, water corporation staff and health personnel who are in charge of providing or implementing programs or projects design to raise people’s living standard within the community such as bore hole, health care center, tap water and channeling of erosion to mention a few. this is because, all these aforementioned programs were expected to be initiated with the good intension of achieving sound health among citizenry which was in tandem with sdg 3 if achieved. 3.3. sample size and sampling technique two local governments were purposively sampled for the study. they are irewole and isokan local government areas of osun state. this was due to the fact that the sampled communities formed the backbone for assessing effectiveness of development programs put in place by the government across the state since inception of oyes in 17th december, 2010. they had sample frame of four-hundred and nineteen (419) and three-hundred and ninety four (394) respectively totaling eight-hundred and thirteen (813) participants in the said empowerment program-osun youths empowerment scheme (oyes). two-hundred and seventy (270) sample were selected with the aid of simple random and purposive sampling techniques. however, one-hundred and fifty (150) and onehundred and twenty (120) were sampled from irewole and isokan local government area of osun state respectively. simple random sampling technique was employed as a result of the fact that each element in the sample frame would have equal chance of being involved in the study. for purposive sampling technique, this allows the researcher to carefully and consciously chooses the subjects to be included in the sample so that the sample can be developed for his needs. in the light of this, only those who had minimum of nigeria certificate in education or ordinary national diploma certificate or its equivalent were sampled and used in the research. this is to ensure efficient and effectiveness administration of the instrument on the respondents, due to their ability to read and understand each of the items enumerated in the instrument. furthermore, yaro yamane technique was used to determine the sample size taken from the sample frame. this technique was useful and relevant to determine sample size through statistical computation where the finite population is known to be eight-hundred and thirteen (813). this is to reduce error and to ensure that the study is not porous, than determining the size by mere approximation percentage that is not statistically backed up. this is consequent upon the fact that sample size is expected and better determined statistically in order to ensure appropriateness of the procedure (uzoagulu, 2011). economy, 2020, 7(1): 42-51 46 © 2020 by the authors; licensee asian online journal publishing group 3.4. instrumentation structured questionnaire which was planned on various rating scales, key informant interview and participant observation were used for gathering relevant data for the study. the questionnaire was developed by the researcher which titled “perceived challenges and strategies towards sustainable development goal 3 attainment questionnaire (pcs-sdg3 aq)’’. the questionnaire had three sections, section a dealt with demographic information of the respondents, while remaining sections were basically designed in structure form to cater for the research questions and objectives. the responses were planned on four points likert-scale rating which ranged from strongly agree, (sa) =4, agree (a) = 3, disagree (d) =2 to strongly disagree (sd) = 1. 3.5. validity of the instrument in order to effectively ensure the validity of the instruments used for this study, the instruments were subjected to content validity measurement which involves face validity and predictive validity. on face and content validity, the items are presented in simple language for easy understanding by the respondents and are also logically and systematically arranged in line with the research questions and objectives. the researcher ensured the validity of the instruments by making sure that the contents of the instruments are consistent with both the objectives and research questions of the study. 3.6. reliability of the instrument the instrument was trial-tested among forty (40) n-power participants serving in various public schools in irewole and isokan local government areas of osun state which are not part of the respondents slated for the study. the internal consistency reliability coefficient was obtained with the aid of cronbach alpha reliability technique. the justification for using cronbach alpha reliability technique was based on the fact that the items on research instrument, that is questionnaire have no right or wrong answer and it allowed respondents to rate the degree or extent to which they agree or disagree with a statement on a particular scale. however, the cronbach alpha reliability test revealed 0.69 and 0.80 for perceived challenges and possible strategies respectively. the outcomes posited that the instrument was suitable, appropriate, adequate and reliable for the research work. 3.7. method of data administration the data were collected through questionnaire, personal interview and participant’s observation. the questionnaire was administered to the respondents by the researcher alongside with a trained research assistant. the research assistant was briefed on the objectives, guidance, approach, and explanations to the respondents on how to complete the questionnaire. in addition, the researcher directly engaged in personal interview and participant observation so as to obtain information as well as to have in-depth knowledge of the research topic through face to face interaction. this instrument was used because it gives opportunity for deeper probing into issues under investigation. the administration of the instrument took place on two wednesdays (that is 12th and 19th june, 2019) at irewole local government secretariat, ikire and african church middle school apomu in isokan local government area of osun state respectively. this was because, the target population usually converged on every wednesdays at the aforementioned venues or some other places for physical exercises and dissemination of vital information across by their respective leaders. the researcher and his assistants collected the instrument immediately after filling and by this two-hundred and seventy (270) respondents submitted which accounted for one-hundred per cent (100%) return rate. 3.8. method of data analysis the quantitative data collected were analyzed using descriptive statistics. this comprised mean and standard deviation. in addition, thematic analysis was used for the qualitative component of the generated data, that is, for outcomes from key informant interview and participant’s observation. 4. empirical results 4.1. analysis based on demographic characteristics of the participants figure-1. a pie-chart showing distribution of respondents by gender. economy, 2020, 7(1): 42-51 47 © 2020 by the authors; licensee asian online journal publishing group figure 1 is expressed in percentage form. it revealed that one-hundred and fifty five (155) of the respondents which represented 57% of the total participants are female going by their gender, while the remaining one-hundred and fifteen (115) which accounted for 43%, were male. it can be deduced that majority of the participants involved in the aforementioned empowerment programs were female as having 57%. this is to say that the empowerment program was gender sensitive at both formulation and implementation phases. as it was packaged towards the attainment of gender equality and women empowerment targets of the developmental agenda. the implication of this distribution is that it conforms to the legal frameworks of promoting, enforcing and monitoring equality and non-discrimination on the basis of sex. figure-2. a pie-chart showing the distribution of respondents with respect to age range. figure 2 that is pie-chart is expressed in percentage, it indicated that 15% of the respondents are between 1825 years of age, 48% of them are between 26-35 years of age, 23% and 14% of the participants are between 36-45 years and 46 years and above respectively. it is revealed that majority of the respondents were within their youthful age of 26-35 years of age range as having 48% of the total respondents. it is inferred that the rationale for engaging majority of youths in the empowerment may in part be attributed to presence of physical, cognitive, social, and emotional characteristics needed for the task under consideration. the program was dominated by adults with the notion that they would serve as conveyor belts to fast track the actualization of the development programs situated within the community. figure-3. bar-chart showing the distribution of respondents by marital status. figure 3 that is bar-chart is expressed in both percentage and frequency of the participants. the results indicated that forty-six (46) of the respondents which represented 17.0% of the total participants are single going economy, 2020, 7(1): 42-51 48 © 2020 by the authors; licensee asian online journal publishing group by their marital status, two-hundred and thirteen (213) and eleven (11) of them which represented 78.9% and 4.1% were married and divorced respectively. while, none of them were widow. it can be deduced that majority of the participants involved in the study were married as having 78.9% of the entire respondents used in the research. it is inferred that majority of the participants own their immediate family as having two-hundred and thirteen out of two-hundred and seventy respondents. this depicted that one of the rationale for introducing and initiating empowerment exercise would be for the beneficiaries to meet their respective basic needs. figure-4. bar-chart showing the distribution of respondents by religion practice. figure 4, that is bar charts showed the distribution of respondents on the basis of their religious practice. it displayed that one-hundred and sixty seven (167) of the participants which represented 61.9% claimed to be muslim. one-hundred (100) which amounted to 37% of them are christianity by their claim, while three (03) which accounted for 1.1% of the total participants are traditional worshipers. hence, majority of the participants involved in the research are muslim as having 61.9% of the overall respondents, followed by christian while the least participants are traditional worshippers. figure-5. pie-chart showing the distribution of respondents by local government. figure 5 that is pie-chart is expressed in percentage. the chart exhibited that one-hundred and fifty (150) participants which amounted to 56% were selected in irewole local government area of osun state, while onehundred and twenty (120) which accounted for 44% were chosen from isokan local government area. this reflected that number of sample taken from irewole local government was slightly higher than the one selected from isokan local government area. this is due to the fact that the number of beneficiaries engaged in irewole was greater than those involved in isokan for the same exercise. economy, 2020, 7(1): 42-51 49 © 2020 by the authors; licensee asian online journal publishing group figure-6. bar-chart showing the distribution of respondents by educational qualifications. figure 6 that is bar chart showed distribution of respondents with respect to their educational qualifications. the chart indicated that one-hundred and six (106) respondents had nigeria certificate in education (nce) which represented 39.3%, fifteen (15) of them which accounted for 5.6% had ordinary national diploma certificate, fortyfive (45) and eight-eight (88) of the respondents which amounted to 16.7% and 32.5% had higher national diploma and first degree certificates respectively, while, sixteen (16) of them had other certificates which may include postgraduate in education and second degree certificates among others. therefore, majority of the participants had nigeria certificate in education (nce). the implication is that they can be used to augment teaching staff at both secondary and primary schools where sufficient teaching personnel is lacking. 4.2. analysis based on research questions and discussion of findings research question 1: what are the perceived challenges militating against effective implementations and utilizations of sdg 3 (good health) programs within the studied area? table-1. descriptive statistics showing the respondents view towards the perceived challenges militating against effective implementations and utilizations of sdg 3 (good health) programs within the studied area. items mean s.d inadequate financial resources towards health care services 3.25 0.72 weak personnel management capacity which usually leads to brain drain among health workers 2.89 0.67 inadequate supervision and evaluation of the health programs or projects 1.50 0.19 inadequate involvement of members of the community in the planning process and mobilization of the people towards health projects 3.76 0.88 lack of adequate land space for building capital projects for health care delivery. 0.12 0.01 political instability due to change in government 3.33 0.74 abandonment of the health care project. 3.00 0.69 inadequate utilization of modern technologies for effective management of the health projects and programs. 3.05 0.69 grand weighted average 2.61 note: n= 270 sa: strongly agree = 4, a: agree = 3, d: disagree = 2 and sd: strongly disagree = 1. decision value: negative = 0.00 -2.00 positive = 2.014.00. table 1 exhibited the participants’ perspective towards the perceived challenges militating against effective implementation and utilization of sdg 3 (good health) programs within the studied area. the empirical findings showed that the perceived challenges towards effective implementation and utilizations of developmental projectshealth and health related programs comprised inadequate provision of financial resources, weak expert or personnel management capacity, inadequate involvement of members of the community during the planning stage of the projects, political instability in terms of change in government, abandonment of the project before the completion phase, and inadequate utilization of modern technologies for effective management of the projects. this is because, the mean values of 3.25, 2.89, 3.76, 3.33, 3.00, and 3.05 respectively which were within the positive region of decision criterion. on the other hand, it was revealed that inadequate supervision and evaluation as well as provision of needed land space for building capital projects (that is hospitals, health centers) were not the main factors that affected effective implementations and utilizations of the developmental programs. this is buttressed with the mean values of 1.50 and 0.12 which were less than the grand weighted average. ajiye (2014) corroborated this by identifying factors like insufficient supply of human resources, inadequate and unreliable data system as well as financial challenges as some of the obstacle guiding against effective implementation of developmental projects. similarly, benyin and ugochukwu (2015) were of the view that challenges to proper implementation of developmental projects range from the non-involvement of citizens in the formulation of policies, lack of adequate human resources or capital, corruption and lack of credible leadership among others. in his own research, dike (2010) concurred that the infrastructure facilities and institutional arrangement vis-à-vis weak technological capability as well as bad governance constituted to the hindrances towards effective implementation and utilization of developmental projects in developing countries like nigeria. igbokwe-ibeto (2015) supported this by acknowledging that government incur huge financial losses due to poor project monitoring and evaluation. in addition, this is in consonance with the review analysis conducted by ayodeji economy, 2020, 7(1): 42-51 50 © 2020 by the authors; licensee asian online journal publishing group et al. (2017) in which late start-up activities, limited funding, lack of constant evaluation, weak coordination and duplication of developmental projects and unhealthy competition among donors of the developmental projects were identified as some of the challenges hindered the effective evaluation of hunger related developmental programs. in the same vein, the participant’s observation and key informant interview (kii) conducted on the subject matter at community level on monday 24th june, 2019 revealed inter alia as thus; ‘it was observed by the researcher that in one of the two communities under consideration a very big government hospital (tagged general hospital) had been abandoned for years. though, an alternative was made available for the people within that community but the physical structure and other sophisticated health equipment available in the abandoned one during operation could not be compared with what is obtainable in the existing one. it was also noticed that stakeholders of the two communities were ready to release land for capital projects whenever the need arises but not all developmental projects like borehole water facilities and public toilet installed were effectively functioning as at time of investigation. besides, it was acknowledged through key informant interview that majority of the developmental projects are usually decided upon by people in the helms of affairs which indirectly hinder the input of members of the community at the policy formulation and implementation stage of the project. finally, it was acknowledged that political instability through change in government could sometimes be beneficial if and only if people in the community have viable representative in the existing cabinet but detrimental if otherwise and even when there is high level of opposition to the ruling party in the community.’ research question 2: what are the possible strategies towards effective implementation and utilization of sdg 3 (good health) programs in osun state, nigeria? table-2. descriptive statistics showing the respondents towards the possible strategies for effective implementation and utilization of sdg 3 (good health) programs in osun state. items mean s.d community members should be involved during formulation and implementation phases of the health and health related programs. 3.05 0.69 government and good spirited individuals should on regularly basis organize training programs for health personnel to enable them effective handle modern technologies. 3.27 0.76 provision of adequate land space for health projects. 0.15 0.03 adequate monitoring and supervision of the health projects instituted in the community. 3.35 0.79 proper finance of health projects by stakeholders to enhance the standard of living in the community. 3.01 0.66 constant and effective evaluation of the health projects by the stakeholders. 3.20 0.75 provision of modern health equipment. 3.04 0.69 public campaign on health and health related programs 3.04 0.69 mobilization of human resources by the community members 3.56 0.82 grand weighted average 2.46 note: n= 270 sa: strongly agree = 4, a: agree = 3, d: disagree = 2 and sd: strongly disagree = 1. decision value: negative = 0.00 -2.00 positive = 2.01-4.00. table 2 contained the participants’ perspective towards the strategies for enhancing effective implementation and utilization of sdg 3 (good health) programs in osun state. the empirical outcomes revealed that participatory approach to developmental projects, organization of constant training programs for community members, adequate monitoring and supervision of the projects, proper finance to enhance the standard of living in the community, public campaign on projects like hospitals, health centers, effective evaluation of the community projects, provision of modern technological equipment and mobilization of human resources by the community were some of the strategies through which effective implementation and utilization of sdg 3 (good health) programs could be achieved as having mean values of 3.05, 3.27, 3.35, 3.01, 3.04, 3.20, 3.04 and 3.56 which were within the positive region of the decision rule. on the other hand, provision of adequate land space for projects like farm settlements, water borehole was not considered as a viable strategies for effective implementation of developmental project as attracted mean value of 0.15, this could be attributed to the fact that provision of land for developmental project had not been a barrier as the stakeholders of the communities under considerations are always ready to donate land whenever the need arises. this is in tandem with submission made by igbokwe-ibeto (2015) in which adherence to due process in all facets of project planning and management, involvement of the people of the grassroots in project initiation, formulation and execution, insistence on continuity on government projects irrespective of change of government or its personnel, availability of visionary and missionary leadership to mention a few were enumerated as way forward. 5. conclusion the study concluded that bottom-down approach or policy, inadequate mobilization of both human and material resources among others were identified to have contributed to slow rate of implementation and utilization of developmental projects among the people of the communities under investigation. it is also concluded that organization of constant training programs for community members, adequate monitoring and supervision of the projects, proper finance to enhance the standard of living in the community, public campaign on projects like hospitals, health centers and effective evaluation of the community projects were some of the strategies towards attainment of sdg-3. 6. recommendations based on the outcomes that originated from this research work, the following recommendations are suggested for stakeholders as thus: i. community stakeholders both governmental and non-governmental bodies are advised to monitor and supervise the developmental projects most especially those that are in line towards the attainment of sdg-3 sited within their society and at the same time find a means of reactivating the abandoned projects, as a result of political instability through change in government. economy, 2020, 7(1): 42-51 51 © 2020 by the authors; licensee asian online journal publishing group ii. government in conjunction with other community stakeholders should make provision for all forms of required physical and financial resources which would stimulate and facilitates effective implementation and utilization of development projects among the people in the community. iii. government and non-governmental organizations who are in charge of formulating and implementing developmental projects should give room for community members’ input during policy formulation. as this would allow the community stakeholders to identify the most pressing needs for the people of the community rather than installing anyone. iv. stakeholders are advised to adequately finance all development projects, most especially, those which are in tandem with sustainable development goal three. as this will facilitate the attainment of the targets enumerated under this goal with resultant multiplier effect on others. v. mass media agents should on regular interval disseminate prominent basic literacy programs which are embellished with health knowledge and information. as this will enhance community stakeholders to expedite action on its implementation and utilization. references adekola, p. o., allen, a. a., adeloye, d., olawole-isaac, a., & adediran, o. (2017). an exploratory assessment of nigeria’s performance in millennium development goals (mdgs): towards a better performance of sustainable development goals (sdgs). iosr journal of humanities and social science, 12(4), 25-37. ajiye, s. (2014). achievements of millennium development goals in nigeria: a critical examination. international affairs and global strategy, 25(2014), 24-36. akpama, s., bessong, c., & bessong, n. (2017). attainment of the sustainable development goals (sdgs): the relevance of adult basic education. journal of faculty of education, university of calabar, calabar–nigeria, 13(1), 13-20. alkire, e. a. (2001). measuring chronic multidimensional poverty: a counting approach. paper presented at the a paper prepared for the conference on income, weather and wellbeing in latin america. anigbogu, t., & ndubuisi-okolo, p. u. (2019). poverty alleviation: the requisite for sustainable development in nigeria. international journal of academic multidisciplinary research (ijamr), 3(3), 25-30. ayodeji, a. a. c., agwu, a. o., emmanuel, o. a., a., c. o., a., o. o., aliyu, a. a., . . . jimoh, h. o. (2017). evaluating the sustainable development goal two (zero hunger) in nigeria: challenges and lessons from the mdgs. journal of sustainable development in africa, 19(1), 105-118. benyin, a. a., & ugochukwu, a. d. (2015). development and its challenges in nigeria: a theoretical discourse. mediterranean journal of social sciences, 6(6), 275-261. business reporting on the sdgs. (2016). an analysis of goals and targets. a collaborative effort from gri and the un global compact. creswell, j. w. (2014). research design: qualitative, quantitative and mixed methods approaches (4th ed.). thousand oaks, ca: sage. creswell., j. w., & plano, c. v. l. (2011). designing and conducting mixed methods. thousand oaks, ca: sage. dike, v. e. (2010). review of the challenges facing the nigerian economy: is national development possible without technological capability. journal of sustainable development in africa, 12(5), 95-112. global tuberculosis report. (2015). geneva: world health organization. retrieved from: http://apps.who.int/iris/bitstream/. [accessed 05 june 2019]. igbokwe-ibeto, c. j. (2015). issues and challenges in local government project monitoring and evaluation in nigeria: the way forward. european scientific journal august edition, 8(18), 180-195. international development association (ida). (2009). ida at work community-driven development: delivering the results people need. retrieved from: http://www.worldbank.org/ida access on 5/5/2019. international diabetes federation. (2017). diabetes atlas (8th ed.). brussels: international diabetesfederation. levels and trends in child mortality report. (2015). estimates developed by the un interagency group for child mortality estimation. new york (ny), geneva and washington (dc): united nations children’s fund, world health organization, world bank and united nations. mcmillan, j. h., & schumacher, s. (2010). research in education: evidence-based inquiry (7th ed.). boston: pearson. mgds. (2015). abridged version of nigeria millennium development goals end-point report. retrieved from: www.mdgs.gov.ng. mwabu, g. (2007). health economics for low-income countries. center discussion paper no. 955. ndubuisi-okolo, p. u., & anigbuogu, t. (2019). insecurity in nigeria: the implications for industrialization and sustainable development. international journal of academic and applied research (ijaar), 3(2), 9-17. ogbodo, j. n., & okoro, n. m. (2015). nigerian public awareness and knowledge of the millennium development goals (mdgs) and their level of implementation in nigeria. european scientific journal, 11(23), 301-316. rodman, h. (1963). the lower-class value stretch. social forces, 42(2), 205-215.available at: https://doi.org/10.2307/2575693. sogunro, o. a. (2015). motivating factors for adult learners in higher education. international journal of higher education, 4(1), 22-39. un. (2017). the sustainable development goals report. united nations: new york. united nations. (2003). indicators for monitoring the millennium development goals: definitions, rationale, concepts and sources. new york: un. uzoagulu, a. e. (2011). practical guide to writing research project reports in tertiary institutions (new edition ed.). enugu, nigeria: john jacob’s classic publishers ltd. world malaria report. (2015). geneva: world health organization. retrieved from: http://www.who.int/malaria/publications/worldmalaria-report. [accessed 5 june 2019]. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. http://apps.who.int/iris/bitstream/ http://www.worldbank.org/ida http://www.mdgs.gov.ng/ http://www.who.int/malaria/publications/world-malaria-report http://www.who.int/malaria/publications/world-malaria-report 119 © 2020 by the authors; licensee asian online journal publishing group economy vol. 7, no. 2, 119-127, 2020 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2020.72.119.127 © 2020 by the authors; licensee asian online journal publishing group the nigeria’s debtgrowth nexus: a blessing or burden? christian gbarawae nwikina1 ledum moses gbarato2 joseph jim meekor3 ( corresponding author) 1department of general studies, school of foundation studies, kenule beeson saro-wiwa polytechnic, rivers state, nigeria. 2department of finance & banking, faculty of management science, university of port harcourt, nigeria. 2department of economics, ignatius ajuru university of education, port harcourt, nigeria. abstract the option of leveraging on recommendable borrowings does not only stimulate favourable economic growth but also offers meaningful upsurge in the financial position of parties involved. it is on this premise that prompted the essence to examine the nigeria’s debtgrowth nexus: whether a blessing or burden, for the period 1981 to 2019. secondary data from cbn statistical bulletin were employed in the study. using the error correction model, the results reveal that, although debt servicing exerts negative relationship with economic growth, it is obvious that debt financing in nigeria is a blessing as external and domestic debt stocks all exert positive influence on economic growth. however, only domestic debt stock is efficient enough to spur economic activities, which suggests that prudent employment of domestic debt which is not affected by exchange rate is a strong catalyst for rapid increase in economic activities in nigeria. therefore, having identified domestic debt as the linchpin of economic growth in nigeria, the study recommends the choice for internally borrowed fund as the best benign financing option as well as its optimal utilization for meaningful commensurate economic activities. also, recommendable threshold point of borrowing should strictly be adhere to, in order to avoid landing the economy into a state of onerous experience. keywords: external debt, domestic debt, debt servicing, nominal gdp, nigeria. citation | christian gbarawae nwikina; ledum moses gbarato; joseph jim meekor (2020). the nigeria’s debt growth nexus: a blessing or burden?. economy, 7(2): 119-127. history: received: 21 october 2020 revised: 17 november 2020 accepted: 30 november 2020 published: 14 december 2020 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group acknowledgement: all authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction .................................................................................................................................................................................... 120 2. literature review .......................................................................................................................................................................... 120 3. research methodology ................................................................................................................................................................. 123 4. presentation and analysis of result .......................................................................................................................................... 125 5. concluding remarks and policy recommendations .............................................................................................................. 126 references ............................................................................................................................................................................................ 126 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2020.72.119.127&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ https://www.asianonlinejournals.com/index.php/economy/article/view/2441 economy, 2020, 7(2): 119-127 120 © 2020 by the authors; licensee asian online journal publishing group contribution of this paper to the literature as a contribution to knowledge, this paper unveils that output level of goods and services in nigeria has been greatly sustained by domestic debt employed. as it portrays efficient influence unlike external debt that favoured the economy marginally. 1. introduction standard of living, level of employment and output level of goods and services in a country are greatly determined by the country’s management of public finance (rafindadi & musa, 2019). an efficient revenue generation sources as well as its allocation and utilization, lubricate economic activities, a sine qua non for economic growth and development. however, differences in natural endowment, technology, human capital development and value system have emanated the country-ranking into developed, developing and underdeveloped economies, where the less counterparts aspire to gain higher economic prominence. this astute quest alongside the need to accommodate increasing population with its attendant challenges necessitates incessant increase in public expenditure. consequently, subjecting the deficit-economic countries, mostly, the underdeveloped and developing countries to greatly rely on the surplus-economic countries for aids, grants and loans in financing public expenditures (adepoju, salau, & obayelu, 2007; fasoye, 2018). therefore, nigerian being an emerging economy is not left out in both internal and external borrowing in order to finance her public expenditures. although, public borrowing is not bad, especially when there is prudent utilization to create productive assets and contagious economic-benefiting environment (ngassam, 2000), however, on the contrary, effect of public debt becomes devastating not only to present generation but also unborn generation. effort on this thoughtful consequence has led to the establishment of debt management office in nigeria in 2000, and vested the responsibility of overseeing, management and servicing of bilateral and multilateral debts, operating under the ministry of finance (rahman, adeola, abiodun, & tolulope, 2010). trend of activities have revealed that nigeria has being in long-term debt experience over the years (festus & saibu, 2019). however, financing ever increasing public expenditures has been a major challenge to government and financial managers in recent times, because of the deficits in government budgets. as observed by debt management office (2019), domestic debt of nigeria has risen by 3.9% from n15.04trn ($49.14bn) as at 30th june, 2017 to n15.63trn ($51.13bn) at the end of the second quarter of 2019, making ratio of total debt to federal government revenue trigger from 158.4% in 2015 to 258.8% in 2016. although declined slightly to 246.8% and 215% in 2017 and 2018 respectively, however, in 2019, it rose up to 227%. also, director general of chamber of commerce muda yusuf, asserted that at present, nigeria spends over n3 trillion naira to service its debt, a great opportunity cost of many public developmental projects (yusuf, 2020). the trend of these debts and their management suggest a robbery of sustainable economic utopia, capable of reducing the standard of living, crippling employment opportunities and stirring increasing social vices in the country. at this point, our concern is that: is debt a blessing or burden to economic growth in nigeria? in other words, what relationship prevails between external debt and nominal gdp in nigeria? what nature of relationship exist between domestic debt and nominal gdp in nigeria? what influence has exchange rate on nominal gdp in nigeria? to what extent has debt servicing influence nominal gdp? answering these questions are important to virtually all the various economic agents, especially, policy makers who will find the response useful in decisionmaking on the best mixture of debt to employ to finance economic activities in nigeria. other sections of this study are as follows. section two presents literature review on debt and economic growth. section three reveals methodology employed, then section four presents the results while section five concludes the study. 2. literature review 2.1. debt debts have been perceived as the monetary resources employed in an organization which is not funded by its owners but obligated to pay at an agreed period with or without interest (oyejide, soyede, & kayode, 2005). soludo (2003) asserts that greater investments as well as greater consumption are two main classifications as well as macroeconomic motives for countries going into borrowing (specifically to finance education and health, and/or to finance transitory balance of payment deficit to lower nominal interest rates abroad, to suffice the lack of domestic long term credit or to circumvent hand budget constraint. the keynesian economics school of thought postulates that government borrowing can be used to promote economic growth, via the financing of government deficit expenditures which stimulates aggregate demand and thus encourage increase in private investments (mbah, 2016; rafindadi & musa, 2019). however, okonjo, soludo, and muhtar (2013) contend that when the quantum of debt increases to a specific threshold, debt-servicing becomes a burden, thereby, landing most countries on the wrong side of the debt laffer curve, with debt crowding out investment and growth. but, bakare (2011) with little variance, posits that stunted growth in an economy is not a result of the country’s indebtedness, rather, its inability to rationally employ the borrowed fund judiciously for economic growth and development advancement as well as efficiency in the debtservicing as envisaged. thus, we see that debt-decision and implementation is not a burden, but failure to optimize its determined purpose frustrates the accompanied blessings. 2.2. debt situation and management in nigeria it is more than a decade that the level of public debt is escalating at both domestic and international level, particularly after the financial crisis in 2008 yet without commensurate increase in growth and development (festus & saibu, 2019). in 2010, 2015 and 2019, the trend of external debt stood at n689.837 billion, n2,111.510 billion and n9,022.422 billion respectively, while that of domestic debt stood at n4,551.822 billion, n8,836.996 billion and n14,272.645 billion respectively, signifying that the country depends greatly on internal sourcing of fund. economy, 2020, 7(2): 119-127 121 © 2020 by the authors; licensee asian online journal publishing group after the debt forgiveness in 2005, much of external debts are contracted through multilateral debt, bilateral debt and euro bond. however, treasury bills, fgn bonds and treasury bonds are the major debt instruments for domestic debts. the graphical illustrations are shown below. figure-1. graphical presentation of the trend of domestic debt instruments (treasury bills, federal government bonds, and treasury bonds) for the period 2010 to 2019. . figure-2. graphical presentation of the trend of external debt (multilateral debts, bilateral debts, and euro bond) for the period 2010 to 2019. figure 1 and 2 show major components of domestic debts and external debts respectively. within the past decade, domestic debt through federal government bond has an accelerated increased trend from n2,900 billion in 2010 to n10,500 billion in 2019. the case of treasury bills, although comparatively lower than fgnb, has been relatively stable within the period with the value of n1,200 billion and n2,600 billion in 2010 and 2019 respectively. however, treasury bonds trend appears very low with decelerated movement as n370 billion was recorded in 2010, but in 2019, only n125 billion was borrowed. from the components of external debt, multilateral debt, bilateral debt and euro bond all possess a rightupward movement within the period (2010 2019). however, only multilateral debt is pronounced with value of n635 billion and n4,120 billion in 2010 and 2019 respectively. bilateral debt stood at n24 billion in 2010 and n1,250 billion in 2019. although euro bond was zero naira in 2010, in 2017 and 2019, its value increased to n1,800 billion and n3,500 billion respectively. there is a clear indication that dependence on domestic borrowings stands taller, compared to external borrowings, nevertheless, federal government bonds and multilateral debts are their respective instruments of borrowing within the period. economy, 2020, 7(2): 119-127 122 © 2020 by the authors; licensee asian online journal publishing group 2.3. nigerian total debt and economic growth nexus figure-3. graphical presentation of the trend of the ratio of total debt to gdp (tdgdp), ratio of total debt to export (tdex), ratio of total debt to government revenue (tdgr), and ratio of total debt servicing to government revenue (tdsgr) for the period 2010 to 2019. the ratio of total debt to gdp (tdgdp) in figure 3 maintained a steady average trend of 10.5% from 2010 to 2015, then 14.3% in 2016 and 16.1% in 2017 to 2019. this depicts the quantum of total debt engrossed in the output level of goods and services. also, ratio of total debt service to government revenue (tdsgr) is not far from tdgdp trend, but varied little from 2015 with a rate 15.3% and later increase sharply to 25.4% in 2016. however, tdsgr experienced a slight fall to 24.5% in 2017 and later 22.6% which was maintained in 2018 to 2019. this situation of tdsgr, although marginal within 2010 to 2014, the later speaks volume of government revenue consumed by debt servicing within the period. on the other hand, the ratios of total debt to government revenue (tdgr) and to export (tdexp) all portray parallel trends with relative gap within the period. while tdgr stood at 71.8%, 158.4% and 227.0%, tdexp recorded 43.6%, 123.8% and 117.0% in 2010, 2015 and 2019 respectively. this suggests the country’s great reliance on debt to finance its expenditures as well as its export, thereby, creating huge imbalance in the terms of trade as well as balance of payment. the unconceivably increase in nigeria’s debt beyond imagination has posed great concern to citizens’ welfare and economic activities, not only to the detriment of the country’s image but also has mortgaged future’s investment, standard of living, balance of payment, through heavy taxation. fasoye (2018) asserts that: the economic implications of nigeria’s rising debt profile are not only topical but also becoming provocative public debates and discourse every moment. for instance, most developing countries are submerged in the whirlpool of which significantly hinders their economic growth and development. it is also true that any economy structured and sustained by borrowing cannot achieve economic prosperity. although repayment of public debts could be approached through: debt rescheduling, debt equity conversion; ban on external borrowing, debt repudiation, and debt forgiveness as experienced in 2005, rahman et al. (2010) identified scarcity of statistical data, institution arrangements; ineffective law and regulation, and low yield on debts instruments as key problems mitigating against effective management of debt in nigeria. 2.4. challenges facing debt management in nigeria i. instability in oil generated revenue due to global recession, vandalism, militant activities (the world bank, 2017), and economic shut-down arising from pandemic occurrence (covid-19, natural disaster). ii. lack of major tax policy reforms to significantly increase non-oil revenues led to large revenue shortfalls at all levels of government (the world bank, 2017). iii. multiple and high rates for foreign exchange in the country iv. dominant presence of corruption in public revenue allocation and expenditure (egeonu, 2017). v. prodigal attitude for foreign investment and property ownership by top political leaders. egeonu (2017) argues that debt woes befalling the third world and african countries which nigeria belongs, is a self-inflicted one, as most african political elites offer themselves as willing tools for exploitations in the hands of developed nations by stealing the resources of their countries and hiding them in the developed countries’ banks, buying of properties and investments abroad at the detriment of their countries. mobutu seseseko of zaire (drc) was said to be richer than his country. all the looted funds were lost to the foreign nations where he hid them after his death (egeonu, 2017). discovery of sani abacha’s loot of $319 million held in united kingdom and france (okwumbu, 2020) and $2.2 billion held in switzerland (british broadcasting corporation, 2018) from nigeria coffer is an indication of chronic pandemic loot by most of nigerian leaders to enriched greatly foreign economies where this funds are being held. economy, 2020, 7(2): 119-127 123 © 2020 by the authors; licensee asian online journal publishing group 2.5. theoretical underpinning i. debt overhang theory: on debt overhang theory, krugman (1988) posits “if there is likelihood that in the future debt will be larger than the country’s repayment ability; expected debt service costs will discourage further domestic and foreign investment because the expected rate of return from the productive investment projects will be very low to support the economy as the significant portion of any subsequent economic progress will accrue to the creditor country”. the theory portrays the fact that a counter-productive effect of debt instruments will severely decrease investment prospects as well as low level of output in the economy (fasoye, 2018). also, claessens and diwan (1990) declare that “debt overhang is a situation in which the illiquidity effect, the disincentive effect, or both effects are strong enough to discourage growth in the absence of concessions by creditors.” it is the inability of a country to get her debts serviced as at when due. in this respect government fails to discharge her fiscal obligations (fasoye, 2018). ii. dual gap theory: the dual gap theory vies development as a product of investment, which is a core function of domestic savings, which is not always sufficient to finance growth and development. this calls for the government to employ available instruments for external borrowings, needed quantum of money that can be invested to spur economic activities in the country. it is believed that, the invested fund is equal with the sum that was saved. in addition, the domestic resources are to be augmented from abroad, such that we have excess of import over export (adedoyin, babalola, otekunri, & adeoti, 2016). as shown in national income accounting, surplus of investment over domestic saving is equal to surplus of import over export. (i.e., i-s = m-e). thus: income = consumption + import + savings output = consumption + export + investment income = output this is the basis of dual gap analysis; it explains that if the domestic saving available falls short of the level needed to realize the target rate of growth, a savings investment gap is thought to be in existent, thus borrowing is induced. on a similar note, if the maximum import requirement necessary to realize the growth target is larger than the maximum possible level of export, then there is an export-import exchange gap (adedoyin et al., 2016). iii. dependency theory: dependency theory states that the poverty of the countries in the periphery is not only because they are not integrated or fully integrated into the world system, as it is often argued by free market economists, but because of how they are integrated into the system. from this standpoint a common school of thought is the bourgeoisie scholars, who are of the view that the state of underdevelopment and the constant dependence of less developed countries on developed countries are as a result of their domestic mishaps. they believe this issue can be explained by their lack of close integration, diffusion of capital, low level of technology, poor institutional framework, bad leadership, corruption, mismanagement, etc (mackinnon, haug, & michelis, 1999). the proponents of this school of thought see the underdevelopment and dependency of the third world countries as being internally inflicted rather than externally afflicted. to this school of thought, a way out of the problem is for third world countries to seek foreign assistance in terms of aid, loan, investment, etc, and allow undisrupted operations of the multinational corporations (adedoyin et al., 2016). 2.6. empirical review debt-growth relationship has attracted many researchers’ interest. their studies are of mixed findings both positive and negative effects of debt on economic growth. some of these studies are reviewed. interesting, mixed findings from accessed extant literature could be attributed to variations in methodology, period and variables employed in the study. as observed in table 1 above, while adedoyin et al. (2016); akhanolu et al. (2018); lawrence and victor (2016); lucky and godday (2017); nwaoha et al. (2017); omodero and alpheaus (2019) reveal that external debt has greatly retarded economic growth, only festus and saibu (2019) establishes that external debt’s negative influence on economic activities is nominal. however, egbetunde (2012) and orji (2018) show that external debts marginally favour economic activities in nigeria. although, lawrence and victor (2016); onakoya and ogunade (2017) found domestic debt to have great retarded influence on economic activities, however, akhanolu et al. (2018); egbetunde (2012); lucky and godday (2017) empirically concur that domestic debt efficiently favour the output level of goods and services in nigeria. on this note, omotosho et al. (2016) counsels that even though, external and domestic debt favour economic activity, caution should be made to identify the threshold point at which additional debt incurred will retard economic growth. therefore, omotosho et al. (2016) posit that to avoid a state of quandary and onerous situation, total debt threshold level of 73.70 percent is recommended, while estimation inflexion points for external and domestic debts are 49.4 percent and 30.9 percent, respectively. debt servicing is not left out as some found it retarding economic activities (egbetunde, 2012; orji, 2018), but omodero and alpheaus (2019); onakoya and ogunade (2017) reveal it as a blessing to economic growth. 3. research methodology the curiosity to ascertain whether the influence of nigeria’s borrowing on economic growth is a blessing or burden, has necessitated this study. as an ex-post facto design study, secondary data sourced from central bank of nigeria statistical bulletin 2019. upon determining that the variables were all stationary at difference 1(1) using the augmented dickey fuller unit root test, the study employs the johansen co-integration test to ascertain the long-run integration among the variables, thereafter, regressed the model for statistical estimation of the speed of adjustment of the dependent variable in response to changes in the predictor variables, using the error correction mechanism. economy, 2020, 7(2): 119-127 124 © 2020 by the authors; licensee asian online journal publishing group table-1. showing synopsis of related studies. s/n author (s) study employed techniques findings 1 egbetunde (2012) external borrowing and economic growth in nigeria (1970-2008) i. ordinary least square i) external debt exerts positive but insignificant influence on gdp ii. cointegration test ii) domestic debt exerts positive and significant influence on gdp iii) presence of negative significant influence of debt servicing on gdp 2 omotosho, bawa, and doguwa (2016) determining the optimal public debt threshold for nigeria (2005-2015) threshold regression i) total debt threshold level of 73.70 was recommended. ii) the estimated inflexion points for external and domestic debts were 49.4 and 30.9 per cent, respectively. 3 adedoyin et al. (2016) external debt and economic growth: evidence from nigeria (1981-2014) i. auto-regression distributed lag i) presence of strong relationship between external debt and economic growth ii.granger causality test ii) absence of causality relationship among the variables 4 lawrence and victor (2016) is public debt a necessary factor for improving economic growth? a var modeling of the nigerian situation (19802014). var i) both external and domestic debt show insignificant relationship with economic growth. 5 onakoya and ogunade (2017) external debt and nigerian economic growth connection: evidence from autoregressive distributed lag approach (1981-2014) i.auto-regression distributed lag test i external debt exerts negative but significant influence on gdp ii.granger causality test ii) domestic debt and inflation exert negative and insignificant influence on gdp iii) external debt service and export exert positive but insignificant influence on gdp iv) unidirectional relationship prevails with causality from domestic debt to rgdp, and rgdp to export. 6 nwaoha, ejem, egwu, ugojieke, and nwabeke (2017) an error correction model analysis of the effect of total external debt on the nigerian economy (1980–2015) i. ecm i) external debt exerts negative but significant influence on gdp 7 lucky and godday (2017) the nigeria debt structure and its effects on economic performance (1990-2015) i. ols i) external debt exerts negative but significant influence on gdp ii) domestic debt exerts positive and significant influence on gdp 8 orji (2018) the effect of foreign debt on the economic growth of nigeria (1995-2017) i. ols i) there is presence of positive insignificant influence of external debt on nigerian gdp. ii) foreign debt servicing exerts negative and insignificant influence on gdp 9 akhanolu, babajide, akinjare, tolulope, and godswill (2018) the effect of public debt on economic growth in nigeria: an empirical investigation (19822017) i. two-stage least square ) external debt shows negative significant impact on gdp ii) domestic debt positively and significantly impacts on gdp 10 omodero and alpheaus (2019) the effect of foreign debt on the economic growth of nigeria (1997-2017) i. ols i) foreign debt exerts a negative significant influence on nominal gdp ii) foreign debt servicing has a strong and significant positive impact on nominal gdp 11 festus and saibu (2019) effect of external debt on nigerian economy: further evidences (19812016) i. ardl i) external debt contributes negatively and insignificantly to growth in nigeria in line with our research questions, external debt, domestic debt, total debt servicing, and exchange rate are used to proxy the nigerian debt. while nominal gdp is used to measure growth (the explained variable). reason for nominal gdp is because of its non-deflated nature to match with the non-deflated predictor variables employed in the study as recommended by bhole (2006). also, adapting from the model of omodero and alpheaus (2019) with little modification, the functional relationship is given as: economic growth = f (debt) ngdp = f (eds, dds, tds, exr) (i) the equation is transform into econometric form with logarithm taken to transform the data. thus: lnngdp = β0+β1lneds + β2lndds + β3lntds + β4exr + μ (ii) economy, 2020, 7(2): 119-127 125 © 2020 by the authors; licensee asian online journal publishing group where: ngdp = nominal gross domestic product. eds = external debt stock. dds = domestic debt stock. tds = total debt servicing. exr = exchange rate, as the controlling variable. ln = logarithm β0, = constant parameter β1, β2, β3, β4= coefficients or parameters μ = error term a priori expectation: β1>0, β2>0, β3<0, β4<0. 4. presentation and analysis of result 4.1. unit root tests the unit root test was conducted in the study to ascertain the statationarity of the variables using the augmented dickey-fuller (adf) test. the result of the unit root test is shown in table 2 below: table-2. adf stationarity (unit root) test result. variable adf test statistic critical value 5% order of integration prob. lnngdp -3.208552 -2.943427 i(1) 0.0274 lneds -4.725971 -2.943427 i(1) 0.0005 lndds -4.566508 -2.943427 i(1) 0.0008 lntds -7.885127 -2.943427 1(1) 0.0000 exr -5.218774 -2.943427 1(1) 0.0001 note: critical values at 5% is considered significant. the adf unit root result in table 2 shows that all the variables became stationary at first difference given that the adf statistic value for each of the variables is greater than the critical values in absolute terms and at 5% level of significance. on the basis of this result we proceed to estimate the presence or other wise of long-run relationship among the variables using johansen co-integration test. 4.2. co-integration test having established that the variables are integrated at order one 1 (1), we tested for the existence of long run relationship among the variables using the johansen multivariate co-integration analysis based on trace test and maximum eigenvalue test. the result of the co-integration test is presented in table 3 below: table-3. johansen co-integration test result. hypothesized trace 0.05 no. of ce(s) eigenvalue statistic critical value prob.** none * 0.674751 108.4297 88.80380 0.0010 at most 1 * 0.504033 67.99589 63.87610 0.0216 at most 2 0.456190 42.75104 42.91525 0.0519 at most 3 0.309821 20.82145 25.87211 0.1871 at most 4 0.187443 7.472483 12.51798 0.2978 note: trace test indicates 2 cointegrating eqn(s) at the 0.05 level. * denotes rejection of the hypothesis at the 0.05 level. **mackinnon et al. (1999) p-values. from table 3, the result of the johansen’s co-integration analysis based on trace statistics shows two cointegrating equations which imply that the variables are co-integrated and that significant long-run relationship exists between the various determinants of debt and economic growth in nigeria. we therefore reject the null hypothesis of no co-integration and proceed to determine the adjustment for the discrepancies between the longrun and short-run interaction of the times series using error correction estimation mechanism. 4.3. error correction mechanism the error correction mechanism (ecm) is used in this study to determine the speed or rate at which the dependent variable will adjust to changes in the independent variables. the error correction mechanism result is therefore presented in table 4 . table-4. error correction estimate output for the model. dependent variable: lnngdp ecm(-1) -0.064848 0.02468 -2.62790 0.0095 d(lneds) 0.022417 0.03298 0.67973 0.4978 d(lndds) 0.196333 0.09803 2.00289 0.0471 d(tds) -0.054643 0.03435 -1.59060 0.1139 d(exr) 0.000133 0.00065 0.20506 0.8378 constant 0.100733 0.03656 2.75519 0.0066 r-squared 0.576090 log likelihood 47.07051 adj. r2 0.473767 akaike info criterion -2.111919 sum sq. resid 0.170110 schwarz criterion -1.763613 s. e. equation 0.076589 mean dependent var 0.184750 f-statistic 5.630111 s.d. dependent var 0.105579 prob. (f-stat) 0.000052 durbin-watson stat 2.010592 economy, 2020, 7(2): 119-127 126 © 2020 by the authors; licensee asian online journal publishing group from the ecm result presented in table 4 above, the coefficient of -0.064848 shows that the error correction term is correctly signed and significant, implying that the discrepancies between the short-run and long-run equilibrium can be corrected each year by the tone or speed of 6.5 percent. the fstatistics with the p-value of 0.000052 shows that the regression is statistically significant and the model has a good fit. the coefficient of determination of 0.576090 shows that about 57.6 percent of the total variation in economic growth as proxied by nominal gdp is jointly explained by the variation in debt variables within the study period while the remaining 42.4 percent variation is attributed to other factors not included in the model. this implies that debt determinants exhibited an average power in explaining the variations in the growth of nigerian economy. analysis of the shortrun estimates showed that while total debt servicing exert negative influence, external debt stock, domestic debt stock and exchange rate have positive relationship with nominal gdp in nigeria within the study period to the extent that a one percent increase in eds, dds and exr, all things being equal will increase the output level of goods and services in nigeria by 0.02, 0.19 and 0.00 percent respectively. however, domestic debt stock does not only exert positive influence but also significantly influence economic activities in nigeria. the implication of the result is that domestic debt stock is the only proficient borrowing source that drive the output level of goods and services in nigeria, thereby spurring economic growth and development in terms of employment generation and improvement in standard of living. all the explanatory variables’ results comply to the a priori expectations with exception to exchange rate, which showed a positive but marginal relationship with nominal gdp in nigeria. this could be attributed to nigeria’s largest export of crude oil to the united states accounting over 80% of trade transactions from nigeria (okoro & charlse, 2019). this finding agrees with the a priori expectations, and is consistent with previous studies by egbetunde (2012) and orji (2018) where the coefficient values of external debts were positive and debt servicing signed in negative and all insignificantly impact on the economic growth. the study also finds credence to the studies of akhanolu et al. (2018); lucky and godday (2017) where, domestic debt was found to efficiently promote the output level of goods and services in nigeria during the evaluation period. 5. concluding remarks and policy recommendations this paper that set out to empirically examine the nigeria’s debt-growth nexus: whether a blessing or burden for the period 1981-2019, and adopted the augmented dickeyfuller unit root test, co-integration analysis and error correction model estimation techniques. from the ecm results, it is obvious that debt financing in nigeria is a blessing as external and domestic debt stocks all exert positive influence on economic growth. however, only domestic debt stock is efficient enough to spur economic activities, which suggests that prudent employment of domestic debt which is not affected by exchange rate is a strong catalyst for rapid increase in economic activities in nigeria. therefore, having identified domestic debt as the linchpin of economic growth in nigeria, the study recommends the choice for internally borrowed fund as the best benign financing option as well as its optimal utilization for meaningful commensurate economic activities. also, recommendable threshold point of borrowing should strictly be adhere to in order to avoid landing the economy into a state of onerous situation. references adedoyin, l. i., babalola, b. m., otekunri, a. o., & adeoti, j. o. 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(2016). impact of external debt on economic growth in nigeria: an ardl bound testing approach. paper presented at the proceedings of the fifth middle east conference on global business economics, finance and banking (me16dubai october conference) isbn: 9781-943579-27-3 dubai-uae. 14-16 october. paper id: df601. ngassam, c. (2000). sub-saharan africa’s debt crisis: analysis and forecast based on nigeria. managerial finance, 32(7), 606-620. nwaoha, w. c., ejem, w. c., egwu, c. a., ugoji-eke, p. n., & nwabeke, c. e. (2017). an error correction model analysis of the effect of total external debt on the nigerian economy (1980–2015). international journal of economics and financial research, 3(8), 119-129. okonjo, n., soludo, c. c., & muhtar, m. (2013). the debt trap in nigeria: towards a sustainable debt strategy (pp. 23-74). new york usa: african world press. okoro, c. u., & charlse, f. b. (2019). naira exchange rate variation and nigeria economic growth: a time series study. american economic & social review, 5(2), 21-30.available at: https://doi.org/10.46281/aesr.v5i2.360. http://www.google.com/amp/s/www,bbc.com/news/amp/world-africa-44654931?espv=1 economy, 2020, 7(2): 119-127 127 © 2020 by the authors; licensee asian online journal publishing group okwumbu, r. (2020). boom: nigeria’s total debt portfolio hits at n27.4 trillion. retrieved from: https://nairametrics.com/2020/04/02/nigeria-total-debt-portfolio-hits-at-n27-4-trillion-as-at-end-of-2019/. omodero, c. o., & alpheaus, o. e. (2019). the effect of foreign debt on the economic growth of nigeria. management dynamics in the knowledge economy, 7(3), 291-306. omotosho, b. s., bawa, s., & doguwa, s. i. (2016). determining the optimal public debt threshold for nigeria. cbn journal of applied statistics, 7(2), 1-25. onakoya, a. b., & ogunade, a. o. (2017). external debt and nigerian economic growth connection: evidence from autoregressive distributed lag approach. journal of economics and development studies, 5(1), 66-78.available at: https://doi.org/10.15640/jeds.v5n1a7. orji, o. (2018). the effect of foreign debt on the economic growth of nigeria. journal of accounting and financial management, 4(4), 22-29. oyejide, t. a., soyede, a., & kayode, m. o. (2005). nigeria and imf (vol. 1, pp. 2-4). ibadan: heinemann publication. rafindadi, a. a., & musa, a. (2019). an empirical analysis of the impact of public debt management strategies on nigeria’s debt profile. international journal of economics and financial issues, 9(2), 125-137. rahman, y. b., adeola, i. k., abiodun, o. m., & tolulope, a. o. (2010). debt management and economic growth in nigeria: performance, challenges and responsibilities. information management, 12, 31-40. soludo, c. c. (2003). debt poverty and inequality: towards an exit strategy for nigeria and africa. in: okonjo, n., soludo, c.c., & muhtar, m. (2013). the debt trap in nigeria: towards a sustainable debt strategy (pp. 23-74). new york usa: african world press. the world bank. (2017). nigeria bi-annual economic update: fragile recovery. international bank for reconstruction and development, 1-49. yusuf, m. (2020). nigerian debt profile: economic sustainability plan. channels television nigeria. retrieved from: https://m.youtube,com/watch?index=110&list=pl161vhbheqwzxiujzuxolaekd6ftaiwac&v=sh9trrabrdk. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. 41 © 2019 by the authors; licensee asian online journal publishing group economy vol. 6, no. 2, 41-55, 2019 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2019.62.41.55 © 2019 by the authors; licensee asian online journal publishing group a small macroeconometric model of nigeria alarudeen aminu1 joshua adeyemi ogunjimi2 ( corresponding author) 1,2department of economics, university of ibadan, nigeria. abstract this study presents a small macroeconometric model to forecast and simulate policy options for the nigerian economy. the model consists of ten behavioural equations and five identities made up of ten endogenous variables and thirteen exogenous variables. autoregressive distribution lag (ardl) framework is used to estimate the behavioural equations using annual time-series data for the period 1981-2014. the predictive ability of the model is evaluated and found to be satisfactory as the mean absolute error (mae), root mean square error (rmse) and theil inequality coefficient are considerably small. policy simulations to quantify the impact of shocks to government expenditure, exchange rate and crude-oil price on the economy are analysed. the results shows that a positive shock in government expenditure raises aggregate output, total exports, total import, gross fixed capital formation, exchange rate, consumption, and inflation rate while interest rate falls; a negative shock to exchange rate has a negative effect on gross fixed capital formation and a positive effect on aggregate national output, consumer price level, interest rate, consumption, total export and total imports; and a negative shock in oil prices results in an increase in total imports, total exports, consumption, exchange rate, gross fixed capital formation and aggregate national output. hence, the study recommends that the monetary authorities employ a managed-floating exchange rate to address the volatility in exchange rate and government should formulate and implement policies aimed at diversifying the economy to cushion the shocks that result from oil price volatility in the international market. keywords: behavioural equations, shocks, macroeconometric model, autoregressive distributed lag (ardl), simulation, nigeria. jel classification: c32; c53; e27; n17. citation | alarudeen aminu; joshua adeyemi ogunjimi (2019). a small macroeconometric model of nigeria. economy, 6(2): 41-55. history: received: 4 june 2019 revised: 10 july 2019 accepted: 12 august 2019 published: 20 september 2019 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group acknowledgement: both authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ...................................................................................................................................................................................... 42 2. the nigerian economy ................................................................................................................................................................... 43 3. a review of macroeconometric models ..................................................................................................................................... 44 4. the structure of the model ........................................................................................................................................................... 45 5. conclusion and policy recommendations .................................................................................................................................. 54 references .............................................................................................................................................................................................. 55 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2019.62.41.55&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ http://asianonlinejournals.com/index.php/economy/article/view/1010 http://orcid.org/0000-0002-9808-3398 http://orcid.org/0000-0002-5162-3326 http://asianonlinejournals.com/index.php/economy/article/view/1010 http://orcid.org/0000-0002-9808-3398 http://orcid.org/0000-0002-5162-3326 http://asianonlinejournals.com/index.php/economy/article/view/1010 http://orcid.org/0000-0002-9808-3398 http://orcid.org/0000-0002-5162-3326 http://asianonlinejournals.com/index.php/economy/article/view/1010 http://orcid.org/0000-0002-9808-3398 http://orcid.org/0000-0002-5162-3326 economy, 2019, 6(2): 41-55 42 © 2019 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this paper contributes to the existing literature by constructing an operational and up-to-date small macroeconometric model for the nigerian economy wherein the impact of shocks to monetary policy, fiscal policy and oil price are examined so as to devise the appropriate policy with which to achieve desired outcomes in the nigerian economy. 1. introduction apparently, there are complexities in the real world and inter-relationships among economic variables thus, making it an uphill task to appropriately ascertain the effects (direct and indirect) of economic policies. nevertheless, building macroeconomic models provides a plausible basis for inference making as regards the direction of impact of policy interventions. an economic model is a simplified representation of a system and abstraction of the real world. thus, a model can be judged relevant by its ability to replicate real world features, the degree to which it explains the observed interactions among economic agents, the extent of its ability to accommodate indirect effects of policy interventions, and its ability to provide alternative policy directions through sensitivity analyses (nwaobi, 2011). the nigerian economy is plagued with structural inadequacies which are the primary roadblocks to the achievement of the developmental objectives in the country. from independence, various forms of macroeconomic instabilities constrained the performance of the economy. the country is faced with some fundamental issues which include: persistent fall in the crude oil price (our main export product) in the international market, inability of the nigerian government (especially state governments) to pay the minimum wage, a persistent fall in the standard of living, incessant increase in the cost of living, high rate of unemployment, infrastructural and institutional decadence, high inflation rate and high level of corruption. nigerians place a high premium on imported products at the expense of locally produced goods, hence the reason for the high dependence on imports. unfortunately, we also import foreign policies without taking cognizance of the peculiar nature of our economy. this has had devastating effects on the economy as a whole as policy makers are frustrated by the ineffectiveness of economic policies in the country. an economic policy that works perfectly well in an economy might fail in another due to the different institutional and economic frameworks, among other reasons, in the economies. economic policies are contextual, hence the reason for their failure if taken out of context. thus, it is highly imperative that government agencies and macroeconomic modelers understand the intricacies of their domestic economy. for instance, the adoption of the structural adjustment programme (sap) in 1986 had a debilitating effect on the nigerian economy. this is because the world bank and imf, who instigated the programme, had a poor perception of the nigerian economic problem. thus, what was intended to serve as an economic panacea led to more devastating situations. one of the major effects of sap is that it has eroded the value of the domestic currency overtime. most economies undergoing adjustment have experienced a drastic fall in the value of their currency relative to other currencies. sap, by its nature, is inflationary because it raises the amount of local currency used in buying units of local goods and import. another notable example is the recent issue on devaluation following the incessant fall in the value of naira which has brought representatives from the world bank and imf to persuade the nigerian government to devalue her currency. the effects of devaluation on a country like nigeria will be devastating for the following reasons: nigeria is highly import-dependent, her export (mostly primary products) prices are quoted in foreign currencies and so is her import. apparently, a devaluation of the domestic currency will further worsen the situation of the economy. this policy stance came due to a relatively good understanding of the structure of the nigeria economy. a more comprehensive knowledge of the nigerian situation will help policy makers formulate beneficial policies and not policies that will further worsen the economic situations of the country. hence, to tackle the existing and impending problems facing the nigerian economy, an appropriate framework that will be an accurate representation of the domestic economy and also serve as a point of reference is imperative. it is also essential to study the nature of relationship between different macroeconomic variables in nigeria in order to formulate well-informed policies. however, in building this model, it is also important that the modelers have a sound knowledge of the basic structure of the economy to aid the determination of the various sets of policy interventions that will correct the structural inadequacies in the economy. they should also be aware of the linkages among the various sectors of an economy and the impacts (direct and indirect) of policy coordination on individual sectors. this study identifies few research gaps. several attempts have been made at building an operational and up-to-date macroeconometric model for nigeria, the most recent being central bank of nigeria (cbn) (2010); olofin et al. (2014) and nkoro and uko (2018). however, there are a number of research gaps in these studies. for instance, cbn (2010) estimated only short-run equations for each of its stochastic equations in the model neglecting the long-run equations which should form the basis for simulation and forecast. also, olofin et al. (2014) developed a small-scale macroeconometric model which focused primarily on the response of key macroeconomic variables to changes in the monetary policy rate (mpr) in nigeria neglecting the impact of fiscal policy and exchange rate movement on the performance of key macroeconomic variables in nigeria. moreover, nkoro and uko (2018) only focused on the impact of oil price shocks and monetary policy on macroeconomic performance without accounting for the impact of fiscal policy. hence, this study fills these research gaps. the novelty of this study lies in its contribution to the theoretical, methodological and empirical literature. theoretically, this study contributes to the extant literature by adopting the standard keynesian approach used by asteriou et al. (2011) and khan (2014) for greece and india respectively. this approach is holistic in that it covers all sectors of the economy. to the best of our knowledge, this approach has not been used in developing a macroeconometric model in nigeria. with respect to methodological contribution, many studies favour the choice of ordinary least square (for example the works of olayide et al. (1981); cbn (2010); hanif et al. (2011); and egwaikhide et al. (2012) among others), the seemingly unrelated regression equations (see e.g. akanbi and du toit (2011)) the two-stage least square technique (see e.g. khan (2014)). most of these studies did not take account of the stationarity properties of the macroeconomic variables, a practice which results in spurious regression. in addition, the long-run relationship, an important basis for forecast, of the macroeconomic variables was not economy, 2019, 6(2): 41-55 43 © 2019 by the authors; licensee asian online journal publishing group ascertained before estimation by several studies. these inadequacies render the findings from the model estimation unfit for policy analysis. however, to circumvent these inadequacies, this study adopts a relatively more robust model with inherent cointegration test technique: the autoregressive distributed lag (ardl). gurara (2013) have used same methodology for similar study in rwanda. the empirical contribution of this study lies in the fact that most studies (cbn, 2010; egwaikhide et al., 2012; olofin et al., 2014) on macroeconometric model of nigeria examined the effects of monetary and fiscal policy on the nigerian economy. since nigeria doubles as a net oil exporter and importer, it is needful to evaluate the transmission mechanism through which changes in oil price in the international market filters into the aggregate economy, this analysis is missing in the literature. however, this study will fill this knowledge gap by examining the impact of changes in government expenditure (fiscal policy), oil price and exchange rate (monetary policy) on the overall performance of the nigerian economy so as to devise the appropriate policy with which to achieve desired outcomes in the nigerian economy. this study aims at developing and estimating a model that explains the relationships between major macroeconomic variables and to operationalise the model by using it to forecast and simulate policy options for the economy. friend and taubman (1964) argued that small models are the best at explaining the economy more efficiently as against large models that make analysis of the economy more difficult and cumbersome due to the many equations in the model. thus, they suggested that economic modellers should “keep it sophisticatedly simple (kiss)”. this principle forms the premise on which this study develops a small macroeconometric model of nigeria. the rest of this paper is structured as follows: section two takes an overview of the nigerian economy while section three contains the review of relevant literatures. section four presents the methodology and empirical results of this study and section 5 concludes this study with policy recommendations. 2. the nigerian economy nigeria, with a population of over 170 million, is the most populous black nation with total land area of 923,773 square kilometres, covering five different vegetation zones. nigeria‟s economy is second to none in africa in terms of key macroeconomic indicators. nigeria‟s gross domestic product (gdp) was estimated at n251.05 billion in 1981 and it grew to n328.61 billion, n412.33 billion, n776.33 billion and n950.11 billion in 1990, 2000, 2010 and 2013 respectively (see cbn (2014)). the nigerian economy is dominated by agricultural and crude oil production which are both primary products. the oil and gas sector is the main driver of the economy, in terms of its share in government revenue, foreign exchange and foreign investments inflows. the contribution of the primary sector to gdp in 1981 was 33.6%, 38.5% for secondary sector and 27.9% for tertiary sector. in 1986, the year in which structural adjustment programme (sap) was introduced, the share of primary sector to gdp stood at 41.4% and it rose to 42.1% in 2002 but fell to about 40% in 2014. however, the share of the secondary sector to gdp reached an unprecedented level of 40% in 1990 and further fell to 21.3% in 2014. this is because nigeria is heavily dependent on imports at the expense of local production. the tertiary sector‟s share of gdp rose markedly from 29% in 2002 to 40.3% in 2012. this implies that the service sector grew markedly in the new millennium which was traceable to telecom investment by firms in the communication sector thereby leading to a rapid development of the sector. government expenditure has been changing and volatile overtime. between 1981 and 1983, the capital expenditure was more than the recurrent expenditure. the reverse was the case between 1987 and 1996 as recurrent expenditure was greater than capital expenditure. this implies that capital projects were not adequately provided during those periods. between 1996 and 1999, however, government spent more on capital expenditure than on recurrent expenditure. from the new millennium to 2014, recurrent expenditure outweighs capital expenditure as recurrent expenditure was n3417.58 billion while capital expenditure stood at n783.12 billion in 2014. nigeria‟s trade interaction with the rest of the world is categorized mainly into oil and non-oil due to the dual nature of the economy. a significant difference exists in the export of oil and non-oil products. the ratio of oil to non-oil export was n10.680.5 to n342.8 in 1981, n106626.5 to n3259.6 in 1990, n1920900.4 to n24822.9 in 2000 and n14326518.7 to n913708.4 in 2011. this clearly shows that the mainstay of the nigerian economy is crudeoil; it is the major source of foreign exchange; and nigeria depends heavily on the proceeds from oil which is a primary product susceptible to fluctuations in the international market. implicit price deflator rose from double-digit of 37.57 in 1981 to about 1108.76 in 1991, before declining to 1026.97 in 1998. the figure again jumped to about 1190.32 in 1999 and it continued to grow until it reached 3614.44 and 4561.28 in 2008 and 2012 respectively. it can be observed that the implicit price deflator grew steadily overtime. the increase in the implicit price deflator was attributed to increases in the domestic pump-price of petroleum products. another notable reason for the increase in the implicit price deflator especially in 2008 and 2009 is the effects of the global financial crisis which led to naira depreciation and a reduction in general credit creation. the monetary policy rate which substituted the minimum rediscount rate (mrr) in 2006 is the official interest rate of the central bank of nigeria (cbn) and is the anchor rate for other interest rates in nigeria. mrr was highly regulated in the period between 1970 and 1986. it was 4.5 percent between 1970 and 1975 before it experienced marginal increases in subsequent years and become stable again at 10 percent between 1984 and 1986. the cbn fixed the mrr and removed all controls on interest rate in 1987 to depict the direction it intends interest rate to go. mrr stood at 12.75 percent in 1987 and1988 and 18.5 percent in 1989 and 1990. it however plummeted to 13.5 percent from 1994 to 1997 and fluctuated till 2006 when mrr was change to mpr. this change had an almost immediate effect as interest rate fell from two-digits to one-digit between 2007 and 2011 before it rose to 12 percent in 2012 and 2013 and to 12.25 percent in 2014. nigeria is financially indebted to paris club, london club, multilateral creditors, promissory note creditors, bilateral and private sector creditors. nigeria‟s external debt stock profile stood at n2.33 billion in 1981. the figure increased significantly to n100.79 billion and n633.02 billion in 1987 and 1998 respectively. it further increased markedly to n2577.37 billion, a 307% increase. this happened at a time when there was a change in government from military to democratic rule. external debt further rose tremendously to n4890.27 billion in 2004 economy, 2019, 6(2): 41-55 44 © 2019 by the authors; licensee asian online journal publishing group but plummeted to n438.89 billion in 2007. however, the figure started increasing as there was a change of government and it stood at n1631.52 in 2014. nigeria‟s stock of external reserves depends largely on the world price of crude oil. the reserve derives from the excess of receipts on export of crude oil on import. the reserve grew persistently because of growing price of crude oil in the world market. nigeria‟s external reserves trended downwards from us$4682.9 million in 1981 to us$456.6 million in 1984 before it rose gradually to us$981.8 million. since then the figure has trended upwards till 1988 when it stood at us$6022.2 million and then declined marginally to us$3662 million in 1989. however, there was a persistent increase in the stock of external reserve from 1989 to 2008 when the stock reached an unprecedented us$58472.8 million before it started falling again until it reached us$37220.3 million in 2014. the exchange rate in nigeria has been fluctuating overtime. between 1974 and 1980 the exchange rate of naira in relation to the us dollar stood between n0.54 and n0.71 with the naira appreciating against the dollar during this period, after 1980, the exchange rate started depreciating. however, the value of naira in relation to the us dollar has been rising over the years as a result of the various policies of the cbn. the rate was fixed by the then military government and it increased by about 300% from n21.89 in 1998 to n92.69 in 1999 with inflation rate rising by 6.6%. the exchange rate hit a triple digit in year 2000 with the rate at n102.11 and it has been increasing since then till it hit n150.31 to a dollar in year 2010 and n158.55 in 2014. stock/securities, debt/bonds and equities are the major financial instruments traded in the nigeria stock exchange market. the stock exchange market has experienced tremendous growth overtime from n5 billion in 1980 to n10 billion in 1988. it later increased by about 162% from n180.4 billion in the 1995 to n472.3 billion in 2000. it later increased to four-digit of n1359.3 billion in 2003 and grew astronomically to n13181.7 billion in 2007, a 870% increase. however, the figure fell to n9563 billion and n7030.4 billion in 2008 and 2009 respectively. this decline can be attributable to the effects of the global financial crises of that period. however, the figure increase to reach an unprecedented level of n19077.4 billion in 2013 before it fell to n16875.1 billion in 2014.the persistent rise in the market capitalization depicts how the nigerian stock exchange market evolved overtime. the recapitalization of commercial banks, regulation of the market, and improved confidence in the market, among other reasons, contributed immensely to rise in stock prices. 3. a review of macroeconometric models efforts have been made by individuals and government institutions to develop a macroeconometric in order to understand the transmission mechanism through which policy changes affects different macroeconomic variables of interest. for instance, gurara (2013) analysed the macroeconomic impact of different policy interventions by developing a macroeconometric model for rwanda. the ardl framework was employed to estimate the individual macroeconomic equations. the result showed that the model effectively tracked historical data given its low biasness and desirable theil‟s inequality coefficient. the simulation results showed raising expenditure on infrastructure will lead to an increase in inflation and the scenario of cutting aid flows will have a devastating effect on growth. with the purpose of analyzing the response of macroeconomic variables to changes in monetary policy in the pakistan economy, hanif et al. (2011) constructed a small macroeconometric model. the model contains 17 equations including 11 behavioural equations and 6 identities. annual time-series data for the period 1973-2006 was estimated using the ordinary least squares method. the findings revealed that the most effective monetary policy transmission mechanism is the credit channel; government investment crowds-in private investment; and demand for narrow money is relatively stable. khan (2014) developed a macroeconometric model to forecast the supply and demand of food in india from 2012 to 2013. six equations (3 structural equations and 3 identities) were specified and estimated using the twostage least square (2sls) method and the projection was based on compound average growth rate (cagr). the results suggest an increase in both demand for and supply of food items by 2030 however, the government will have to make concerted efforts at increasing investment in the agricultural infrastructure and encouraging labour participation in the agricultural sector. in a bid to account for model validation and bridge the theory-data gap in, spanos and papadopoulou (2013) constructed a small macroeconometric model for cyprus. the model contains 8 endogenous variables and 20 exogenous variables. quarterly time-series data from 1995q1 to 2012q4 was estimated and the estimates were used to forecast from 2013q1 to 2020q4. the results showed a less severe recession in cyprus in 2013 and a positive gdp growth rate in 2017. in their study, asteriou et al. (2011) developed and estimated a small macro-econometric model for greece purposely to examine various economic policy scenarios and their effectiveness in the debt crisis confronting the greek economy. the study adopted a standard post-keynesian approach to model the greek economy. more precisely the model contains behavioral equations for investment, consumption, prices, imports and exports, labor, wages, factors demand and potential gdp. the data for the macroeconomic variables are annual data for the period between 1980 and 2010. the results of the estimation of the equations showed that no particular policy can effectively tackle the high public debt to gdp ratio in greece. thus, it was recommended that the greek government boost competitiveness and create jobs in order to raise gdp growth rates beyond the eu average. several individuals and institutions have made efforts geared towards building a macroeconometric model for the nigerian economy in the past. the purpose of their construction varied from purely academic exercise, to practical policy applications. recent efforts have been made to improve the macroeconometric model for nigeria as the previous studies were not simulated for numerical solution and their common features are their emphasis on demand side and neglect of micro considerations. for instance, akanbi and du toit (2011) developed all-inclusive macroeconometric models for nigeria to bridge the gap between growth and poverty in nigeria. the models examined the existing demand-side and supply-side constraints hampering growth and it identified socio-economic constraints as the major sources of poverty in nigeria. using annual time-series data for the period 1970-2006, the models were estimated using the engle-granger two-step cointegration technique to capture the dynamic shortrun and long-run properties of the nigerian economy. the models were subjected to policy scenarios to find the economy, 2019, 6(2): 41-55 45 © 2019 by the authors; licensee asian online journal publishing group appropriate policy options capable of stimulating growth and reducing poverty. the result revealed that the supply side will in no small way help devise suitable policies to address the high and sticky poverty level in nigeria. in addition, udah (2009) developed a model broadly classified into six blocks: aggregate demand, fiscal, monetary, labour market, production and the external sector block, for nigeria. the results showed that the government‟s debt to the banking system is a medium through which government finance and monetary variables are linked. the model was simulated for the period 1970 to 2004 and the results showed that a monetary squeeze of 20 percent would reduce inflation rate faster than if there was a 10 percent reduction in money supply. as a result of this reduction in money supply, employment, output and government expenditure will also reduce which may have devastating effects on the domestic economy. the paper thus concluded that nigeria has to choose between higher gdp growth or inflation as a trade-off exists between these variables in nigeria. moreover, cbn (2010) constructed a medium macroeconometric model which disaggregated the nigerian economy into five sectors (i.e. the real, the external, the fiscal, the monetary and the price sectors) discussed under six blocks namely supply, private demand, government, external, monetary/financial and price blocks. the linkages of the six blocks were identified and the model solved simultaneously to incorporate those linkages. the model was simulated and model evaluation tests were performed. single-equation analyses indicated that the stochastic equations were well specified and in-sample performance was satisfactory. the dynamic simulation results showed that the simulated and actual data are very close. evaluating the response of some macroeconomic variables to changes in fiscal and monetary variables, egwaikhide et al. (2012) developed a structural macroeconomic and estimated it using the ordinary least squares technique. the result showed that monetary policy is more effective in stabilizing and managing counter-cyclical output in the nigerian economy than fiscal policy. specifically, interest rate is a very tool for stimulating aggregate output. however, fiscal policy play more important role than monetary policy in the long-run as monetary policy wanes as time goes by. similarly, nworuh and nwachukwu (2010) developed a macroeconometric model for nigeria. the result showed a desirable variance proportion, bias proportion, covariance proportion and theil‟s inequalities indicating that the model depicts reality and is useful for policy prescription. olofin et al. (2014) built a small macroeconometric model of nigeria to support the efforts of the central bank of nigeria (cbn) in developing a pragmatic model that will help provide evidence-based monetary policy decisions. the model is termed „cbn mac ii‟ and is a revised edition of the cbn mac i. the model was subjected to sensitivity analysis and was found to be adequate in tracking developments nigeria‟s key macroeconomic indicators. the results showed that the monetary authority has to choose between the objectives of lowering the lending rate and maintaining a stable exchange rate. similarly, nkoro and uko (2018) constructed small macroeconometric model for nigeria to evaluate the impacts of oil price shock and monetary policy on the economy. the model contains 19 equations (12 behavioral equations, 3 definitional equations and 4 identities) and was estimated using the ordinary least square method using data from 1981 to 2012. the results showed that the model tracks historical data well and that an increase in monetary policy rate will make private investment, nominal interest rate, inflation, and gdp dwindle while unemployment will remain constant. likewise, a rise in crude-oil price make government revenue and gdp increase while lending rate, inflation and exchange rate will remain unchanged. 4. the structure of the model this study builds a small macroeconometric model of nigeria. the model comprises ten behavioural equations and five identities with ten endogenous variables and thirteen exogenous variables. the autoregressive distribution lag (ardl) framework is used to estimate the behavioural equations in the model using annual data sourced from central bank of nigeria statistical bulletin, opec annual statistical bulletin and world development indicators (wdi) for the period between 1981 and 2014. the validity of the model is checked through both within-sample and out-of-sample forecasts. 4.1. model specification 4.1.1. aggregate output following cobb-douglas production function, aggregate capital stock and aggregate labour force are the major drivers of aggregate output in an economy. also, following the specification of the aggregate output function in the studies by john and chris (2000) labour force (labf), human capital measured using expenditure on education (hcap) and physical capital represented by gross fixed capital formation (gfcf) are determinants of aggregate output (rgdp). aggregate output is also a function of exchange rate. thus, the aggregate output model can be specified as follows: rgdp = γ1 + γ2hcap + γ3gfcf + γ4labf + γ5exr + µ a priori expectation: γ2, γ3, γ4> 0 γ5 < 0 4.1.2. interest rate the nominal interest rate equation is assumed to be an inverted keynes‟ money demand function where interest rate is influenced by money demand represented in this study by total monetary assets (m2) and national income (rgdp). the studies by folawewo and tennant (2008); ferdinand et al. (2015) and anthony and babatunde (2012) show that interest rate is influenced by money supply (m2), consumer price index (cpi), exchange rate (exr), reserve requirement (rr), and aggregate output (rgdp). thus, the nominal interest rate can be specified as: int = ɮ1 + ɮ2m2 + ɮ3cpi + ɮ4rr + ɮ5rgdp + ɮ4exr + µ a priori expectation: ɮ2, ɮ3, ɮ5> 0 while ɮ4, ɮ5 < 0 economy, 2019, 6(2): 41-55 46 © 2019 by the authors; licensee asian online journal publishing group 4.1.3. consumer price index fatukasi (2005) showed that the nigerian consumer price index is influenced by interest rate (int), exchange rate (exr) and money supply (m2). furthermore, saravanan (2015) included money supply (m2) and government expenditure (gexp) as drivers of consumer price index. olatunji et al. (2010) incorporated real gdp (rgdp) into their cpi model specification. hence, the cpi model can be specified as: cpi = ʊ1 + ʊ2int + ʊ3exr + ʊ4m2 + ʊ5rgdp + ʊ6gexp + µ a priori expectation: ʊ3, ʊ4, ʊ5, ʊ6 > 0 while ʊ2< 0 4.1.4. exchange rate following the specification of ajao and igbekoyi (2013) exchange rate (exr) is driven by trade openness (trop), interest rate (int) and money supply (m2). udousung et al. (2012) also incorporated trade openness into their exchange rate model. ben (2011) in his model of exchange rate, included the price of oil (oilp) to depict that the price of oil in the international market determines the value of naira in relation to the us dollars. exr = ƕ1 + ƕ2trop + ƕ3int + ƕ4m2 + ƕ5oilp + µ a priori expectation: ƕ2, ƕ3, ƕ5> 0 while ƕ4< 0 4.1.5. consumption consumption is the largest component of aggregate demand. it can be divided into private consumption (pcon) and government consumption (gcon). following the keynes‟ absolute income theory of consumption and kuznet‟s theory of consumption, the primary determinants of consumption are income (rgdp). also, in line with the law of demand, price level (measured with cpi) is a major determinant of quantity demanded (consumption). due to the import-dependent nature of the nigerian economy, the exchange rate (exr) is also a major determinant of consumption expenditure in nigeria. because foreign remittances (rem) have become a significant source of income for many households in the country, net income from abroad is incorporated into the consumption model. the consumption model, which follows (cbn, 2010) model closely, is specified as follows: con = ɮ1 + ɮ2rgdp + ɮ3cpi + ɮ4exr + ɮ5rem + µ a priori expectation: ɮ2, ɮ5> 0 while ɮ3, ɮ4< 0 4.1.6. gross fixed capital formation investment is the second key component of aggregate demand after consumption because it is a veritable instrument for achieving and sustaining economic growth. aggregate investment can be decomposed into private investment (prinv) and public investment (puinv). following keynesian and classical investment theories, interest rate (int) and income (rgdp) drive investment. duruechi and ojiegbe (2015) incorporated inflation rate (cpi), exchange rate (exr) and interest rate (int) into their investment model as explanatory variables. investment is measured by gross fixed capital formation (gfcf). thus, the investment model can be specified as follows: gfcf = ƕ1 + ƕ2int + ƕ3rgdp + ƕ4exr + ƕ5cpi+ µ a priori expectation: ƕ3> 0 while ƕ2, ƕ4, ƕ5< 0 4.1.7. export nigeria‟s export can be disaggregated into oil export and non-oil export. while oil export dominates nigeria‟s export portfolio, non-oil only constitute a small proportion of the overall export of the country. 4.1.7.1 oil export nigeria‟s major export product is crude-oil whose price is exogenously determined at the world market and whose quota is regulated by opec. thus, the barrels of crude oil extracted per day determine the volume of crude oil nigeria will supply to the world market. united states of america is the major buyer of nigeria‟s export product as she imports about 40 percent of nigeria‟s crude-oil thus a change in us‟ national income and the naira/us$ exchange rate directly affects the nigerian economy. from the foregoing, nigerian oil-exports (oilx) can be said to be influenced by price of crude-oil in the world market (oilp), opec quota (opec), foreign demand of crude-oil represented as united states gdp (usgdp) and exchange rate (exr). this specification is in consonance with that of cbn (2010). thus, the oil-export equation can be specified as follows: oilx = δ1 + δ2oilp + δ3opec + δ4usgdp + δ5exr + µ a priori expectation: δ2, δ3, δ4, δ5 > 0 4.1.7.2. non-oil export prior to the discovery and exploration of crude oil in commercial quantities in the early 1970s, the mainstay of the nigerian economy was agriculture. although, crude-oil dominates the nigerian exports profile, non-oil products and other natural resources are still being exported to other nations of the world but at a relatively lower rate than what obtained before the 1970s. non-oil export is influenced by production in the non-oil sector (noily) and exchange rate (exr). this specification follows (cbn, 2010) specification of the non-oil sector equation. thus, the non-oil export (noilx) equation can be specified as follows: noilx = φ1 + φ2noily + φ3exr + µ10 a priori expectation: φ2, φ3> 0 4.1.8. import nigeria is highly import-dependent such that we import both consumer and capital goods. imports constitute a significant share of inputs for both domestic production and final consumption. this study disaggregates import into oil and non-oil import. economy, 2019, 6(2): 41-55 47 © 2019 by the authors; licensee asian online journal publishing group 4.1.8.1. oil import nigeria exports crude-oil and imports its refined products. nigeria‟s refineries refine crude-oil but not efficiently thus, the little production is augmented with import to meet the growing demand for crude-oil products. exchange rate and price of crude-oil in the international are other important determinants of oil import. hence, demand for oil imports (oilm) is influenced by domestic production of crude oil (dpro), the price of crude-oil (oilp) in the international market and the exchange rate (exr). thus, the oil-import equation can be specified as follows: oilm = ω1+ ω2dpro + ω3exr + ω4oilp + µ a priori expectation: ω2, ω3, ω4< 0 4.1.8.2. non-oil import usually, countries import goods and service they cannot produce, goods in which they do not have comparative advantage, and to augment domestic production, among other reasons. the latter reason implies that the volume of nigeria‟s imports depend on the country‟s non-oil output (noily). the tariffs (tar) levied on imported goods also influence the volume of import together with exchange rate (exr) and domestic interest rate (int). this specification follows closes that of cbn (2010). thus, non-oil imports model can be specified as follows: noilm = §1 + §2noily + §3tar + §4exr +§5int+ µ a priori expectation: §2, §6> 0 while §3, §4, §5< 0 identities con = pcon + gcon gfcf = prinv + puinv exp = oilx +noilx imp = oilm +noilm rgdp = con + gfcf + gexp + exp – imp 4.2. empirical results 4.2.1. augmented dickey fuller unit root test the results of the augmented dickey-fuller unit root test are presented in table 1. the results show that the first difference of most of the variables were taken before they became stationary thus they are integrated of order 1, that is, i(1). a few variables like interest rate, non-oil export, opec quota and tariff are found to be stationary without differencing their series. hence, it is necessary to check if long-run relationship exists among the variables. the autoregressive distributed lag (ardl) bounds test approach to cointegration is employed to investigate if these variables converge in the long-run. the choice of this approach is premised on the fact that the series are a combination of i(0) and i(1) without the inclusion of i(2). table-1. augmented dickey fuller unit root test result. variables level 1st difference i(d) variables level 1st difference i(d) int -2.979575a** -6.027197c* i(0) lnoily -1.068062b -3.850615a* i(1) lcon -2.777769b -3.065783c* i(1) loilm -1.579322a -7.106029a* i(1) lcpi -1.670254a -2.706235a*** i(1) loilp -2.104341b -6.089483c* i(1) ldpro -1.103451b -5.763333c* i(1) loilx -0.967106a -6.246777a* i(1) lexr -2.319449a -4.945028b* i(1) lopec -3.450675a** -6.566612c* i(0) lgexp -0.960402a -4.349583b* i(1) lrem -1.967389a -5.645840c* i(1) lgfcf -2.994514b -2.953288c* i(1) lrgdp -1.873552b -4.247826a* i(1) lhcap -1.842259b -6.693017b* i(1) lrr -2.056679b -4.758919a* i(1) llabf -1.760340b -5.093305a* i(1) ltar -4.599778b* -7.910454c* i(0) lm2 -2.909531b -3.730620a* i(1) ltrop -1.390444b -6.572491a* i(1) lnoilm -2.255197b -7.094259a* i(1) lusgdp -3.028256a** -5.371590b* i(0) lnoilx -4.245504b** -7.130983a* i(0) source: author‟s computation using eviews9. note: *, ** and *** implies statistical significance at 1 percent, 5 percent and 10 percent respectively. a, b and c implies model with intercept, trend and intercept and none respectively. i(0) and i(1) implies that the time series is stationary at level and first difference respectively. 4.2.2. autoregressive distributed lag (ardl) bounds test approach to cointegration sequel to the result of the unit root test, cointegration test is carried out using ardl bounds test approach to cointegration. the choice of this approach is premised on the fact that our variables are not integrated of the same order, thus negating the use of engle-granger and johansen cointegration test approach. pesaran and shin (1999) and pesaran et al. (2001) developed the ardl cointegration approach which has three major advantages over other traditional cointegration approaches. firstly, ardl does not require that all the variables under study have the same order o integration; it can be used if the series are i(0) or i(1) or both. secondly, it is relatively more efficient using small sample sizes. thirdly, unbiased estimates of long-run model are obtained using ardl method (harris and sollis, 2003). cointegration test is carried out to determine the existence of a long-run relationship between the dependent and explanatory variables. the rule of ardl bounds test of cointegration states that the null hypothesis be rejected if the value of the computed f-statistic is greater than the upper bounds value and accepted if the fstatistic is less than the lower bounds value. the ardl cointegration test will be said to be inconclusive should the computed f-statistic falls between the lower and upper bound. the result of ardl bound test is presented in table 2. the result shows that the null hypothesis for cpi model, consumption model, gfcf model and non-oil imports model should be rejected since the value of their computed f-statistic is greater than the upper bound critical value at 1 percent level of significance and at 10 economy, 2019, 6(2): 41-55 48 © 2019 by the authors; licensee asian online journal publishing group percent level of significance for the interest rate model. this implies that there is a long-run relationship among the endogenous variables and their respective explanatory variables. however, real gdp model, exchange rate model, oil export model, non-oil export model and oil import model are found not to be cointegrated because the values of their computed f-statistic are less than 5 percent, 1 percent, 5 percent, 10 percent and 10 percent level of significance respectively. we will proceed to estimating the ardl error correction model (short run) and their respective long run models for each of the models. table-2. results of ardl bounds test approach to cointegration. endogenous variables significance lower bound upper bound computed f-statistic cointegration status lrgdp 10% 2.45 3.52 2.49 not cointegrated 5% 2.86 4.01 1% 3.74 5.06 int 10% 2.26 3.35 3.39 cointegrated 5% 2.62 3.79 1% 3.41 4.68 lcpi 10% 2.26 3.35 5.58 cointegrated 5% 2.62 3.79 1% 3.41 4.68 lexr 10% 2.45 3.52 3.38 not cointegrated 5% 2.86 4.01 1% 3.74 5.06 lcon 10% 2.45 3.52 6.61 cointegrated 5% 2.86 4.01 1% 3.74 5.06 lgfcf 10% 2.45 3.52 7.73 cointegrated 5% 2.86 4.01 1% 3.74 5.06 loilx 10% 2.45 3.52 2.72 not cointegrated 5% 2.86 4.01 1% 3.74 5.06 lnoilx 10% 3.17 4.14 2.69 not cointegrated 5% 3.79 4.85 1% 5.15 6.36 loilm 10% 2.72 3.77 2.32 not cointegrated 5% 3.23 4.35 1% 4.29 5.61 lnoilm 10% 2.45 3.52 5.07 cointegrated 5% 2.86 4.01 1% 3.74 5.06 source: author‟s computation using eviews9. 4.3. presentation and interpretation of results the results from the estimation of the autoregressive distribution lag (ardl) model of each of the endogenous variables are presented and interpreted below. the optimal lag lengths for the selected ardl error correction representation of each model are determined by the schwarz criterion (sc). the results of the long run coefficient and error correction representation of the selected ardl model for individual equation are presented in table 3. 4.3.1. aggregate output the result of the estimation of aggregate output (real gdp) equation is presented in table 4. the result reveals that the estimated error correction coefficient is negative and significant at 5 per cent level of significance and shows that approximately 32 percent of disequilibrium from the previous year‟s shock of the explanatory variables converges back to the long-run equilibrium in the current year. more precisely, the result shows that a one percent increase in human capital and gross fixed capital formation will bring about approximately 0.06 percent and 0.07 percent increase and decrease in aggregate output in the short run respectively. also, a one percent increase in labour force will lead to 0.11 percent fall in aggregate output which implies that marginal product of labour fall as output increases in nigeria. this result is plausible because the service sector which is capital-intensive is the booming sector of the economy and in recent times, contributes immensely to the nigeria‟s aggregate output. furthermore, a one percent depreciation of the exchange rate will decrease aggregate output by 0.05 percent in the short-run. on the other hand, whereas human capital, gross fixed capital formation and exchange rate have a positive relationship with aggregate output in the long-run, labour force is inversely related to aggregate output. however, only human capital was found to be significant in explaining changes in aggregate output both in the short-run and the long-run. put differently, human capital is a determinant of aggregate output in nigeria both in the short-run and long-run. the result also shows that the model explains about 99 percent of the variation in aggregate output. interestingly, the long run impacts of each of the explanatory variables on aggregate output exceed their short-run impacts. 4.3.2. interest rate (monetary policy rate) the result of the estimated interest rate short-run equation shows that interest rate will fall by 6.5 percent if money supply increases by one percent indicating that interest rate and money supply are inversely related. this result is plausible and it supports economic theory which posits an inverse relationship between money supply and interest rate. also, a one percent increase in price level and reserve requirement will lead to approximately 1.06 percent and 1.67 percent increase in interest rate; a one percent increase in real gdp will raise interest rate by economy, 2019, 6(2): 41-55 49 © 2019 by the authors; licensee asian online journal publishing group approximately 7.22 percent; and a one percent depreciation of exchange rate will result in about 4.66 percent fall in interest rate. this implies that the interest rate is very sensitive to changes in the explanatory variables of the model. however, only exchange rate and money supply are significant in influencing interest rate in nigeria while other variables of the model are not significant in the short-run. the result also shows that about 59 percent of the variation in interest rate is explained by the explanatory variables of the model. the coefficient of the error correction term is very high indicating a high speed of adjustment to equilibrium following short-run shocks that is, about 90 percent of the disequilibrium, caused by previous period shocks converges in the long-run. on the other hand, the long run results show that exchange rate has a positive and significant relationship with interest rate such that interest rate increases by 5.2 percent if exchange rate depreciates (increases) by one percent. also, money supply has a negative but significant relationship with interest rate in the long-run such that interest rate falls by 7.26 percent if money supply increases by one percent. in addition, consumer price index, reserve requirement real gdp and exchange rate have a positive relationship with interest rate while only money supply is inversely related to interest rate in the long run in nigeria. however, only money supply and exchange rate are determinants of interest rate in the long run in nigeria. interestingly, the long run impacts of each of the explanatory variables on interest rate exceed their short-run impacts. 4.3.3. consumer price index (cpi) the result in table 3 also shows that the first-period lag of cpi has a positive relationship with cpi such that a one percent increase in its lag will bring about, on the average, 0.56 percent increase in the present price level. this indicates that cpi in nigeria follows adaptive expectation in that the previous value of cpi predicts its present value. in addition, the result shows that a one percent depreciation of exchange rate will bring about approximately 0.1 percent fall in price level; a one percent increase in real gdp will bring about 0.45 percent decrease in price level; and a one percent change in money supply and government expenditure will bring about approximately 0.18 percent and 0.15 percent change in price level respectively. however, among all the explanatory variables, only real gdp, lag of interest rate and lag of cpi are found to be significant in determining cpi in nigeria in the short-run. in sum, whereas first period lag of cpi, interest rate, money supply and government expenditure have a positive relationship with cpi in the short-run, first period lag of interest rate, exchange rate and real gdp are inversely related to cpi in nigeria. furthermore, the result shows that the model explains about 99 percent of the variation in the price level. the speed of adjustment of the explanatory variables to long-run equilibrium is about 46 percent. however, the long run coefficients result reveals that the estimated coefficients of real gdp and government expenditure are significant in determining price level. it shows that in the long run, a one percent increase in real gdp will lead to 0.98 percent fall in cpi and a one percent increase in government expenditure will lead to approximately 0.81 percent increase in cpi. also, an increase in interest rate and money supply by one percent will lead to 0.03 and 0.39 percent increase in cpi respectively. in sum, interest rate money supply and government expenditure have positive impacts on cpi while exchange rate and real gdp are inversely related to cpi in the long-run. 4.3.4. exchange rate table 3 also shows that the coefficient of the error correction term in the estimated exchange rate equation is negative and significant. it reveals that the speed of adjustment of the model to its long run equilibrium is about 42 percent. the result also shows that, in the short-run, a percent increase in interest rate, money supply and oil price will lead to approximately 0.02 percent, 0.58 percent and 0.07 percent depreciation (increase) in exchange rate respectively. also, exchange rate will depreciate by 0.18 percent if trade openness increases by one percent. however, it is found that, of all the explanatory variables of the model, only money supply is significant in explaining exchange rate movement in nigeria in the short-run. the positive relationship between oil price and exchange rate in nigeria is plausible because the price of crude-oil is quoted in us dollar and the effect of the increase in price on the naira is not direct as the increase in price of oil only increases nigeria‟s foreign exchange earnings. the coefficient of the adjusted r-square shows that about 98 percent of the variation in exchange rate is explained by the trade openness, interest rate, money supply and oil price. however, in the long run, trade openness and oil price have a negative impact on exchange rate while interest rate and money supply have positive influence on exchange rate in nigeria. nonetheless, only money supply and oil price are significant determinants of exchange rate in nigeria in the long-run. in sum, trade openness has an inverse relationship with exchange rate both in the short-run and long-run; interest rate and money supply have a direct relationship with exchange rate both in the short-run and long-run; and oil price is positively related to exchange rate in the short-run but inversely related to it in the long-run. this suggests that if oil price changes persist, it will transit from having a positive impact on exchange rate to have a negative impact. 4.3.5. consumption the result of the estimated consumption equation in table 3 shows that there is a positive relationship between real gdp and consumption such that a one percent rise in real gdp will bring about approximately 0.18 percent increase in consumption. this result parallels the theory of the absolute income which states that consumption is a function of income (real gdp in our case). also, a one percent increase in price level will lead to about 0.37 percent fall in consumption indicating that inflation reduces the purchasing power of consumers thereby reducing their consumption; a one percent depreciation in exchange rate will bring about 0.1 percent fall in consumption; and a one percent increase in remittance will lead to a 0.02 percent increase in consumption. in addition, a one percent increase in the lag value of both consumption and exchange rate will lead to 0.39 percent and 0.27 percent decline in consumption. however, of the six explanatory variables of the consumption model, only the lag value of both consumption and exchange rate are significant in explaining changes in consumption. the adjusted r-squared value shows that about 97 percent of the variation in consumption is explained by gdp, cpi, exchange rate and remittance and the durbin-watson autocorrelation coefficient of 1.97 shows the absence of autocorrelation among the explanatory variables. the speed of adjustment of the model to its long-run equilibrium economy, 2019, 6(2): 41-55 50 © 2019 by the authors; licensee asian online journal publishing group state is about 42 percent. however, in the long run, real gdp, exchange rate and remittance have a positive but not significant relationship with consumption while cpi has a negative but insignificant relationship with consumption in nigeria. this implies that only exchange rate is a determinant of consumption in the long-run in nigeria. interestingly, the long run impacts of each of the explanatory variables on consumption exceed their short-run impacts. 4.3.6. gross fixed capital formation (gfcf) the result of the short-run estimation shows that only the lag of interest rate and real gdp are statistically significant to influence gfcf such that a one percent increase in lag of interest rate and real gdp will bring about 0.002 percent and 0.7 percent increase in gfcf. similarly, interest rate has an insignificant positive effect on gfcf such that an increase in interest rate by one percent raises investment by 0.002 percent. this result is against theoretical postulation which posits an inverse relationship between interest rate and investment (gross fixed capital formation). also, a one percent increase in cpi and one percent depreciation in exchange rate will bring about 0.01 percent and 0.02 percent fall in gfcf indicating that they are both inversely related to gfcf. in sum, in the short-run, interest rate and its first period lag as well as real gdp are positively related to gfcf while exchange rate and cpi are inversely related to gfcf. furthermore, the coefficient of the error correction term indicates that approximately 51 percent of disequilibrium from the previous year‟s shock of the independent variables converges back to the long-run equilibrium in the current year. furthermore, it is apparent that about 93 percent of the variation in gfcf is explained by the explanatory variables. in the long run, however, gfcf will fall by 0.01 percent, 0.03 percent and 0.02 percent if interest rate, exchange rate and cpi increase by one percent respectively. also, real gdp has a positive and significant relationship with gfcf in the long run such that gfcf will increase by 1.37 percent if real gdp increases by one percent. hence, only real gdp is a driver of investment in the long-run in nigeria. as is the case with previous equations, the long-run impacts of the explanatory variables (interest rate, real gdp, exchange rate and cpi) of the gfcf equation exceed their impacts in the shortrun. 4.3.7. oil export the result of the oil export equation shows that a one percent increase in oil price, opec quota and exchange rate will bring about approximately 0.75 percent, 0.02 percent and 0.16 percent increase in oil export respectively. these results are in line with a priori expectation as exchange rate depreciation will make exports cheaper thus, increasing output as well as the volume of oil exports. also, opec gives quota for exports to its member nations including nigeria; an increase in this quota means an increase in the volume of export while an increase in oil price will encourage producers and exporters to increase the volume of both production and export thereby, increasing their revenue. furthermore, a one percent increase in united states‟ gdp, which implies an increase in us national income, will lead to approximately 1.81 percent increase in oil export. this result implies that oil export responds to changes in the explanatory variables of this model. this result is plausible in that a change in the national income the united states, which is the major importer of nigerian crude-oil, will greatly affect the volume of nigeria‟s oil export and revenue. this was evident during the recession in the us in 2008 when nigeria was also badly hit by the recession which originated in the united states. however, only oil price is significant in explaining the changes in oil export in nigeria in the short-run. on the other hand, oil price and opec quota have negative impacts on oil exports while us gdp and exchange rate have positive effects on oil export in nigeria in the longrun. however, none of these variables is a determinant of oil export in the long-run. furthermore, the model explains about 99 percent variation in the volume oil export in nigeria and the coefficient of the durbin-watson (1.86) indicates the absence of autocorrelation in the model. interestingly, the long run impacts of each of the explanatory variables on oil exports exceed their short-run impacts. 4.3.8. non-oil export non-oil output and exchange rate are incorporated into nigeria‟s non-oil export equation. the result shows that only non-oil output is significant in explaining the movement in non-oil export nigeria in the short-run while both non-oil output and exchange rate drive non-oil export in the long-run. also, the result shows that in the short run, a one percent change in non-oil output will bring about approximately 1.27 percent change in non-oil export while non-oil exports will fall by about 0.09 percent when exchange rate depreciates (increases) by one percent. the result implies that non-oil export gives a sharp response to shocks in non-oil export in nigeria. in the long run, however, non-oil exports have a positive relationship with exchange rate such that non-oil exports will increase by approximately 0.7 percent when exchange rate appreciates by one percent. this implies that the impact of exchange rate on non-oil exports moves from positive to negative as time progresses. furthermore, the model explains about 98 percent variation in the volume non-oil export in nigeria and the durbin-watson coefficient reveals that there is no serial correlation in the model. the coefficient of the error correction term reveals that approximately 49 percent of disequilibrium from the previous year‟s shock of the independent variables converges back to the long-run equilibrium in the current year. interestingly, the long run impacts of each of the explanatory variables on non-oil exports exceed their short-run impacts. 4.3.9. oil import the result of the estimated oil import equation shows that exchange rate and oil price are positively related to oil imports such that one percent exchange rate depreciation and one percent decline in crude-oil price will result in approximately 0.78 percent and 0.01 percent increase in oil-import respectively. also, a one percent increase in domestic crude-oil production will lead to about 0.17 percent fall in oil-import. this result is plausible in that an increase domestic production should reduce the imports of the same product although this implies that the domestic production of crude-oil products is not enough to meet the energy demand of the teeming population of the nigerian economy. however, only exchange rate is found to be significant in influencing oil import in nigeria both in the short and long run. in addition, about 96 percent of the variation in oil import is explained by the economy, 2019, 6(2): 41-55 51 © 2019 by the authors; licensee asian online journal publishing group explanatory variables of the model. in sum, domestic production of crude-oil is inversely related to imports both in the short-run and the long-run while exchange rate and oil price are positively related to oil import in nigeria both in the short-run and the long-run. the coefficient of the error correction term implies that that approximately 48 percent of disequilibrium from the previous year‟s shock of the independent variables converges back to the longrun equilibrium in the current year. the coefficient of the durbin-watson (2.19) indicates the absence of serial correlation in the model. interestingly, the long run impacts of each of the explanatory variables on oil imports exceed their short-run impacts. table-3. results of short-run and long-run coefficients of selected ardl models. regressors short-run coefficients long-run coefficients regressors short-run coefficients long-run coefficients aggregate output equation interest rate equation c 27.943437 c -212.010636 d(lhcap) 0.059001** 0.187105** d(lm2) -6.501138** -7.255029** d(lgfcf) 0.067482 0.214002 d(lcpi) 1.058286 1.181008 d(llabf) -0.113243 -0.359121 d(lrr) 1.674527 0.340235 d(lexr) -0.011596 0.219883 d(lrr(-1)) 2.214642*** d(lexr(-1)) -0.053117 d(lrgdp) 7.217633 8.054611 ecm(-1) -0.315333** d(lexr) 4.658220* 5.198401* adjusted r-squared 0.9867 ecm(-1) -0.896087* durbin-watson 1.88 adjusted r-squared 0.5893 durbin-watson 2.17 cpi equation non-oil import equation c 26.238690** c -2.617710 d(lcpi(-1)) 0.564784* d(lnoilm(-1)) -0.357448* d(int) 0.003747 0.030354 d(lnoily) -1.875787 1.235078 d(int(-1)) -0.018297* d(lnoily(-1)) 1.913407 d(lexr) -0.102748 -0.225096*** d(ltar) 0.296322** 1.541259 d(lm2) 0.177042 0.387854 d(lexr) -0.125161 0.494570 d(lrgdp) -0.447983** -0.981416** d(int) -0.017603*** -0.187511*** d(lgexp) 0.145423 0.811245* d(int(-1)) -0.036215** ecm(-1) -0.456466* ecm(-1) -0.192260** adjusted r-squared 0.9981 adjusted r-squared 0.9940 durbin-watson 1.79 durbin-watson 2.62 consumption equation gfcf equation c -8.627151 c -19.300394*** d(lcon(-1)) -0.388340** d(int) 0.001948 -0.006785 d(lrgdp) 0.182747 0.434877 d(int(-1)) 0.024696** d(lcpi) -0.366074** -0.232034 d(lrgdp) 0.699998* 1.369061* d(lexr) -0.099164 0.405210*** d(lexr) -0.019461 -0.038061 d(lexr(-1)) -0.271237* d(lcpi) -0.009047 -0.017694 d(lrem) 0.015245 0.036279 ecm(-1) -0.511298* ecm(-1) -0.420227** adjusted r-squared 0.9255 adjusted r-squared 0.9730 durbin-watson 1.69 durbin-watson 1.97 oil export equation exchange rate equation c -163.931707 c -0.518808 d(loilp) 0.753157* -0.058075 d(ltrop) -0.181612 -0.436298 d(lopec) 0.016205 0.050296 d(int) 0.025115 0.060336 d(lusgdp) 1.808769 5.614029 d(lm2) 0.579170* 1.391373** d(lexr) 0.158039 0.490519 d(loilp) 0.069543 -1.530567** ecm(-1) -0.322187* ecm(-1) -0.416257* adjusted r-squared 0.9865 adjusted r-squared 0.9825 durbin-watson 1.86 durbin-watson 2.01 oil import equation non-oil export equation c 3.496850 c -13.850723* d(ldpro) -0.173225 -0.361106 d(lnoily) 1.274462*** 2.602096* d(lexr) 0.777420* 1.620612* d(lexr) -0.094395 0.703143* d(loilp) 0.009267 0.019318 ecm(-1) -0.489783* ecm(-1) -0.479708* adjusted r-squared 0.9750 adjusted r-squared 0.9631 durbin-watson 1.83 durbin-watson 2.19 *, ** and *** implies significance at 1%, 5% and 10% respectively. source: computed by author using eviews9. 4.3.10. non-oil import the result of the estimated non-oil import reveals that all the explanatory variables, except non-oil output and exchange rate, are significant in determining changes in non-oil imports in nigeria in the short-run. it is apparent from the result that non-oil imports in nigeria follows adaptive expectation in that the previous value of non-oil imports predicts its present value as depicted by the coefficient of the non-oil imports and its corresponding probability value. the result shows that in the short-run, a one percent increase in the lag of non-oil import, noneconomy, 2019, 6(2): 41-55 52 © 2019 by the authors; licensee asian online journal publishing group oil output, exchange rate, interest rate, and the previous value of interest rate will result in approximately 0.36 percent, 1.88 percent, 0.13 percent, 0.02 percent and 0.04 percent decline in non-oil imports. also, a one percent increase in lag of non-oil output and tariff will lead, on the average, to about 1.91 percent and 0.3 percent increase in non-oil imports. in addition, about 99 percent of the variation in oil import is explained by the explanatory variables of the model. in the long run, non-oil output, tariff and exchange rate are found to have positive relationship with non-oil import while interest rate has an inverse relationship with non-oil imports. moreover, only interest rate significantly influence non-oil imports in nigeria in the long run. interestingly, the long run impacts of each of the explanatory variables on non-oil imports exceed their short-run impacts. 4.4. model forecast evaluation and simulation the primary purpose of this macroeconometric model is to explain the relationships between major macroeconomic variables, forecast and simulate future time paths of selected economic variables. the predictive accuracy of the model is crucial because it shows the closeness of the solution values of each equation in the models to the time paths of their actual values. the model is evaluated for both within-sample and out-of-sample predictive performance and the results are presented below. 4.4.1. within-sample performance time series data running from 1981 to 2014 is used to generate a static solution for the model. the actual values are plotted against the static simulation values for the endogenous variables in figure 1. the figure shows that the predicted series are very close to actual series except for gross fixed capital formation (gfcf) which has few gaps between actual and predicted series. however, the closeness of the predicted series to the actual series indicates a good forecasting power of the model thus, suggesting that the simulation result will be valid for policy prescriptions. 5 10 15 20 25 30 1985 1990 1995 2000 2005 2010 actual int (baseline) int 4.5 5.0 5.5 6.0 6.5 7.0 1985 1990 1995 2000 2005 2010 actual lcon (baseline) lcon -2 0 2 4 6 1985 1990 1995 2000 2005 2010 actual lcpi (baseline) lcpi -2 0 2 4 6 1985 1990 1995 2000 2005 2010 actual lexr (baseline) lexr 21.5 22.0 22.5 23.0 23.5 24.0 1985 1990 1995 2000 2005 2010 actual lgfcf (baseline) lgfcf 0 2 4 6 8 10 1985 1990 1995 2000 2005 2010 actual lnoilm (baseline) lnoilm economy, 2019, 6(2): 41-55 53 © 2019 by the authors; licensee asian online journal publishing group -2 0 2 4 6 8 1985 1990 1995 2000 2005 2010 actual lnoilx (baseline) lnoilx -4 0 4 8 12 1985 1990 1995 2000 2005 2010 actual loilm (baseline) loilm 0 2 4 6 8 10 1985 1990 1995 2000 2005 2010 actual loilx (baseline) loilx 30.0 30.4 30.8 31.2 31.6 32.0 1985 1990 1995 2000 2005 2010 actual lrgdp (baseline) lrgdp figure-1. actual and simulated values of the endogenous variables. source: authors‟ computation from eviews9. 4.4.2. out-of-sample performance time series data spanning the period between 1981 and 2014 are estimated to generate static solution of the model and one-step ahead out-of-sample predictions were made. the focus of the out-of sample forecast is to compare the forecast figure of each of the endogenous variables with their actual figures. this will help ascertain the accurate predictive performance of our model. the statistics used to evaluate the predictive performance of a model are mean absolute errors (mae), root mean square errors (rmse) and theil inequality coefficient. table 4 presents these statistics for all the endogenous variables and it shows that the errors are considerably small indicating that the model predicts historical data well. table-4. prediction statistics of the macroeconometric model. endogenous variables mean absolute error (mae) root mean absolute error (rmse) theil inequality coefficient real gdp 0.061 0.071 0.001 consumer price index 1.891 2.542 0.094 interest rate 0.144 0.173 0.027 exchange rate 0.293 0.338 0.046 consumption 0.103 0.124 0.011 gross fixed capital formation 0.182 0.241 0.005 oil export 0.298 0.427 0.031 non-oil export 0.369 0.455 0.057 oil import 0.482 0.682 0.066 non-import 0.300 0.435 0.031 source: computed from eviews9. 4.5. analysis of impact of shocks on the endogenous variables the model checked for the impact shocks have on the endogenous variables using stochastic simulation exercises. given the above tests and the level of satisfactory performance observed in many of the variables and equations, simulation on possible outcomes of changes in selected variables (government expenditure, money supply and oil price) are provided. the process involves introducing shocks to selected policy variables and tracing their impacts given the relationships in the model. the aim is to examine what will happen to the endogenous variables if a particular policy instrument is altered. this study looks at the impact of three sets of shocks: scenario 1: a 10 percent increase in government expenditure. scenario 2: a 10 percent depreciation of exchange rate. scenario 3: a fall in oil price in the international market by 10 percent. 4.5.1. simulation results there are three policy variables used for the simulation: government expenditure, exchange rate and crude oil price. the actual figures of these policy variables for 2015 and 2016 are inserted into the model and the result of the simulation is presented in table 5. scenarios 1: a 10 percent increase in government expenditure scenario 1, which depicts the impact of an increase in government expenditure by 10 per cent on the model of the nigerian economy, shows that real gdp will increase by 3 percent consecutively in 2017 and 2018 economy, 2019, 6(2): 41-55 54 © 2019 by the authors; licensee asian online journal publishing group respectively; this shows that there is a positive relationship between government expenditure and real gdp. the results of this scenario also show that the shock will make consumption increase by 4 percent consecutively in 2017 and 2018 respectively. furthermore, the result revealed that exchange rate is expected to depreciate by 16 percent and 14 percent in the immediate future if the economy is hit by a positive government expenditure shock. also, there will be a surge in the general price level as cpi will increase as well as gross fixed capital formation while interest rate will nosedive in 2017 and 2018. furthermore, as a result of the 10 percent positive shock in government expenditure, oil export, non-oil exports, oil imports and non-oil imports is expected to increase in 2017 and 2018 respectively. this confirms the positive relationship between government expenditure and each of the other endogenous variables (real gdp, consumption, exchange rate, cpi, oil exports, non-oil exports, oil imports and non-oil imports). in sum, the effects of an increase in government expenditure by 10 percent is that real gdp, consumption, price level (cpi), oil exports, non-oil exports, oil imports and non-oil imports will increase while exchange rate will depreciate in the following years. scenarios 2: a 10 percent fall in oil price in the international market table 5 shows that a 10 percent decrease in the price of crude-oil in the international market will result in an increase in real gdp by 3 percent in 2017 and 2 percent in 2018. the oil price shock is expected to lead to a depreciation of exchange rate by 3 percent and 23 percent in 2017 and 2018 respectively. also, interest rate is expected to rise by 7 percent and 36 percent and gross fixed capital formation will fall by 1 percent consecutively in 2017 and 2018. total export (oil and non-oil) and total imports (oil and non-oil) are expected to increase in 2017 and 2018 if oil price falls by 10 percent. this result is plausible because the recent incessant fall in oil price propels nigeria to export more crude-oil to increase her revenue since the proceeds from this product is the major source of revenue to the government. furthermore, the oil price shock will lead to an increase in consumer price index 11 percent and 8 percent in 2017 and 2018 respectively. summarily, the impact of a 10 percent fall in oil price in the international market is that whereas real gdp, interest rate, oil and non-oil exports and imports will increase, exchange rate will depreciate and gross fixed capital formation will fall in subsequent years. scenario 3: a 10 percent depreciation of exchange rate the result of introducing a shock of a depreciation of exchange rate by 10 percent would lead to a rise in real gdp by 4 percent in 2017 and 3 percent in 2018; an increase in consumer price index (cpi) by 6 percent in 2015 and 11 percent 2018. the depreciation of exchange rate will bring about an increase in interest rate and also an increase in gross fixed capital formation in 2017 and 2018. the shock to exchange rate will lead to increases in the values of oil export, non-export, oil import and non-oil imports in the years under review. furthermore, the exchange rate shock will lead to an increase in consumption by 4 percent in 2017 and 3 percent in 2018. summarily, the impact of a10 percent exchange rate depreciation on the nigerian economy is that real gdp, price level (cpi), interest rate, gross fixed capital formation, consumption, oil export, non-export, oil import and non-oil imports will all increase although with different magnitude. this implies that exchange rate depreciation will have diverse effects on the nigerian economy. however, depending on the policy objective of the government and monetary authorities, this policy stance can be used albeit it has its inherent trade-offs. table-5. policy scenarios. endogenous variables year scenario 1 scenario 2 scenario 3 endogenous variables year scenario 1 scenario 2 scenario 3 real gdp 2016 31.94 31.94 31.94 gross fixed capital formation 2016 23.84 23.84 23.84 2017 31.97 31.97 31.98 2017 23.86 23.83 23.88 2018 32.01 32.00 32.01 2018 23.89 23.83 23.91 consumer price index 2016 4.85 4.85 4.85 oil export 2016 10.22 10.22 10.22 2017 5.00 4.96 4.91 2017 10.38 10.43 10.33 2018 5.10 5.07 4.99 2018 10.53 10.60 10.48 interest rate 2016 13.45 13.45 13.45 non-oil export 2016 8.58 8.58 8.58 2017 13.43 14.15 13.94 2017 8.99 9.08 8.95 2018 13.37 14.51 14.42 2018 9.42 9.56 9.37 exchange rate 2016 6.13 6.13 6.13 non-oil export 2016 9.36 9.36 9.36 2017 6.29 6.43 6.28 2017 9.54 9.75 9.42 2018 6.43 6.66 6.43 2018 9.73 10.06 9.57 consumption 2016 6.87 6.87 6.87 non-oil import 2016 10.38 10.38 10.38 2017 6.91 6.89 6.91 2017 10.71 10.80 10.64 2018 6.95 6.92 6.96 2018 11.03 11.17 10.92 source: author‟s computation using eviews 9. 5. conclusion and policy recommendations this study presents a small macroeconometric model of nigeria. the model is estimated and simulated to describe time paths of the endogenous variables of the system of equations specified in the study. the results shows that a positive shock in government expenditure raises aggregate national output, total exports (oil and non-oil), total import (oil and non-oil), gross fixed capital formation, exchange rate, consumption, and inflation rate while interest rate falls; a negative shock (depreciation) to exchange rate has a negative effect on gross fixed capital formation and a positive effect on aggregate national output, consumer price level, interest rate, consumption, total export and total imports; and a negative shock in oil prices results in an increase in total imports, total exports, consumption, exchange rate, gross fixed capital formation and aggregate national output. the study reveals that exchange rate plays a vital role in determining the behaviour of almost all the endogenous variables in the model thus recommends that the monetary authorities should ensure stability in exchange rate by employing a managed-floating exchange rate regime as a fixed exchange rate regime will make her lose control of her monetary policy and floating exchange rate regime subject the value the naira to market forces which is not in nigeria‟s favour as a result of the import-dependent of the country. also, the government economy, 2019, 6(2): 41-55 55 © 2019 by the authors; licensee asian online journal publishing group should also provide enabling and conducive environment where investment can thrive and gear efforts towards formulating and implementing policies to diversify the economy to prevent it from the shocks that result from oil 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the authors; licensee asian online journal publishing group economy vol. 6, no. 1, 13-24, 2019 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2019.61.13.24 © 2019 by the authors; licensee asian online journal publishing group cluster development in a transforming economy: the case of motorcycle spare parts firms in nnewi, anambra state of nigeria tobechi f. agbanike1 augustine c. osigwe2 denis n. yuni3 thank-god c. onoja4 sunday a. okwor5 ( corresponding author) 1,3,4,5department of economics and development studies, alex ekwueme federal university, ndufu-alike, ebonyi state, nigeria. 2research and training division national institute for legislative studies, national assembly, abuja, nigeria. abstract this paper examined the impact of cluster development in nnewi, anambra state of nigeria. the estimated parsimonious model revealed that capital and labour were significant determinants of sales made by the firms while the cluster dummy variable was insignificant. this insignificance of the cluster dummy variable implied that, in terms of total sales, there was no significant difference between firms in the cluster and firms outside the cluster. for the profit model, we found that capital, labour and the cluster dummy were significant at 1% level. capital, labour and cluster dummy have a positive relationship with firm profit. the positive coefficient of the cluster dummy variable indicated that the profit of firms in the cluster was significantly higher than that of the firms outside the cluster by about ₦31,050. it was therefore concluded that cluster residency made a significant difference in firm profit and recommended that government should encourage cluster development to accelerate the transformation of the economy. keywords: cluster, economy, firms, motorcycle, nnewi, nigeria. jel classification: b21; l2; r3. citation | tobechi f. agbanike; augustine c. osigwe; denis n. yuni; thank-god c. onoja; sunday a. okwor (2019). cluster development in a transforming economy: the case of motorcycle spare parts firms in nnewi, anambra state of nigeria. economy, 6(1): 13-24. history: received: 23 april 2019 revised: 31 may 2019 accepted: 3 july 2019 published: 6 september 2019 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group acknowledgement: all authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ...................................................................................................................................................................................... 14 2. literature review ............................................................................................................................................................................ 16 3. data and methods ............................................................................................................................................................................ 19 4. data analysis and presentation of empirical results .............................................................................................................. 20 5. conclusion ......................................................................................................................................................................................... 22 references .............................................................................................................................................................................................. 22 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2019.61.13.24&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ http://asianonlinejournals.com/index.php/economy/article/view/971 http://orcid.org/0000-0001-9063-7176 http://orcid.org/0000-0001-6528-3521 http://orcid.org/0000-0002-7468-4105 http://orcid.org/0000-0003-3746-4186 http://orcid.org/0000-0002-1502-8618 http://asianonlinejournals.com/index.php/economy/article/view/971 http://orcid.org/0000-0001-9063-7176 http://orcid.org/0000-0001-6528-3521 http://orcid.org/0000-0002-7468-4105 http://orcid.org/0000-0003-3746-4186 http://orcid.org/0000-0002-1502-8618 http://asianonlinejournals.com/index.php/economy/article/view/971 http://orcid.org/0000-0001-9063-7176 http://orcid.org/0000-0001-6528-3521 http://orcid.org/0000-0002-7468-4105 http://orcid.org/0000-0003-3746-4186 http://orcid.org/0000-0002-1502-8618 http://asianonlinejournals.com/index.php/economy/article/view/971 http://orcid.org/0000-0001-9063-7176 http://orcid.org/0000-0001-6528-3521 http://orcid.org/0000-0002-7468-4105 http://orcid.org/0000-0003-3746-4186 http://orcid.org/0000-0002-1502-8618 http://asianonlinejournals.com/index.php/economy/article/view/971 http://orcid.org/0000-0001-9063-7176 http://orcid.org/0000-0001-6528-3521 http://orcid.org/0000-0002-7468-4105 http://orcid.org/0000-0003-3746-4186 http://orcid.org/0000-0002-1502-8618 http://asianonlinejournals.com/index.php/economy/article/view/971 http://orcid.org/0000-0001-9063-7176 http://orcid.org/0000-0001-6528-3521 http://orcid.org/0000-0002-7468-4105 http://orcid.org/0000-0003-3746-4186 http://orcid.org/0000-0002-1502-8618 http://asianonlinejournals.com/index.php/economy/article/view/971 http://orcid.org/0000-0001-9063-7176 http://orcid.org/0000-0001-6528-3521 http://orcid.org/0000-0002-7468-4105 http://orcid.org/0000-0003-3746-4186 http://orcid.org/0000-0002-1502-8618 economy, 2019, 6(1): 13-24 14 © 2019 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study contributes to the existing literature by examining the impact of cluster development in nnewi, anambra state of nigeria. 1. introduction 1.1. background to the study in terms of official documentation, the concept of cluster is relatively new in nigeria. cluster initiatives began to gain prominence in the country in early 2007 when the federal government embraced the cluster model, recommended by the federal ministry of commerce and industry (fmci) as a new industrial development strategy for nigeria. fmci (2007) remarked that the concept of cluster was not completely a policy shift but a refocusing of implementation strategy to accelerate industrialization. according to iwuagwu (2011) the strategy, therefore, proffered key steps, needed to position the country on the path to rapid industrialization and thus achieving its vision of becoming one of the twenty largest economies in the world by the year 2020. fmci (2007) documented that the concept of cluster would operate on five planks: free trade zones; industrial parks; industrial clusters; enterprise zones1; and, incubators2. free trade zones was defined as fertile land for economic activities usually located in the proximity of seaports or international airports (both entry and exit points). in such zones, goods are brought in or taken out of the country without the usual payment of duties crosschecked. this is because the zones are considered to be aside customs‟ jurisdiction. therefore the federal government would create more of such zones throughout the country to beef the existing ones, while the zones would grant special motivations to attract fdis. industrial parks were described as mega parks covering areas of between 30 50 square kilometres for large manufacturing enterprises with great value addition in the production of goods. according to fmci (2007) it was planned that at least one park located in each of the six geo-political zones of the country. each of these parks was to focus on processing products which the zone has comparative and competitive advantages over others. economic activities are clustered to create a controlled environment for industrialization to flourish, face especially in the presence of chronic infrastructural deficits. nigeria does not only have a number of large industrial estates and complexes but also witnessed the spontaneous development of small clusters across the country. the latter includes computer village in otigba, lagos, the auto and industrial spare parts fabricators in nnewi, the leather tannery in kano and the footwear, leatherworks, and garment cluster in aba. there are approximately 25 free trade zones licensed by the federal government (chete et al., 2014). since independent in 1960, swift economic development through industrialization has remained a mirage in nigeria. ever since, diverse approaches to industrial development have been adopted by different administration. in addition, different economic development policies which have bearing on the industrial sector have also been adopted in the past five decades. among these policies are: import substitution strategy (iss), indigenization policy and the structural adjustment program (sap). in the opinion of iwuagwu (2011) the challenges of the industrial sector remained unresolved despite adoption of these policies. nigeria strayed further away from industrialization in the wake of the policies. amakom (2006) earlier observed that despite successive governments‟ efforts to encourage industrialization, minimal positive results have been achieved and the industrial sector remains poorly developed. available statistics from the central bank of nigeria (cbn) (2015) indicates that the manufacturing sub-sector on the average accounted for 5.19% of nigeria‟s rgdp between 1981 and 1985. between 1986 and 1990, it averaged 6.81% and later declined to 4.46% from 1991 to 1995; between 1996 and 2000, it nosedived to 3.60%; and marginally increased to 3.65%; from 2001 to 2005. the manufacturing sub-sector contribution to the rgdp averaged at 4.08% between 2006 and 2010 and slightly increased to 4.20% from the year 2011 to 2014 figure 1. figure-1. manufacturing sector contribution to real gdp (percentage). source: authors‟ analysis based on data from cbn (2015). 1.1.1. nigeria industrial revolution plan the nigeria industrial revolution plan (nirp) released in january, 2014, is a five-year plan to rapidly build up industrial capacity and improve nigeria‟s competitiveness. it aimed at increasing the contribution of manufacturing to gdp from its 4 per cent value in 2013, to 6 per cent by 2015, and finally above10 per cent by 2017. the nipr is driven by the desire to a process of intense industrialization, based on sectors where nigeria has comparative advantages, such as the agro-allied sectors; metals and solid minerals-related sectors; oil and gas related industries; as well as construction, light manufacturing and services. the nirp also addresses the numerous issues that have 1 a specific geographical area that has been designated by a governmental authority (usually federal). businesses within the enterprise zone are entitled to receive various types of financial aid. these include tax benefits, special financing and other incentives designed to encourage businesses to establish and maintain a presence within the specified zone. enterprise zones are often established in low-income areas or places that are recovering from disaster. business are encouraged, through cost savings, to open their doors and hire local residents within these areas in order to stimulate economic growth. 2 incubators create room for business development services covering key development areas, access to an extensive international network of key industry players, as well as facilitate investor contacts. economy, 2019, 6(1): 13-24 15 © 2019 by the authors; licensee asian online journal publishing group held back the nigerian non-oil sector for years; it addresses the high cost of funding and lack of long-term finance in nigeria; it builds up industrial infrastructure and power for industry; provides industrial skills; links innovation and industry; improves our investment climate; strengthens product standards; and promotes local patronage (ministry of industry trade and investment, 2014). the nirp is expected to drive the following outcomes:  job creation.  economic and revenue diversification.  import substitution.  export diversification.  broadened government tax base. 1.1.2. brief background story of nnewi nnewi is a major industrial and commercial hub in nigeria. high commercial undertakings in the town attract many merchants. nnewi is home to the first car producing firm in nigeria and 'naseni m1' the first locally produced motorcycle was manufactured in the town. in the context of manufacturing, nnewi is loosely described as the japan of africa. this is because it hosts local firms, including cutix and adswitch, cento group of companies, coscharis group of companies, ibeto group of companies, omata holdings ltd, uru industries ltd, ejiamatu group of companies, innoson group of companies, louis carter group, john white industries, ebunso nig. ltd, chikason group, and so on. most of these firms double as dealers who market some of their products (typically motor parts) through their distribution channels. 1.2. statement of the problem nigeria‟s low level of industrialization is linked to its colonization. efforts of the colonial masters towards industrializing the country could at best be described as abysmal (aiae, 2006). they focused mainly on excavating and exporting to britain, raw materials that served as industrial inputs and importing to nigeria finished goods that sold at exorbitant prices. in other words, they showed commitment to the execution of any effective industrialization policy. aiae (2006) corroborates the foregoing as follows; the genesis of the poor state of our national economy and low level of industrialization is traceable to the colonial era. the colonial masters paid lip service to manufacturing and industrialization. their major concern was to extract as much primary products as possible for use by industries in their home countries. in other words, there was no deep-seated commitment for the implementation of what passed for colonial industrialization policy (aiae, 2006). a number of significant barriers hamper the growth of the nnewi cluster. these include: lack of necessary infrastructure, absence of skilled workforce, failure to systematically connect with stakeholders both inside and outside of their networks (including businesses and universities), conservatism in business enterprises, bribe and corrupt practices, volatile local business environment, poor policy implementation, inefficient public administration and policy inconsistency. other challenges confronting cluster development in nnewi include but not limited to: lack of access to credit, high interest rate, high tariff and declining sales (see, aiae (2006)). furthermore, due to the massive revenue from crude oil, some regimes abandoned other crucial economic sectors, manufacturing inclusive. this negligence aggravated the state of the national economy. instead of being proactive, different administrations focused mainly on crude oil revenue without any deliberate effort and commitment to ensuring the execution of spirited industrial policies for economic development. thus, the belief that crude oil abundance is a curse rather than a blessing to nigeria; a phenomenon popularly referred to as the dutch disease. the persistent insecurity of lives and property in the country occasioned by armed robbery, assassinations, kidnappings and, more recently, bombings in northern parts of the country, constitute major hindrances to cluster development. such anti-social and anti-growth activities do not encourage entrepreneurs to perform optimally; they rather discourage the inflow of fdi into the country. a case in point was the closure of some telecommunication industries‟ services in the northern part of the country due to insecurity in the area. based on the foregoing, the following research objectives shall guide this study: 1.3. research objectives this study examines the impact of cluster development on a transforming economy with specific reference to motorcycle spare parts firms in nnewi, anambra state of nigeria. to achieve this, the following specific objectives are pursued: i) to identify the difference in performance between motorcycles spare parts firms in cluster and outside cluster in nnewi, anambra state. ii) to assess the impacts of cluster residency on the performance of motorcycle spare parts firms in nnewi, anambra state. iii) to examine the enabling conditions and barriers to the growth of motorcycle spare parts cluster in nnewi, anambra state. iv) to determine the effects of government policies on the motorcycle spare parts cluster in nnewi, anambra state. 1.4. justification of the study this study is motivated by the increasing consciousness on the significance of motorcycle spare parts business in the socioeconomic development of nigeria. for instance, the business is capable of improving people‟s income and creating more employment opportunities. the outcome of this study will be of immense benefit to nigerians as economy, 2019, 6(1): 13-24 16 © 2019 by the authors; licensee asian online journal publishing group it will to focus on the contributions of motorcycle spare parts business and the informal sector in general to socioeconomic development of the people. last year, the federal government of nigeria advised state governments across the country and the federal capital territory (fct) to ban3 motorcycles as a means of commercial transportation. prior to the advice, many states4 had implemented the „okada‟ ban policy in some of their major cities. the policy, no doubt, will have ripple effects on motorcycle spare parts business, at least, starting with the fall in the demand for motorcycle and its spare parts by those who use it for transportation business. against this backdrop, this study, among other objectives, examined the effects of government policies on the motorcycle spare parts cluster in nnewi, anambra state. as identified in the literature, cluster of factories contribute to economic development, at least in the area of job creation (see, sparks and barnett (2010)). the alarming rate of unemployment in nigeria with its agonizing effects has become a subject of concern to both the government and other stakeholders in the economy. according to the nbs (2012) with the current unemployment rate of 23.9 per cent and unemployed youth population of 20.3 million, nigeria still generates about 4.5 million new entrants into the labour market annually. even though the government has been making efforts to address this ugly trend, the status quo still remains. expectedly, when firms perform well in terms of sale and profit, their capacity to employ more labour force and pay taxes increases. however, the ban on „okada‟ discourages manufacturing and employment of labour. given the unemployment situation in the country, we investigate, among other things, the difference in performance (sale and profit) between motorcycle spare parts firms in cluster and outside cluster in nnewi, anambra state. the findings of this study will provide evidence for policy purposes. previous studies have examined the effects of industrial clusters on the nigerian economy (see for example, (oyelaran-oyeyinka, 2001; uzor, 2004; abiola, 2006; amakom, 2006; iwuagwu, 2011)). the specific objectives of these studies differ markedly on account of many factors, ranging from the typology of cluster of interest to location of cluster. of all these studies, amakom (2006) and oyelaran-oyeyinka (2001) are of particular interest to this research. amakom (2006) attempted to find out if the same problems that bedeviled other industries that are scattered all over the country are also affecting those in the industrial clusters whereas oyelaran-oyeyinka (2001) investigated the basis for long-term sustainable development of industrial clusters in lagos, nigeria and compared the metropolitan clusters with the nnewi cluster, located within a rural setting in a homogeneous ethnic community. none of these studies examined the impact of cluster residency on the performance of motorcycle spare parts firms in nnewi. this makes the present study relevant and timely. finally, the review on the rationales for industrial cluster presented in section 2.2 indicates a plethora of reasons supporting cluster-focused economic development strategy. among these reasons are: access to markets, technological spill overs, potentials to enable more entrepreneurs to participate in industrial production, lowering the capital barriers to entry, ensuring competitiveness of firms and fast-tracking industrial and economic growth, boosting innovation, entrepreneurship, wages, and business specialization. to know the extent to which the nnewi motorcycle spare parts cluster delivers on a number of these, it is necessary to conduct a study of this nature. 2. literature review 2.1. conceptual issues industrial cluster simply refers to the concentration of economic activities of a certain sector or group of firms that produce similar and closely related goods in a given location. according to porter (2000) clusters „represent a new way of thinking‟ about economic growth at all levels, but which requires new roles for companies, government agencies, universities and other organizations in enhancing competitiveness. in a study carried out for the world bank on ethiopia, ali (2012) strongly argues that cluster development programmes have become increasingly widespread tools in fostering innovation and growth of a competitive private sector in developing countries. to schmitz and nadvi (1999) industrial clusters provide a wide range of advantages that enable enterprises to become competitive and profitable. martin and sunley (2003) note that clustering has two dimensions. first, the functional dimension which includes local inter-firm linkages and forward and backward linkages with such interconnected agents as input suppliers and output buyers. such linkages, they maintain, often result in social interrelationships that are expressed through trust and collaborative networks that develop over a long period of time. second, the physical dimension that points to the physical co-location of enterprises close to one another (geographic proximity) in the cluster. they argued that while geographic proximity helps stimulate the functional dimensions of clustering, it does not offer a direct view about the nature and strength of local inter-firm linkages and social networks. ali (2012) use a diagram to depict an example of composition of an industrial cluster. in the diagram, he shows that industrial cluster involves the supply of both raw materials and machinery within a group of related firms. this group of firms could have common service providers in terms of designing, maintenance, finance, training and so on. it is also clear from the diagram that there are public and private institutions whose activities affect the operations of the firms. these activities could be in the areas of policies, research or even in the other forms of cooperations. lastly, the firms could get their outputs across to the final consumer directly or through the help of selling agents figure 2. 3 three main reasons adduced by the government for the ban policy are; high rate of crippling and fatal accidents per unit of distance travelled, increased rate of crime and okada business has been criticized for causing or exacerbating traffic congestion in the cities where they operate 4 these states include, lagos, imo, niger, rivers, delta, enugu, edo, kano, plateau, kaduna. economy, 2019, 6(1): 13-24 17 © 2019 by the authors; licensee asian online journal publishing group figure-2. examples of composition of an industrial cluster. source: ali (2012) . to clar et al. (2008) different approaches have been developed towards facilitating clusters. they acknowledged that four main schools of thought have emerged in this regard table 1. the californian and nordic schools of thought are tied to economic systems while the industrial and porter‟s industrial cluster are more generic. according to them, the oecd5 countries have engaged in a good deal of experimentation with respect to the various approaches. table 1 situates the nnewi motorcycle spare parts cluster within the hybrid of industrial and porter‟s industrial cluster. table-1. four schools of thought on clustering. school of thought characteristics industrial district external economies, mutual trust and a positive atmosphere of cooperation between companies, leading to incremental innovations. californian school vertical disintegration, reduced transaction costs and a specialized local labour market, plus conventions, informal rules, and habits, leading to greater collaboration among companies. nordic school innovation as the basis for obtaining competitiveness for firms, regions and nations, learning is seen as mainly a localised process, information is relatively globally mobile, knowledge is remarkably spatially rooted. porter‟s industrial cluster external economies strengthened by proximity and better access to input factors, local rivalry, and local customers; collective improvement of the competitiveness of companies and creation of opportunities for the establishment of new niche companies to support the expansion of local supply chains and add more value to the cluster. source: ec (2002). 2.2. rationales for industrial cluster there seems to be a consensus6 on the relevance of clustering as an alternative strategy for industrial development in developing countries. for example, adam smith chronicled the economic gains available to firms through the division of labour, an indisputable characteristic of industrial clustering. following this, marshall (1920) recognised that industrial clusters enjoy at least three well-known major benefits, namely, access to markets, labour market pooling, and technological spill overs (krugman, 1991). extending marshall‟s view, schmitz (1995) and schmitz and nadvi (1999) observe that embedded in these benefits are the potentials to enable more entrepreneurs to participate in industrial production that may otherwise be inaccessible to them. these benefits have been branded „collective efficiencies‟ in the literature. ruan and zhang (2009) identified a further important collective efficiency of clustering mechanism. to them, clustering can assist in lowering the capital barriers to entry through division of the production processes among firms, thus enabling more firms with otherwise limited capital to enter the production process/chain. cluster development is usually considered as one of the ways of ensuring competitiveness of firms and fast-tracking industrial and economic growth (see for example, (mwamila and diyamett, 2011; brakman and van marrewijk, 2013)). more so, clustering is believed to offer unique opportunities to engage in the wide array of domestic linkages between users and producers, between the knowledge-producing sector. (universities and r&d institutes) and the goods and services-producing sectors of an economy that stimulates learning and innovation (nadvi, 1995; nadvi and schmitz, 1997; meyer-stamer, 1998a). clusters drive productivity and innovation. firms that are located within a cluster can transact more efficiently, share technologies and knowledge more readily, operate more flexibly, start new businesses more easily, and perceive and implement innovations more rapidly. they can also efficiently access “public goods” such as pools of specialized skilled employees, specialized infrastructure, technological knowledge, and others. clusters embody traditional notions such as input-output linkages, among others. because of the importance of physical proximity in reaping cluster benefits, clusters are often regional instead of national except in small countries (porter, 2009). 5 oecd means organisation for economic cooperation and development and is usually considered as the club of the rich countries. 6 see the studies by meyer-stamer (1998b); weijland (1999); bell and albu (1999); porter (2000); gordon and mccann (2000); fujita et al. (2001); sonobe and otsuka (2011); nakabayashi (2006) and ruan and zhang (2009). economy, 2019, 6(1): 13-24 18 © 2019 by the authors; licensee asian online journal publishing group clusters and cluster strategies have the potential to accelerate regional economic growth and assist in economic restructuring. at a time of tepid growth, cluster strategies possess documented power to help power regional economic growth by boosting innovation, entrepreneurship, wages, employment and business specialization. at a time of shaken confidence in past growth models, cluster frameworks point to the centrality to national wellbeing of practical economic systems in regions and so offer a fresh paradigm for new thoughts on national economic management. and finally, as a policy framework, clusters provide a practical tool for policy coordination and possibly increased return on public investments. clusters deliver significant productivity advantages to groups of firms, suppliers and related actors and institutions that draw mutual advantage from localization (muro and bruce, 2010). in the nigerian context, iwuagwu (2011) argues that clustering would permit greater focusing of public resources as infrastructural facilities would be concentrated in identified locations, especially for industrial and commercial purposes. according to him, because of geographic proximity of firms as well as financial and other business institutions, clustering would enhance the effectiveness of the innovation process required to kick start nigeria‟s industrial take-off. it would also encourage localization of economies and enhance the likelihood of interfirm technology and information transfers as well as motivate companies in nigeria to go into product specialization and adoption of new technologies. 2.3. cluster development and economic growth empirical literature on the role and importance of clusters in supporting economic development is mixed and still emerging. there is a huge body of empirical literature supporting clustering as the key determinant of economic development (see for example, (audretsch and feldman, 1996; european commission, 2002; lee et al., 2017; zeibote, 2018)). several international bodies have been advocating for cluster development. they include the oecd, the world bank, the inter-american development bank (iadb), the united nations conference on trade and development, the world economic forum, and the united nations industrial development organization. as noted by choe and roberts (2011) advocacy has helped to move the debate from the academic sphere to the realm of policy and business. according to unido (2010) cluster concept has gained prominence as an economic policy tool aimed at fostering innovation and growth of a competitive private sector in developing countries. unido (2010) maintains that, recently, donors and development agencies have paid increasing attention to the potential of cluster initiatives to bring about pro-poor effects. the organization is of the view that thriving clusters can generate employment, income and opportunities for the local community and become drivers of broad-based local economic development. unido (2010) further state that in the framework of private-sector development initiatives, cluster-based interventions have gained momentum. according to the organization, three main arguments can be advanced to explain the focus on clusters as targets of development assistance: i) collective efficiency gains; ii) spatial proximity effects; and iii) pro-poor potential. using arizona as a case study, waits (2000) presented a practical evidence of the benefits from cluster-based economic development strategy. he asserted that clusters of world-class firms in related industries are the most important economic development clusters in the global economy. according to him, these clusters, rather than individual companies or simple industries, are source of jobs, income and export growth. this is what arizona has found to be the case. he maintains that, as a result of cluster-focused economic analysis and strategy development, arizona has a better understanding of its economy and economic development clusters. the state also has a viable approach cluster working groups and organizations for putting industries together to design policies, address common problems and implement initiatives. oyelaran-oyeyinka (2001) investigates the basis for long-term sustainable development of industrial clusters in lagos, nigeria, comparing the metropolitan clusters with the nnewi cluster, located in a rural homogeneous ethnic community. according to him, the characteristics of clustering examined are: the forms and intensity of inter-firm linkages, including the formation of trade networks and the role of business associations. he found a significant level of collaboration among firms in sharing utilities and modest forms of subcontracting non-core activities among lagos firms, but this is not prevalent in nnewi. he further reveal that the lagos clusters have relatively high proportions of educated manpower. however, this important asset is underemployed in a situation of low growth rate of demand for quality products. in addition, the study shows that the firms in nnewi, on the other hand, are owned by semi-illiterates who came from trading backgrounds into manufacturing. networks such as industry associations were found to be playing vital roles such as information providers and as links to the global market even though the benefits are still latent. ethnic and kinship ties were identified to play a prominent role at nnewi while social networks and non-family ties were found to be more important in the lagos clusters. the study suggested that non-economic factors exert profound influence on the evolving forms of industrial organisations in late industrialisation. uzor (2004) examined the cluster concept and its impact on private sector development in africa in general and on sme development in nigeria in particular. the findings of the study indicate that there are no effective institutions supporting cluster development in africa in general and in nigeria in particular. competition and learning were considered in the study as two important elements needed in african clusters given that they are the benchmark for the private sector development in the region. limitations of the clusters in the region were classified into; i) level of education of the entrepreneurs, ii) weak government, institutional support and market development, and iii) financial constraints of the smes needed for expansion. the study recommended the need for partnership building among the state, institutions and the private sectors for sme development. such relationship plays an important role in economic development generally, especially in infrastructure and in capacity building. more so, the study added that policy objective for the support of technical education and training is imperative in the south east region and in nigeria generally. amakom (2006) attempted to find out if the same problems facing other industries scattered all over the country are also affecting those in the industrial clusters which the government claims to be more environment friendly. the study employed data from the unido survey 2006 on leather industry in kano industrial cluster. economy, 2019, 6(1): 13-24 19 © 2019 by the authors; licensee asian online journal publishing group also the study employed probit regression and found that the inability of the leather sector to meet its target is due to low efficiency caused by poor technical know-how cum high cost of doing business (high indirect costs as a result of inadequate of physical infrastructure) which resulted to low capacity utilization. according to amakom, this finding is not at variance with the findings of studies involving other firms scattered all over the country. therefore it would be erroneous to accept any hypothesis that firms within the industrial cluster have friendlier environment. a study by abiola (2006) focused on three key elements: the origin of investment in manufacturing technology; the technological learning strategy and mechanism; and the technological capabilities acquired. the study which was titled knowledge, technology and growth: the case study of nnewi auto parts cluster in nigeria discovered that majority of firms implemented technical change simply to improve old processes. it was revealed in the study that foreign technological linkages currently form the basis of development. abiola identified the major obstacles to getting or procuring the foreign inputs for production of machinery and automotive components in nnewi cluster as follows: tariff and non-tariff, finance, custom formalities, information and security of lives. 2.4. industrial clusters in different countries and industrial regions of the world in latin america, the brazilian shoe cluster of sinos valley is remarkable. brazil is one of the world‟s leading producers of leather shoes and the bulk of its export-oriented leather shoes are produced in the sinos valley industrial cluster. three factors have been noted for sinos valleys‟ economic success. they are: i) backward linkages with local input suppliers; ii) forward linkages with producers and buyers, mainly export agents; and iii) the tactical intervention of local support institutions in aiding the cluster‟s capacity to move into higher value added product markets. clusters in east asia have been successful as a result of the following; i) imitation and assimilation of foreign technologies, ii) the formation of geographically dense industrial clusters consisting of a large number of small enterprises producing similar and related products and, iii) the advent of manifold innovations leading to progress in the industrial structures. for instance, china and taiwan modelled their industrial development after that of japan. pakistan‟s industrial cluster located in siatkot produces surgical equipment and is export-oriented. siatkot surgical instrument industrial cluster‟s success is enormous as a result of the producers‟ ability to meet high export standards. also, it adopted in no small measure designs and technical experts from britain besides the development of technical institutions for the training of workers. 3. data and methods the study adopted the survey method to evaluate the impacts of cluster of motorcycle spare parts factories in nnewi on the economy of anambra state. the population of the study includes all motorcycle spare parts factories operating in nnewi; anambra state. some of these firms are clustered within 21 unequal zones (clustered firms) while others are outside the cluster (non-clustered firms). the purposive sampling technique was adopted in the selection of three zones – zone 6 (300 dealers), zone 13 (200 dealers) and zone 10 (100 dealers). the selected zones have characteristics that typically represent the firms in the cluster. for instance, the largest number of dealers is found in zone six and it is considered as the hot spot of the cluster. zone 10 possesses the direct opposite of the characteristics of zone 6 whereas zone 13 represents the moderate of zones 6 and 10. the yaro yamane‟s formula (yamane, 1967),   2 (1 ) n n n e   , (n = sample size, n = population and e = error margin) was employed to develop a representative sample size of 384 motorcycle spare parts from the population of the three zones. in addition, 384 non-clustered motorcycle spare parts factories were randomly7 sampled to serve as a control. in all, 768 motorcycle spare parts factories were surveyed. the validity and reliability of the instruments were tested to ensure efficiency. the study employed the t-test distribution technique, multiple regressions and descriptive analysis to achieve its objectives. to achieve the first objective of identifying the difference in performance of firms in cluster and the non-clustered firms, the t-test of significance was employed. the specific performance indicators examined are; volume of sales, capital, labour and profit. for the second objective of assessing the impact of cluster residency on the performance of motorcycle spare parts firms in nnewi, anambra state, three multiple regression models (with profit and sales as dependent variables) were estimated. the compact version of the estimated econometric equation is presented as: 0 1 n i i i i y x        where yi is the dependent variable (sales or profit), 0 is the constant term or the intercept, i represents the coefficient of the determinants and ix the explanatory variables which include: cluster dummy (1 if firm is in a cluster and 0 otherwise), capital, labour, experience of firm head, years of education of firm head, age of firm head and access to credit dummy (1 if firm has access to credit and 0 otherwise). n represents the number of explanatory variables while  stands for the error or residual term. the third and fourth objectives which were to examine the enabling conditions and barriers to the growth of motorcycle spare parts cluster and to determine the effects of government policies on the motorcycle spare parts cluster in nnewi, anambra state were achieved by employing the likhert scale. the likhert scale was used in ranking the responses whereas the means were derived to show the average position of the respondents. 7 each individual firm was chosen randomly and entirely by chance, such that each one of them had the same probability of being chosen. economy, 2019, 6(1): 13-24 20 © 2019 by the authors; licensee asian online journal publishing group 4. data analysis and presentation of empirical results data collected first underwent manual editing. this was followed by the coding of the completed questionnaire, data entering, processing and analysis, using the appropriate statistical packages. the results of the analysis are presented in appendix 1 and discussed in the next section. 4.1. differences in performance of firms in cluster and non-cluster in nnewi, anambra state in terms of sales, the mean value of small firms in the cluster stood at n125, 112 whereas that of non-clustered small firms amounted to n121, 084.2. this difference was not statistically significant, judging from the absolute t value of 0.34. the mean value of sales of medium firms in the cluster was n319, 877 as against that of firms outside the cluster which was n316, 577.1. the absolute t value of 1.98 indicate that the difference in sales of the two categories being compared was statistically significant. similarly, the mean value of sale of the large firms was n4, 444, 094 while that of the non-clustered firms came up to n4, 422, 870. this difference in mean sales value of large firms in cluster and outside cluster is statistically significant. figure 3. overall firm size – sales. source: authors‟ analysis based on data from field study. for the capital of the different firm sizes, no significant difference was found between firms within and outside cluster. figure-4. overall firm size – capital. source: authors‟ analysis based on data from field study. similarly, no significant difference was found in the labour of clustered small and large firms and non-clustered small and large firms. however, a significant difference exists in clustered medium firms and non-clustered medium firms. figure-5. overall firm size – labour. source: authors‟ analysis based on data from field study. the mean profit of the three categories of firms in the cluster was significantly different from the mean profit of those outside the cluster. figure-6. overall firm size – profit. source: authors‟ analysis based on data from field study. economy, 2019, 6(1): 13-24 21 © 2019 by the authors; licensee asian online journal publishing group 4.2. impacts of cluster residency on the performance of motorcycle spare parts firms in nnewi, anambra state the study estimated multiple regression models to show the impacts of cluster residency on output and profit of the firms. a dummy variable that connotes 1 if firm is in cluster and 0 otherwise was considered as the key variable. other control variables were also considered. they include: capital, labour, experience of firm head, years of education of firm head, age of firm head and access to credit dummy. in all, three models consisting of two equations each were estimated. the first model is the complete model while the second and third represent its parsimony. the regression results of the three models are presented in appendix 2. the results show that the probability of the f-statistics of the models is less than 0.05 implying that the overall model is significant in each case. the r square values (ranging from 39% to 62%) indicated that the models are reasonably of good fit considering the cross-sectional nature of the data. the mean variance inflation factor for all the models emerged quite low while all the individual variables showed negligible presence of multi-colinearity. the problem of heteroscedasticity was automatically addressed within the software. in specific, the results from model 1 show that capital, experience of the firm head and access to credit are significant determinants of the sales of the firms. the said variables are positively related to sales, implying that increase in capital base of the firm and experience of the firm head leads to increase in sales. the results further reveal that firms that have access to credit have a significant difference in sales of about ₦50,493 over firms that do not access credit. interestingly, when the two least significant variables (age and years of education of firm head) were dropped in the second model, capital, experience of the firm head and access to credit remained significant determinants of sales of the firm. in the third model, where capital, labour and the cluster dummy were retained, capital and labour emerged significant while the cluster dummy remained insignificant. the cluster dummy variable which is the variable of interest was not significant in the three models. this showed that in terms of total sales, there is no significant difference between firms in the cluster and the non-clustered firms. for the profit regressions, the results showed that only capital, labour and the cluster dummy were significant at 1% significant level. experience of firm head was significant at 10% significant level while years of education of firm head, age of firm head and access to credit were not significant at all. again, capital, labour and cluster dummy have a positive relationship with firm profit. the positive coefficient of the cluster dummy variable indicated that the profit of firms in the cluster is significantly higher than the non-clustered firms by about ₦33,351. in addition to capital, labour and the cluster dummy, experience of the firm head became significant in the second model. noteworthy is the fact that the cluster dummy variable was significant in all profit equations in the three models, unlike in the case of the sales equations. this therefore implies that though residing in clusters might not make a significant difference in total sales, it definitely makes a significant difference in profit. this could be explained by the fact that firms in clusters enjoy economies of scale and sometimes scope that reduce their overall cost of doing business, hence improving profits. 4.3. enabling conditions and barriers to the growth of motorcycle spare parts cluster in nnewi on the average, the respondents were indifferent to government‟s devotion to the cluster but disagreed that the government frequently attends to the needs of the cluster residents. they disagreed that the current location of the cluster in terms of distance to the market is beneficial. the respondents agreed that the road network of the cluster contributes positively to firm output. they also strongly agreed that the cluster encouraged localization of firms. they were indifferent as to whether taxation is lower for those in the cluster and disagreed that shops are unaffordable table 2. table-2. enabling conditions and barriers to the growth of motorcycle spare parts cluster in nnewi. description likert scale conclusion the government is very devoted to the cluster. 4 indifferent the government frequently attends to the needs of the cluster residents. 2 disagree the current location of the cluster is beneficial in terms of sourcing raw materials. 4 agree the current location of the cluster is beneficial in terms of distance to the market. 2 disagree the road network of the cluster contributes positively to firm output. 4 agree the cluster has encouraged localization of firms and industries. 5 strongly agree taxation is lower for those in the cluster. 3 indifferent shops are unaffordable. 2 disagree business is easier now in the cluster. 4 agree shops are available. 4 agree clusters are the best option for development of small firms. 5 strongly agree health care services are available within the cluster. 4 agree there is adequate electricity supply. 2 disagree there is access to credit and other banking services. 4 agree security in the cluster is adequate. 4 agree source: authors‟ analysis based on data from field study. on the average, they agreed on the following: the current location of the cluster is beneficial in terms of sourcing raw materials; business is easier in the cluster; shops are available; healthcare services are available within the cluster; there is access to credit and other banking services; and security in the cluster is adequate. further, they strongly agreed that clusters are the best options for the development of small firms and disagreed that there is adequate electricity supply in the cluster. 4.4. impact of government policies on the motorcycle spare parts cluster in nnewi our field study indicated that „okada‟ ban policy has negatively affected motorcycle spare parts cluster in nnewi, anambra state. the average likert scale showed that the respondents strongly agree on this negative effect. the respondents agreed on three key issues as follows; “infrastructure is well developed in the cluster”, “the economy, 2019, 6(1): 13-24 22 © 2019 by the authors; licensee asian online journal publishing group initiatives of the government are meant at improving factory performance”, and “government supports in addressing the challenges of the residents in the cluster”. however, they disagreed that the government has done everything within its ability to optimise the functions of the cluster table 3. table-3. government policies on the motorcycle spare parts cluster in nnewi. description likert scale conclusion the „okada‟ ban policy has negatively affected motorcycle spare parts cluster. 5 strongly agree infrastructure is well developed in the cluster. 4 agree the initiatives of the government are meant at improving factory performance. 4 agree government supports in addressing the challenges of the residents in the cluster. 4 agree the government has done all in its power to optimise the functions of the cluster. 2 disagree source: authors‟ analysis based on data from field study. 5. conclusion this paper examined the impact of cluster development on a transforming economy using motorcycle spare parts firms in nnewi, anambra state of nigeria as a case study. in terms of sales, the mean value of medium firms, and large firms in the cluster stood at 319, 877 naira and 4, 444, 094 naira, respectively, whereas that of the nonclustered medium, and large firms were in turns, 316, 577.1 naira and 4, 422, 870 naira. the differences in mean value of sales of medium and large firms were found to be statistically significant, judging from their absolute tvalues of 1.98 and 2.09, respectively. the difference between the mean values of sales of small firms in the cluster and non-clustered small firms was statistically insignificant with an absolute t-value of 0.34. for the capital of the different firm sizes, no significant difference was found between firms within and outside the cluster. similarly, no significant difference was found in the labour of clustered small and large firms and non-clustered small and large firms. however, a significant difference (t-value of 1.91) existed in labour of clustered medium firms and nonclustered medium firms. the mean profit of the three categories of firms in the cluster (small 25,789.54 naira, medium 159,104.4 naira and large 390,383 naira) was significantly different from those outside the cluster (small 25,438.79 naira, medium – 142,901.9 and large – 375,498.6 naira). in this study, three models consisting of two equations each were estimated. the first model was the complete model while the second and third represented its parsimony. the results from model 1 showed that capital, experience of the firm head and access to credit were significant determinants of the sales of the firms. the results further revealed that firms that access credit have significant difference in sales of about ₦50,493 over firms that do not access credit. in the absence of the two least significant variables (age and years of education of firm head) capital, experience of the firm head and access to credit remained significant. in the third model, capital and labour were still significant while the cluster dummy variable remained insignificant. the cluster dummy variable which is the variable of interest was not significant in the three models, implying that in terms of total sales, there is no significant difference between firms in the cluster and the non-clustered firms. for the profit regressions, it was discovered that capital, labour and the cluster dummy were significant at 1% level while experience of firm head was significant at 10%. however, years of education of firm head, age of firm head and access to credit dummy variable were not significant at all levels. capital, labour and cluster dummy had a positive relationship with firm profit. the positive coefficient of the cluster dummy variable indicated that the profit of firms in the cluster was significantly higher than the non-clustered firms by about ₦33,351. in the second profit model, in addition to capital, labour and the cluster dummy, experience of the firm head became significant at 5% level. noteworthy is the fact that the cluster dummy variable was significant in all profit equations across the three models unlike in the case of the sales equations, thereby, implying that cluster residency makes a significant difference in firm profit. this could be explained by the fact that firms in clusters enjoy economies of scale and sometimes scope that reduce their overall cost of doing business, hence improving profits. on the enabling conditions and barriers to the growth of motorcycle spare parts cluster in nnewi, it was 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https://doi.org/10.15181/rfds.v25i2.1750. appendix-1. descriptive statistics of firms in cluster and non-clustered firms. variables firm size cluster -mean non cluster -mean absolute t-value sales small firms 125,112 121,084.2 0.3360 medium firms 319,877 316,577.1 1.9809** large firms 4,444,094 4,422,870 2.0949** overall 812,610.5 613,153.8 1.3615 capital small firms 110,265.3 118,241.6 0.4194 medium firms 280,981.9 279,997.4 0.0161 large firms 581,060.5 901,700.8 1.2432 overall 261,569.1 303,664.9 0.6848 labour small firms 2.89 2.62 0.6282 medium firms 18.14894 17.0339 1.9057* large firms 36.60714 31.95 0.7196 overall 18.61458 18.44792 0.9121 profit small firms 25,789.54 25,438.79 1.0912 medium firms 159,104.4 142,901.9 2.1503** large firms 390,383 375,498.6 2.2640** overall 139,907.8 124,886.1 2.1669** * implies significant at 10%, ** implies significant at 5% & *** implies significant at 1%. economy, 2019, 6(1): 13-24 24 © 2019 by the authors; licensee asian online journal publishing group appendix-2. regression results of the three models. variables model 1 model 2 model 3 sales profit sales profit sales profit cluster dummy 63799.3 (1.47) 33351.4*** (2.78) 27069.4 (1.33) 33440.3*** (2.77) 27480.9 (1.36) 31050*** (2.72) capital 1.700647 *** (3.14) 23.51677 *** (2.66) 1.611556*** (3.97) 23.52155*** (2.66) 1.606348*** (3.97) 23.76177*** (2.71) labour -4548.209 (-1.11) 15263*** (2.93) -4548.209 (-1.14) 15470.4*** (2.97) 31097.43** (2.25) 16884.7*** (2.95) experience of firm head 42641.91 ** (2.03) 40576* (1.89) 39993.58)** (2.01) 43059.28 ** (1.99) years of education of firm head 20259.1 (1.58) 46734.7 (0.71) age of firm head 17549.8 (1.02) 2769.428 (0.10) access to credit dummy 50,492.6 ** (2.10) 17,4196 (0.85) 40576 (2.09) ** 31850 (1.27) constant 15563 (1.34) 86423 (1.19) 18982 (1.55) -74319.9 (-0.55) 50492.6 (2.10) -10979.9 (0.98) r square 0.3924 0.6165 0.4399 0.6154 0.4957 0.6085 f probability 0.0046 0.0000 0.0029 0.0000 0.0004 0.0000 mean vif 1.25 1.25 1.06 1.06 1.03 1.03 * implies significant at 10%, ** implies significant at 5% & *** implies significant at 1%. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. 52 © 2020 by the authors; licensee asian online journal publishing group economy vol. 7, no. 1, 52-58, 2020 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2020.71.52.58 © 2020 by the authors; licensee asian online journal publishing group the performance of the economic and financial crimes commission (efcc) in the fight against corruption in nigeria: a critical appraisal obiwuru chidera rex pan-african institute, rivers state, nigeria; department of politics and international relations; esep le berger university, republic of benin. abstract this very article is essentially geared towards evaluating the performance of the efcc as an antigraft agency in nigeria. the benchmark for this evaluation is a few selected functions of the agency as enumerated in the economic and financial crimes commission (establishment) act 2004 (section 6). based on the sensitivity of the topic, secondary analysis is strictly used. the data generated for the study are both quantitative and quantitative. the study revealed, with pictorial evidence as well as names of culprits and properties confiscated, that the efcc is actually carrying out its functions as mandated by the parliamentary act of its establishment. however contrariwise, the findings revealed that the commission is yet to be fully independent in the discharge of its assignment. it is also yet to effectively reduce crime rate in the country. the study recommended among other things that the independence of the commission should not be compromised; that is, it should not be used by any government in power as a ridiculing, incapacitating machine against the opposition. keywords: efcc, performance, appraisal, nigeria, corruption. jel classification: k23 regulated industries and administrative law. citation | obiwuru chidera rex (2020). the performance of the economic and financial crimes commission (efcc) in the fight against corruption in nigeria: a critical appraisal. economy, 7(1): 52-58. history: received: 20 february 2020 revised: 24 march 2020 accepted: 27 april 2020 published: 11 may 2020 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. competing interests: the author declares that there are no conflicts of interests regarding the publication of this paper. transparency: the author confirms that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ...................................................................................................................................................................................... 53 2. the establishment and functions of the efcc ........................................................................................................................ 53 3. theoretical framework .................................................................................................................................................................. 54 4. conclusion ......................................................................................................................................................................................... 56 5. recommendations ............................................................................................................................................................................ 56 references .............................................................................................................................................................................................. 56 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2020.71.52.58&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ https://www.asianonlinejournals.com/index.php/economy/article/view/1615 https://orcid.org/0000-0003-4205-9249 https://www.asianonlinejournals.com/index.php/economy/article/view/1615 https://orcid.org/0000-0003-4205-9249 https://www.asianonlinejournals.com/index.php/economy/article/view/1615 https://orcid.org/0000-0003-4205-9249 economy, 2020, 7(1): 52-58 53 © 2020 by the authors; licensee asian online journal publishing group contribution of this paper to literature the study contributes to the existing literature by appraising the efforts/performance of the economic and financial crimes commission (efcc) in the fight against corruption in nigeria. it also tried to correct, with evidence, the notion among nigerians that the efcc is a dormant, inefficient anti-graft agency. 1. introduction one of the characteristics of every human society is crime. there is no society or country devoid of crime or corruption. if such a society ever exists at all, its existence then does not go beyond the confines of the mind, or human imagination. in fact thinking of such a society is a sign of hallucination. in the united states for example, we have, regardless of the country‟s level of development, foreign corrupt practices act (occa), and the federal bureau of investigation (fbi). in united kingdom, its level of hyper-civilization notwithstanding, it has the serious fraud office (sfo). even in italy whose capital city is rome – the abode of the roman catholic church – also has the central anticrime directorate of italian police service (dac-sps). with this therefore, crime or corruption is ubiquitous, hence, the reason for the establishment of the above act of parliament and agencies in those countries. just like in other states, the presence of corruption is the prime reason for the setting up of the economic and financial crimes commission (efcc). some of the criminal acts that the agency combats in nigeria include but not limited to e-commerce/card fraud [which involves defrauding unsuspecting members of the public, after their account details, pin and password have been retrieved from them through sending of mails with fake letterheads and logos of banks], wonder bank/ponzi schemes [involves recruiting investors who are promised high rates of return but later disappointed when the operators – fraudsters – feel they have had large number of clients and shut down], romance and dating scam [targeted mostly against gullible foreigners who are in need of love or marriage], employment scam [targeted against desperate job seekers due to the high rate of unemployment in the country], and charity scam [used against benevolent men and women in the society by guising oneself in order to look pitiable, and presenting fabricated, pathetic stories] (efcc, 2019). other crimes that the agency is established to fight are embezzlement, looting, bribery, vandalism, money laundering, contract scam, identity theft/phishing scam, inheritance scam, juju scam, lottery scam, scholarship scam, immigration/visa scam, etc (efcc., 2019; national bureau of statistics and economic and financial crimes commission, 2006). looking at the above diversities of crime in the country, it becomes obvious that corruption has become synonymous with the word “nigeria”. no wonder (orokpo, 2017) claims that although corruption is universal, it is quite pervasive in nigeria as the country ranked 143 most corrupt country in the world out of 182 countries in transparency international‟s 2011 corruption perception index. in like manner, achebe (1983) notes in an unambiguous manner that “anybody who can say that corruption in nigeria has not yet become alarming is either a fool, a crook or else does not live in this country”. 2. the establishment and functions of the efcc prior to the establishment of the efcc, there have been attempts by successive regimes to curb corruption in nigeria. one vivid attempt was the launching of war against indiscipline (wai) in march 1984 under buhariidiagbon regime. the military government of the duo struck its beak severally against the rock in the fight against indiscipline, bribery and corrupt practices in nigeria like an eagle seeking to get rid of its old beak on a mountain top. though corruption significantly reduced, but when the government was sacked by general babangida in august 1985 the rate of corruption in the country again skyrocketed. in fact, fraudulent activities, economic mismanagement, and accountability and transparency became a great issue of concern in all quarters of the federation as it greatly hampered real development in the country. bearing this in mind, akanbi (2004) cited in orokpo (2017) affirms that the legacy of corruption and lack of accountability that were prevalent under military rule (mainly after buhari-idiagbon regime) constituted a kibosh or a constraint to the socio-economic development of the nation. orngu (2006) also cited in (orokpo, 2017) likewise made it clear that prior to the fourth republic that commenced in 1999, corruption stitched and put on nigeria garment of a failed state. nonetheless while trying to set ablaze the shameful garment and trying to rescue the country from the ocean of a failed state, president oluseegun obasanjo‟s administration established the efcc in 2002 by an act of the national assembly. be that as it may, corruption kept soaring in the country to the point that the transparency international ranked nigeria in 2004 corruption perception index as the second most corrupt country in the world (for precision purpose: 133 out of 133 countries surveyed) with an annual loss of us$ 25.76 billion dollars (see (nwoba & monday, 2018; nzejekwu, 2011)). ultimately, the government of obasanjo, considering the above, amended the establishment act in 2004. thus based on the economic and financial crimes commission (establishment) act 2004, the organization performs the following functions: i. the enforcement and the due administration of the provisions of the act. ii. the investigation of all financial crimes including advanced fee fraud, money laundering, counterfeiting, illegal charge transfers, futures market fraud, fraudulent encashment of negotiable instruments, computer credit card fraud, contract scam, etc. iii. the co-ordination and enforcement of all economic and financial crimes laws and enforcement functions conferred on any other person or authority. iv. the adoption of measures to identify, trace, freeze, confiscate or seize proceeds derived from terrorist activities, economic and financial crimes related offences or the properties the value of which corresponds to such proceeds. v. the adoption of measures to eradicate the commission of economic and financial crimes. economy, 2020, 7(1): 52-58 54 © 2020 by the authors; licensee asian online journal publishing group vi. the adoption of measures which includes coordinated preventive and regulatory actions, introduction and maintenance of investigative and control techniques on the prevention of economic and financial crimes. vii. the facilitation of rapid exchange of scientific and technical information and the conduct of joint operations geared towards the eradication of economic and financial crimes. viii. the examination and investigation of all reported cases of economic and financial crimes with a view to identifying individuals, corporate bodies or groups involved. ix. the determination of the extent of financial loss and such other losses by government, private individuals or organization. x. collaborating with government bodies both within and outside nigeria carrying on functions wholly or in part analogous with those of the commission. xi. dealing with matters connected with the extradition, deportation and mutual legal or other assistance between nigeria and any other country involving economic and financial crimes. xii. the collection of all reports relating suspicious financial transactions, analyse and disseminate to all relevant government agencies. xiii. taking charge of, supervising, controlling, coordinating all the responsibilities, functions and activities relating to the current investigation and prosecution of all offenses connected with or relating to economic and financial crimes. xiv. the coordination of all existing economic and financial crimes, investigating units in nigeria. xv. maintaining a liaison with office of the attorney-general of the federation, the nigerian customs service, the immigration and prison service board, the central bank of nigeria, the nigeria deposit insurance corporation, the national drug law enforcement agency, all government security and law enforcement agencies and such other financial supervisory institutions in the eradication of economic and financial crimes. xvi. carrying out and sustaining rigorous public and enlightenment campaign against economic and financial crimes within and outside nigeria. xvii. carrying out such other activities as are necessary or expedient for the full discharge of all or any of the functions conferred on it under this act. 3. theoretical framework 3.1. institutional framework institutions are not nonexistent in any society. this is because family, religion, economic systems, legal systems, language, mass media, business, academia, art, etc. [which are essential attributes of a human society] are themselves institutions (johan, 2017). scott (1995) one of the major doyens or proponents of this theory, notes that institutions “are social structures that have attained a high degree of resilience” and are “composed of culturalcognitive, normative, and regulative elements that, together with associated activities and resources, provide stability and meaning to social life”. the crux of this theory is that institutions help in the establishment or promotion of a desirable, lawful society through the creation and maintenance of order and stability, inculcation of morals and political values in young ones, and even apprehension of law defaulters and imposition of penalties on them (see (meyer, 2008; norback, 2019; orokpo, 2017)). to narrow this down to the study, the government of the federal republic of nigeria, considering the happenings in different nigerian states, set up the efcc to curb economic and financial crimes. no wonder it empowered the agency, like we have in the functions of the efcc above, to, among others, engage in investigation of all financial crimes, confiscation of proceeds derived from economic and financial crimes related offences, and public enlightenment on the dangers of engaging in economic and financial crimes for the overall betterment and thriving of the country and its inhabitants. 3.2. a critical appraisal of the efcc ever since the establishment of the antigraft agency in nigeria, particularly in recent times, there has been commotion as well as verbalization from different angles concerning the efficacy and the trustiness/reliability of the agency in the fight against corruption in the country. while some nigerians believe that the agency is carrying out its sacrosanct duty of investigating corrupt practices and even arresting and arraigning corrupt elements in the law court, others hold that the agency is yet to be serious with its law assigned duties (sowunmi, adesola, & salako, 2010). be that as it may, our appraisal of the performance of the efcc would be based strictly on a review of just five of its objectives or functions stated above so as to see whether or not the agency has truly recorded success in its activities in the country. a. the adoption of measures to eradicate the commission of economic and financial crimes there has been adoption of methods and measures by the efcc towards curbing corrupt practices in the country. the agency established the nigerian financial intelligent unit (nfiu) who, among others, help in the detection of suspicious transactions in financial institutions within nigeria mainly. it also maintains its own database of terrorist groups, individuals, non-governmental organizations (ngos), etc. and thus frequently monitor them (orokpo, 2017). further, the agency has adopted the whistle-blowing policy mainly for the eradication of crime. before now whistle-blowers have been illy treated by the government example of which was dele giwa – a renowned journalist who, under general ibrahim babangida‟s military junta, was bestially killed by a parcel bomb. his lawyer too, late chief gani tawehinmi (san) was attacked by a gang of armed soldiers for providing vital information to the police concerning his client‟s death. but the efcc being an agency that loves to keep an ear to the ground, provides a whistleblower, whose information directly leads to the voluntary return of stolen or concealed public economy, 2020, 7(1): 52-58 55 © 2020 by the authors; licensee asian online journal publishing group funds or assets and whose information is one that the agency does not already have and which it could not have obtained from any other publicly available source, a reward of about 2.5% 5% of the amount recovered (see falana (2018)). the whistle blowing policy has of course yielded positive results so far. the recovery of $43.4m, n23.3m and 27,800 euros at flat 7 osborne towers, ikoyi, lagos state by the efcc is a clear result of the policy. nevertheless, people are presently discouraged and complain that providing the agency with vital information is risky for security reasons and for the fear of the agency reneging or going back on its promise. for example, one whistleblower, abdulmunmini musa, whose information led to the recovery of the ikoyi loot/money, sued the agency for giving him n325 million against n860 million he said is his five percent commission (see pulse.ng (2017)). b. carrying out and sustaining rigorous public and enlightenment campaign against economic and financial crimes within and outside nigeria the efcc has been trying in this very aspect of sensitization or enlightenment of the general public on the negativity, absurdity and unpalatability of fraud, looting and other economic and financial related crimes. first, every arrest made by the agency [and the reasons behind it] is made public for people to be aware of and to desist from such an act. when a culprit is convicted by court, the agency also makes it public. [though there are few cases they keep confidential information from the media, and questions they give no response to for some reasons]. the agency also has a journal named the journal of efcc where articles mainly on crime and corruption are published for the interest of the general public. it also publishes books and handouts for teaching e.g. the anticorruption preaching/teaching manual for christians in nigeria, and the anti-corruption preaching/teaching manual for muslims in nigeria. lastly, the efcc attends youth gatherings across the federation and enlightens them on the havocs corruption and crime have wrought on the economic, political as well as socio-cultural life of the country and the way each nigerian can help out. personally, i have witnessed such or sat under the tutelage of a representative of the agency in nysc orientation camp in rivers state and that is why i‟m attesting to it. there in the camp located at nonwagbam tai local government area in november 2019, the efcc also requested for volunteers, as it has been doing before, who would help to shun crime, economic and financial crimes particularly. c. dealing with matters connected with the extradition, deportation and mutual legal or other assistance between nigeria and any other country involving economic and financial crimes the efcc has been working with different international bodies to ensure the reduction of economic and financial crimes. just very recently, in december 2019 precisely, the efcc secured the deportation of mr. mohammed bello adoke (san), nigeria‟s former attorney-general and minister of justice, from dubai, united arab emirates (uae) over alleged abuse of office and money laundering as it regards granting of the oil prospecting licence (opl) 245 to shell and eni (the case popularly known as the malabu oil scam deal). prior to adoke‟s deportation he had been in the custody of the interpol in same uae since he was apprehended on november 11, 2019. to some, adoke‟s travel to dubai for medical reasons was an attempt to escape arrest, but the antigraft agency still worked with the international police and the uae authorities to ensure his arrest and deportation. d. the investigation of all financial crimes including advance fee fraud, money laundering this is the function that many nigerians give credits to the efcc. the antigraft agency apprehends those suspected to be involved in fraud related crimes as well as investigates their case. in an interview with newsmen in abuja, mr. ibrahim magu – the efcc boss revealed that they recently arrested no fewer than 200 internet fraud suspects [called in nigerian parlance “yahoo boys”]. the agency, according to magu, recovered from one of the arrestees – ismaila mustapha (a.k.a. mompha) [and his lebanese accomplice, hamza koudeih], whom they tagged “kingpin of an organized cyber syndicate network”, a whooping amount of n33bn gotten from alleged money laundering, and a total of five wristwatches valued at over n60m (punch, 2019). nonetheless, some people have continued to find fault in the manner in which the efcc executes his very function. to them, once the agency carries out a raid they arrest both the targets and the innocent non-targets. an example is when the efcc ibadan zone raided a hotel [modzak hotel, lagos precisely] on december 04, 2019 for the purpose arresting only one rasaq balogun but ended up arresting no fewer than 27 other persons there (pulse.ng, 2019). e. the adoption of measures to identify, trace, freeze, confiscate or seize proceeds derived from terrorist activities, economic and financial crimes related offences apart from the efcc going after “yahoo boys”, the agency also is after politicians; it arrests corrupt politicians and freezes/seizes whatever property that belong to them which are gotten by the proceeds of crime. the agency has seized properties (and has even frozen bank accounts) owned by dienzani alison-madueke [former minister of petroleum], haruna momoh [former managing director of ppmc, a subsidiary of the nigerian petroleum corporation – nnpc], sambo dasuki [former national security adviser], ibrahim shema [former governor of katsina state], patience jonathan [former nigeria‟s first lady], ayodele fayose [former governor of ekiti state], etc. that were purportedly acquired with public fund. for shema‟s case, the agency seized his three mansions over his alleged involvement in an74.6bn fraud. according to the efcc boss – ibrahim magu, about 407 properties were seized (with 126 permanently forfeited and 281 under interim forfeiture) by the agency between 2015 and 2018. among the seized properties were filling stations, land, real estate, jewellery, automobiles, petroleum products and so forth (see (olafusi, 2018; pulse.ng, 2016; the nation, 2016)). contrariwise, some people believe and verbalize that the agency is being used by each government that comes to power, particularly the present buhari‟s government, to weaken every opposition. the main opposition party, people‟s democratic party (pdp), has argued that the independence of the efcc is obviously questionable as most economy, 2020, 7(1): 52-58 56 © 2020 by the authors; licensee asian online journal publishing group of its political arrestees or targets are usually its (pdp‟s) members or former members/supporters. some of these allegedly arrested, investigated or persecuted politicians or pdp members/supporters include bukola saraki [former senate president], ayodele fayose, patience jonathan, sambo dasuki, m. walter onnoghen [former chief justice of nigeria], etc. while someone like bola tinubu, the national leader of the ruling all progressive congress (apc), who used bullion vans to allegedly convey huge sum of money to his ikoyi home during the 2019 general elections has never been apprehended nor probed by the agency. in fact when the efcc boss was asked a question by newsmen concerning tinubu‟s matter he gave no response but rather called for another question (pulse.ng, 2019). another important issue with the efcc or the problem most nigerians have with the agency is what the recovered fund and properties by the agency are being used for. an average nigerian sees the agency as the “looter of the recovered loot”, for they have hardly seen or heard where the recovered loots are being invested. however, the agency has tried to clear the air over the matter by saying that the recovered money is being taken to consolidated revenue account in the central bank of nigeria. but, the masses still doubt this and even the credibility of the agency. finally and considering the above, the us-based group, human rights watch, condemned the efcc and deemed it an agency that fights corruption with corrupt hands. it even noted that the nigeria‟s political system “rewards rather than punish corruption” mainly because of the “rapturous welcome” given to a pdp chieftain, olabode gorge [after serving a two-and-a-half year in prison in 2011 for corruption] by even former president olusegun obasanjo – the founder of the “so-called” efcc, and former minister of defence, ademola adetokunbo(bbc news, 2011). 4. conclusion from the evaluation above we have seen the strength and weakness of the efcc particularly in the discharge of its law assigned duties. while the agency has adopted several measures, organized several lectures, seminars and campaigns, made numerous arrested, and seized properties worth billions of naira all in a bid to banish corruption from the country, it has, however, been accused of infidelity, apprehension of non-targets, relooting recovered loot, and being used to persecute the opposition party. whatever, no nigerian, who is not a cook/disher of lies and/or who doesn‟t harbor mendacity and acrimony against the agency, would say the efcc is an inefficient anti-graft body without first covering his/her face with a basket, for proofs of the agency‟s works are there to speak for it. 5. recommendations no good research work that tries to address or correct an anomaly in the society would end without a recommendation. thus considering the findings of this research, the following few suggestions are proffered as recommendations which would help to facilitate meaningful improvement in the manner the efcc fights against corruption in nigeria. i. the government, at both federal and state levels, should stare clear off the activities of the efcc in order for the agency to be fully independent and to be able to fight corruption with a mind devoid of prejudice. ii. the efcc should try not to renege any of its promise especially as it regards rewarding whistleblowers. this will further motivate the people to expose corruption and unscrupulous elements in the country. iii. there should be proper and a more convincing explanation by the efcc on who is in charge of or where the recovered loots are being channeled to so as to correct the notion of the agency “relooting the loot”. iv. the efcc ought to be ultra-careful during raids to avoid apprehending the “innocent” alongside the culprit(s). references achebe, c. (1983). the trouble with nigeria. uk: heinemann. bbc news. (2011). nigeria‟s efcc „failing to tackle corrupt politicians. bbc news, august 25, 2011. efcc. (2019). efcc arrested 27 yahoo boys in lagos hostel raid. pulse.ng, december 05. efcc. (2019). efcc boss magu avoids question on tinubu‟s bullion van. pulse.ng, november 1. falana, f. (2018). the role of whistle-blowers in the fight against corruption in nigeria. retrieved from www.africmil.org/the-role-ofwhistle-blowers-in-the-fight-against-corruption-in-nigeria/. johan, i. s. (2017). institutional theory” in520 lecture. meyer, j. w. (2008). reflections on institutional theories of organizations. the sage handbook of organizational institutionalism, 790-811. national bureau of statistics and economic and financial crimes commission. (2006). nbs/efcc collaborative business survey on crime, corruption and awareness of efcc (book of instructions for field and editing staff). garki, abuja: national bureau of statistics. norback, m. (2019). recycling problems and modernizing the solution: doing institutional maintenance work on swedish public service television. journal of management inquiry, 28(1), 94-112.available at: https://doi.org/10.1177/1056492617712893. nwoba, m., & monday, n. p. (2018). appraisal of economic and financial crimes commission (efcc) in the fight against corruption in nigeria (2007-2017). the social sciences, 13(1), 94-104. nzejekwu, i. a. (2011). the contributions of efcc in promoting financial accountability and transparency in nigeria. masters thesis. department of accounting, university of nigeria,, enugu. olafusi, e. (2018). efcc „seizes‟ over 20 houses from diezani, five from fayose, dasuki. the cable, november 15. orokpo, f. o. (2017). an appraisal of the economic and financial crimes commission (efcc) in nigeria 2002-2015. a dissertation. post graduate school, benue state university, makurdi. pulse.ng. (2016). 11 corruption cases that shocked nigerians in 2016. pulse.ng. december 12. pulse.ng. (2017). whistle-blower sues efcc. pulse.ng, 28 november 2017. pulse.ng. (2019). efcc arrested 27 yahoo boys in lagos hostel raid. pulse.ng, december 05. punch. (2019). we arrested over 200 „yahoo boys‟ in october alone – efcc. punch, november 1, 2019. scott, w. r. (1995). institutions and organizations. thousand oaks, ca: sage. sowunmi, f. a., adesola, m. a., & salako, m. a. (2010). an appraisal of the performance of the economic and financial crimes commission in nigeria. international journal of offender therapy and comparative criminology, 54(6), 1047-1069.available at: https://doi.org/10.1177/0306624x09341043. http://www.africmil.org/the-role-of-whistle-blowers-in-the-fight-against-corruption-in-nigeria/ http://www.africmil.org/the-role-of-whistle-blowers-in-the-fight-against-corruption-in-nigeria/ economy, 2020, 7(1): 52-58 57 © 2020 by the authors; licensee asian online journal publishing group the nation. (2016). efcc seizes three mansions from shema. the nation, september 20. appendix-1. evidence that efcc is working. source: efcc alert, vol. 4, no.1, 31 january 2015. appendix-2. evidence that efcc is working. source: efcc alert, vol. 4, no.1, 31 january 2015. economy, 2020, 7(1): 52-58 58 © 2020 by the authors; licensee asian online journal publishing group appendix-3. publications of the efcc. source: efcc alert, vol. 4, no.1, 31 january 2015. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. 104 © 2020 by the authors; licensee asian online journal publishing group economy vol. 7, no. 2, 104-109, 2020 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2020.72.104.109 © 2020 by the authors; licensee asian online journal publishing group effect of load shedding on small scale entrepreneurs: a case of kitwe district of zambia banda gerald1 simukoko garry2 tailoka frank patson3 ( corresponding author) 1,2mukuba university, itimpi campus, kitwe, zambia. 3copperbelt university, school of mathematics and natural sciences, kitwe, zambia. abstract electricity is one of the key factors that are critical for accelerating the growth of the economy of the country. without electricity, a number of sectors are affected. from 2014, zambia has been facing serious load shedding which has an effect on the lives of people from academia to industry. the study was designed to determine the effect of load shedding on small scale entrepreneurs in zambia. the approach for the study was mixed research. the sample for the study consisted of 200 people working in bars, salons, barbershops and in cafes. simple random sampling was used to come up with 200 participants. data for the study were collected through questionnaire and face to face interviews. data for the study were analyzed using analysis of covariance. the null hypothesis was tested at 5% significance level. the findings of the study revealed that load shedding has negative effect on small scale entrepreneurs in zambia. keywords: load shedding, small scale entrepreneurs, electricity, economy, analysis of covariance, zambia. citation | banda gerald; simukoko garry; tailoka frank patson (2020). effect of load shedding on small scale entrepreneurs: a case of kitwe district of zambia. economy, 7(2): 104-109. history: received: 11 september 2020 revised: 5 october 2020 accepted: 16 october 2020 published: 29 october 2020 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group acknowledgement: author greatly acknowledge the help from the lectures from mukuba university who helped in validating of the instrument. authors further thank all the participants from ndeke masuzyo market in kitwe zambia who took part in the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction .................................................................................................................................................................................... 105 2. literature review .......................................................................................................................................................................... 106 3. methodology ................................................................................................................................................................................... 106 4. data presentation analysis and interpretation ....................................................................................................................... 107 5. conclusion ....................................................................................................................................................................................... 109 references ............................................................................................................................................................................................ 109 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2020.72.104.109&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ https://www.asianonlinejournals.com/index.php/economy/article/view/2282 economy, 2020, 7(2): 104-109 105 © 2020 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study contributes to existing literature by determining the effect of load shedding on small scale entrepreneurs in zambia. 1. introduction zambia is a landlocked country situated in southern-central part of africa. the major economic activities in zambia are mining, agriculture, tourism and energy. zambia has five large power stations. four of the power stations are hydroelectric and one is thermal. zambia has ten provinces and two provinces are dominated by mining activities. copperbelt province and north western province have been the backbone of zambian economy as they produce minerals. the motivation for this study stems from the researchers’ observation that load shedding has been and is still posing a number of challenges to citizens of zambia. since 2015, zambia has been experiencing the worst electricity crisis. according to zulu (2015) the major source of energy in zambia is wood fuel (i.e. firewood and charcoal), with the largest consumer group being households in both rural and urban areas. according to mwila (2017) the electricity supply industry (esi) in zambia is dominated by hydro generation. according to zulu (2015) hydro generation accounted for 96% of national installed capacity 2.1% is from alternative sources such as diesel, heavy fuel oil (hfo) and 1.7% renewable comprising solar and small hydros. according to mwila (2017) zambia has experienced reduction in electricity supply which is as a result of the reduced generation by zambia electricity supply corporation (zesco) due to the low water levels in the reserves caused by poor rainfall. zesco was founded in 1970 and its headquarters is in lusaka zambia. zesco is a stateowned power company in zambia. it is zambia’s largest power company producing about eighty percent of the electricity consumed in the country. these are the power stations under zesco: kafue gorge upper produces 990 mw, kariba north bank produces 720 mw, kariba north bank extension produces 360 mw, victoria falls produces 108 mw and itezhi-tezhi dam produces 120 mw. the power deficit since 2015 range from 560 to 1000 mw. because of the power deficit, zesco increased the extent of load shedding to at least eight (8) hours a day for the majority of its household, commercial and industrial consumers. according to phiri (2017) load shedding has negative effect on business growth and entrepreneurship. in most cases, load shedding affect business operations and financial viability; small enterprises are the most likely to be adversely affected. given the importance of electricity in zambia especially small-scale entrepreneurs, it is important that the impact of load shedding is studied and understood. therefore, the study investigated the impact of load shedding on small scale entrepreneurs. 1.1. statement of the problem the key for economic growth for each and every country is the energy sector. electricity is one of the key factors that are critical for accelerating the growth of the economy of the country. for example, the economy of zambia has not been stable for the past five years. according to economic focus and reports (2018) the gross domestic product (gdp) per capita (usd) for zambia in 2013 was 1,801 representing 5.1% of the gross domestic product growth. in 2014, the gross domestic product (gdp) per capita (usd) reduced from 1,801 to 1,661 representing 5% of the gross domestic product growth. in 2015, the gross domestic product (gdp) per capita (usd) further reduced from 1,661 to 1,046 representing 2.3% of the gross domestic product growth. the 2016 gross domestic product results shows an improvement in the economy. in 2016, the gross domestic product (gdp) per capita (usd) increased from 1,046 to 1,293 representing 3% of the gross domestic product growth. in 2017, the gross domestic product (gdp) per capita (usd) increased from 1,293 to 1,563 representing 4% of the gross domestic product growth. gross domestic product per capita is a measure of a country’s economic output that accounts for its people. gross domestic product per capita is the best measurement of the country’s standard living as it helps people to understand how prosperous a country feels to each of its citizen. it has been noted that a number of reasons could be attributed to the reduction of the gross domestic product growth for the past five years and one of the reasons could be attributed to the continuous load shedding that the country has been experiencing from 2014. so, the study looked at the effect of load shedding on small scale entrepreneurs. 1.2. the purpose of the study the purpose of the study was to investigate the effect of load shedding on small scale entrepreneurs with a special focus on kitwe district on copperbelt province of zambia. small scale entrepreneurs contribute a lot in the development of the economy of the country. if there is an interruption in the supply of electricity their business is disturbed. salons, barbershops and other small-scale entrepreneurs depend on electricity for their businesses to run effectively. however, 2019-2020 load shedding has been worse. as a result of the power deficit, zesco increased the extent of load shedding in 2019-2020 to at least fifteen (15) hours a day for the majority of its household, commercial and industrial consumers. the study therefore aimed to establish to what extent small-scale entrepreneurs in kitwe had been affected by electricity demand and zesco`s load shedding. 1.3. objectives in this study there are two objectives. i. to find out the effect of load shedding on small scale entrepreneurs in kitwe. ii. to assess the measures taken by small-scale entrepreneurs if there is load shedding. 1.4. research questions i. what are the effects of load shedding on small scale entrepreneurs in kitwe? ii. what are the measures in place if there is load shedding? 1.5. hypothesis 𝐻0: 𝜏1 = 𝜏2 = 𝜏3 = 𝜏4 = 0 (load shedding has no effect on small scale entrepreneurs in zambia). economy, 2020, 7(2): 104-109 106 © 2020 by the authors; licensee asian online journal publishing group 𝐻1: 𝐴𝑡 𝑙𝑒𝑎𝑠𝑡 𝑜𝑛𝑒 𝑜𝑓 𝜏𝑖𝑠 𝑖𝑠 𝑑𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑡 (load shedding has an effect on small scale entrepreneurs in zambia). 1.6. significance of the study this study will help in identifying the damage cause by load shedding on small scale entrepreneurs. small scale entrepreneurs depend on electricity for their business to run smoothly. the findings of the study will be of great importance to policy makers on how they can help small-scale entrepreneurs. 1.7. limitation of the study the study collected the opinions of small-scale entrepreneurs. record keeping is a challenge for some smallscale entrepreneurs and some wanted to be paid money for them to disclose the information. 2. literature review the main objective of conducting a literature review in this study is to analyse what other researchers had found concerning the effect of load shedding. the literature review is an important tool in research as it provides theoretical background to the study. according to tichapondwa (2013) a literature review is an account of what has been published on a topic by accredited scholars and researchers. a number of studies have been conducted on the effect of load shedding and some of the studies are highlighted below. the study that mwila (2017) conducted shows that load shedding affects most business operations and financial viability. the study was conducted in zambia and the aim of the study was to investigate the impact of load shedding on small scale enterprises. findings of the study show that small enterprises were the most affected mainly due to their lack of resilience and limited capacity to invest in alternative energy sources. most small enterprises resorted to reducing their work outputs resulting in reduced turnover whilst incurring additional costs such as idle labour and overtime. this study was conducted in solwezi, north-western province while the current study was conducted in kitwe district, copperbelt province. according to phiri (2017) power rationing and load shedding has negative impact on both productivity and profitability. this study was conducted in solwezi on the north-western part of zambia. the study looked at the impact of electricity demand and load shedding on zambian business. a similar study was conducted in south africa by goldberg (2015). the findings of the study showed that load shedding has a negative effect on the retailers and on the economy of south africa. methodologies applied in the above studies are different from the current study. retail markets provide wide range of goods for public, reliable electricity supply is considered to be vital for the operations of retail businesses (muhammad & nabi, 2017). the study was conducted in hyderabad pakistan and the title of the study is effects of load shedding on retail business: a glimpse from hyderabad, pakistan. findings of the study show that problem in dealing customer and decrease in sales and waste of time were found to be the main factors that effect on business due to load shedding, while other factors like increase in cost, waste of time, product damage and health problems were also found to be effects of load shedding. the study is based on a quantitative survey using closed ended questionnaire. sample consists of 262 was randomly selected from retail market of hyderabad. data was analyzed using spss 22.0 in terms of bar charts and multiple regression. the current study was conducted in zambia and analysis of covariance was used to analyse the data.this was just the sample of the studies that have been conducted on the impact of load shedding. 3. methodology 3.1. research design the purpose of the study is to investigate the impact of load shedding on small scale entrepreneurs in zambia. according to ranjit (2011) a research design is a procedural plan that is adopted by the researcher to answer questions validly, objectively, accurately and economically. according to kothari (2004) a research design is the conceptual structure within which the research is conducted. kothari (2004) further, explains that research design includes an outline of what the researcher will do from writing the hypothesis and its operational implications to the final analysis of data. in a simpler way, research design can be defined as a plan that helps a researcher to find out alternative tools to solve the problem. the study used mix methods approach in order to observe the impact of load shedding on small scale entrepreneurs in zambian. mixed research approach is the type of approach that involves collection of both open-ended and closed-ended data. according to daniel (2004) mixed methods research, qualitative or quantitative components can predominate or both can have equal status. in this study, convergent parallel mixed approach was used. qualitative data was gathered from the small-scale entrepreneurs about their views concerning load shedding whereas quantitative data was gathered from the statistics of the customers the small-scale entrepreneurs they have every day on average. 3.2. target population the study was carried out on the copperbelt province of zambia and kitwe district in particular. kitwe district was purposively chosen because of mine activities and load shedding in most cases is twelve to sixteen hours a day. the study investigated the effect of load shedding on small scale entrepreneurs. the target population of the study included all the people photocopying/printing, people selling beer in bars, people working in salons and people working in barbershops. according to robert (2004) target population is the set of units to be studied. 3.3. sampling and sampling procedures the study used purposive sampling to come up with kitwe district which is in copperbelt province of zambia. according to ranjit (2011) the primary consideration in purposive sampling is the judgement of the researcher as to who can provide the best information to achieve the objectives of the study. in purposive sampling the researcher only goes to those people who have the required information and are willing to share the information. simple random sampling was also used when distributing questionnaires to 200 participants. economy, 2020, 7(2): 104-109 107 © 2020 by the authors; licensee asian online journal publishing group 3.4. data collection instrument in this study face-to-face interviews and questionnaires were used to collect data regarding the effect of load shedding on small scale entrepreneurs in zambia. according to nicholas (2011) face-to face interviews tend to concentrate in depth on a particular theme or topic with an element of interaction. 3.5. validity of data collection instrument validity of data collection instrument is an ability for the instrument to determining whether the findings are accurate from the standpoint of the researcher, the participant, or the readers (creswell, 2014). the questionnaire was given to more than three lecturers. corrections and suggestions made from the lecturers were used by the researchers to improve the questionnaire. 3.6. reliability of data collection instrument the concept of reliability in relation to a research instrument means that a research tool is consistent and stable (ranjit, 2011). according to kothari (2004) reliability demonstrates that the operation of a study, such as the data collection procedures, can be repeated with the same outcome. the questionnaire on load shedding was developed by the researchers and was pre-tested through a pilot study to ascertain its reliability. 4. data presentation analysis and interpretation this section presents analysis and interprets the data collected from the respondents by means of questionnaire. 4.1. data presentation in this study analysis of covariance (ancova) was applied. model 𝑦𝑖𝑗 = 𝜇 + 𝜏𝑖 + 𝛽(𝑋𝑖𝑗 − �̅�𝑖) + 𝜀𝑖𝑗 where 𝑖 = 1,2,3,4 𝑗 = 1,2,3,4 • 𝑦𝑖𝑗 is the 𝑗𝑡ℎ observation under the 𝑖𝑡ℎ treatment. • 𝜇 is the grand mean. • 𝜏𝑖 is the effect in the 𝑖𝑡ℎ treatment. • 𝛽 is the linear regression coefficient indicating the dependency of 𝑦𝑖𝑗 on 𝑥𝑖𝑗 . • 𝑥𝑖𝑗 is the 𝑗𝑡ℎ observation of the covariate under the 𝑖𝑡ℎ group. • �̅�𝑖 is the 𝑖𝑡ℎ group mean. • 𝜀𝑖𝑗 is the random error and 𝜀𝑖𝑗~𝑁(0, 𝜎2) for ancova to be used the following assumptions should be met; • data should be drawn from the population by the means of random sampling. • the relationship between the independent variable and the dependent variable must be linear. • independent variables must be drawn from the normal population. • the regression coefficients in every group of the independent variable must be homogeneous. data on effect of load shedding on small scale entrepreneurs was collected and summarized in the table below; table-1. number of customers when there is load shedding and when there is no load shedding. barbershop salon bar photocopying/ printing 𝐴 𝐵 𝐴 𝐵 𝐴 𝐵 𝐴 𝐵 5 10 3 10 20 25 15 20 4 10 4 12 25 30 30 50 7 20 3 8 28 40 60 100 4 8 10 20 40 50 30 50 a: no load shedding. b: load shedding . scores represents the number of customers per day. 𝑆𝑆𝑇𝐴 = ∑ ∑ 𝐴𝑖𝑗 2 − 𝐴… 2 𝑁 𝑛 𝑗=1 𝐾 𝑖=1 𝑆𝑆𝑇𝐴 = 52 + 42 + ⋯ 302 − (5 + 4 + ⋯ + 30)2 16 = 4090 𝑆𝑆𝑇𝑟𝑡𝐴 = ∑ 𝐴.𝑖 2 𝑛 𝑘 𝑖=1 − 𝐴… 2 𝑁 𝑆𝑆𝑇𝑟𝑡𝐴 = 202 4 + 202 4 + 1132 4 + 1352 4 − (5 + 4 + ⋯ + 30)2 16 = 2764.5 𝑆𝑆𝐸𝐴 = 4090 − 2764.5 = 1325.5 𝑆𝑆𝑇𝐵 = ∑ ∑ 𝐵𝑖𝑗 2 − 𝐵… 2 𝑁 𝑛 𝑗=1 𝐾 𝑖=1 economy, 2020, 7(2): 104-109 108 © 2020 by the authors; licensee asian online journal publishing group 𝑆𝑆𝑇𝐵 = 102 + 102 + ⋯ 502 − (10 + 10 + ⋯ + 50)2 16 = 8998.9375 𝑆𝑆𝑇𝑟𝑡𝐵 = ∑ 𝐵.𝑖 2 𝑛 𝑘 𝑖=1 − 𝐵… 2 𝑁 𝑆𝑆𝑇𝑟𝑡𝐵 = 482 4 + 502 4 + 1452 4 + 2202 4 − (5 + 4 + ⋯ + 30)2 16 = 5159.1875 𝑆𝑆𝐸𝐵 = 8998.9375 − 5159.1875 = 3839.75 𝑆𝑆𝑇𝐴𝐵 = ∑ ∑(𝐴𝑖𝑗)(𝐵𝑖𝑗) − (𝐴…)(𝐵…) 𝑁 𝑛𝑖 𝑗=1 𝐾 𝑖=1 𝑆𝑆𝑇𝐴𝐵 = 5(10) + 4(10) + ⋯ + 30(50) − 288(463) 16 = 5900 𝑆𝑆𝑇𝑟𝑡𝐴𝐵 = ∑ (𝐴.𝑖)(𝐵.𝑗) 𝑛𝑗 𝑘 𝑖=1 − − (𝐴…)(𝐵…) 𝑁 𝑆𝑆𝑇𝑟𝑡𝐴𝐵 = 106(664) 4 + 134(708) 4 + 3409(5625) 4 − 5625(15400) 16 = 3677.25 𝑆𝑆𝐸𝐴𝐵 = 5900 − 3677.25 = 2222.75 (a) 𝑆𝑆𝑇(𝑎𝑑𝑗) = 𝑆𝑆𝑇𝐴 − (𝑆𝑆𝑇𝐴𝐵)2 𝑆𝑆𝑇𝐵 𝑆𝑆𝑇(𝑎𝑑𝑗) = 4090 − (5900)2 8998.9375 = 221.77 𝑆𝑆𝐸(𝑎𝑑𝑗) = 𝑆𝑆𝐸𝐴 − (𝑆𝑆𝐸𝐴𝐵)2 𝑆𝑆𝐸𝐵 𝑆𝑆𝐸(𝑎𝑑𝑗) = 1325.5 − (2222.75)2 3839.75 = 38.8 𝑆𝑆𝑇𝑟𝑡(𝑎𝑑𝑗) = 𝑆𝑆𝑇(𝑎𝑑𝑗) − 𝑆𝑆𝐸(𝑎𝑑𝑗) 𝑆𝑆𝑇𝑟𝑡(𝑎𝑑𝑗) = 221.77 − 38.8 = 182.97 or 𝑆𝑆𝑇𝑟𝑡(𝑎𝑑𝑗) = 𝑆𝑆𝑇𝐴 − 𝑆𝑆𝐸𝐴 + (𝑆𝑆𝐸𝐴𝐵)2 𝑆𝑆𝐸𝐵 − (𝑆𝑆𝑇𝐴𝐵)2 𝑆𝑆𝑇𝐵 𝑆𝑆𝑇𝑟𝑡(𝑎𝑑𝑗) = 4090 − 1325.5 + (2222.75)2 3839.75 − (5900)2 8998.9375 = 182.97 table-2. descriptive statistics on effect of load shedding. ancova table source 𝑺𝑺 𝒅𝒇 𝑴𝑺 𝑭∗ treatment 182.97 3 60.99 17.29 error 38.8 11 3.527 total 221.77 14 4.2. decision rule reject 𝐻0 if 𝐹∗ > 𝑓3,11 𝛼=0.05 = 3.5874 4.3. conclusion since 𝐹∗ = 17.29 > 𝑓3,11 𝛼=0.05 = 3.5874, we reject 𝐻0 at 5% level of significance and conclude that load shedding has effect on small scale entrepreneurs. 4.4. discussion from the calculations above, where 𝐹∗ = 17.29 > 𝑓3,11 𝛼=0.05 = 3.5874, we reject 𝐻0 at 5% level of significance and conclude that load shedding has effect on small scale entrepreneurs. the findings in this study are in line with the study conducted by mwila (2017). the study that mwila (2017) conducted shows that load shedding affects most business operations and financial viability. the information from this study revealed that the majority of people agree that load shedding is a bad thing to people. there is need for the government of zambia to find lasting solution for load shedding. for instance, most of the people selling beer in bars have minimum of 50 customers a day if there is no load shedding. in 2019 load shedding was cutting for a minimum of twelve hours a day. if there is load shedding for example, power cuts at 18 00 hours, many customers can not be buying beer in darkness and most of the customers drink beer after 18 00 hours. bar owners are spending extra money buying generators to keep the business moving. most people interviewed who sells beer reviewed that if there is load shedding the number of customers reduced. the reduction in customers has a negative effect on the business and the income reduces. the information gathered from people working in cafes revealed that load shedding destroys their business. some have lost printing and photocopying machines because of load shedding. some machines were burnt because of load shedding and in most cases if there is load shedding, they end up not having customers. the 2019 load shedding was bad for business of printing and photocopying because of the number of hours power was taking to be restored. some people who were interviewed complained bitterly about load shedding and said that load shedding has made their lives difficult because they can’t support their families adequately financially. economy, 2020, 7(2): 104-109 109 © 2020 by the authors; licensee asian online journal publishing group barbershops and salons have been affected negatively by load shedding. not only barbershops and salons, but council workers are also a victim of load shedding. some people working in barbershops and salons pay rentals to kitwe city council. because of load shedding most of them fail to pay rentals to kitwe city council and kitwe city council workers sometimes go months without being paid their monthly salary. school fees for the children whose parents work in barbershops and solons was difficult to pay because their parents cannot raise enough money to feed children at home and pay school fees for their children. some markets in kitwe district have one prepaid meter for electricity to supply to all the shops in the market. if power cut at 18 00 hours, people who benefits are those working in bars selling beer because with them they can work until midnight. as a result, some people buy electricity units without benefiting from them. a number of people interviewed complained about load shedding as they cannot afford to buy generators. reliable electricity supply is considered to be vital for the operations of business for small-scale entrepreneurs. this is in support of the study conducted by muhammad and nabi (2017). if there is load shedding business is disturbed and the income generation is reduced. to avoid making loses, people have resorted to be using generators if there is load shedding. 5. conclusion small-scale entrepreneurs play an important role in the development of the country as they pay tax to the government. an increase in load shedding reduces revenue small-scale entrepreneurs generate every month. results showed that load shedding has negative effect on small scale entrepreneurs in zambia. based on the statistical calculations using analysis of covariance and a number of people who were interviewed, load shedding has negatively impacted small scale entrepreneurs and a number of families have been suffering financially. therefore, the study found that load shedding affects the economy in zambia negatively and people should find other sources of power rather than depending of zesco. it is important for both the government and public to take corrective actions because all are ultimate beneficiaries. references creswell, j. w. (2014). research design: qualitative, quantitative and mixed methods approaches (4th ed.). california: sage. daniel, m. (2004). doing quantitative research in education with spss. london: sage publications ltd. economic focus and reports. (2018). zambian economic outlook. lusaka zambia: economic focus and reports. goldberg, a. (2015). the economic impact of load shedding: the case of south african retailers. pretoria: gordon institute of business science. university of pretoria. kothari, c. r. (2004). research methodology: methods and techniques (2nd ed.). jaipur: new age. muhammad, n., & nabi, n. b. (2017). effects of loadshedding on retail business: a glimpse from hyderabad, pakistan. grassroots, 51(1), 166177. mwila, a. (2017). impact of load shedding on small scale enterprises. lusaka: energy regulation board. nicholas, w. (2011). research metheds. the basics. london: routledge. phiri, j. (2017). electricity demand and loadshedding: impact on zambian business: a case study of selected solwezi based businesses. international journal of multidisciplinary research and development, 146-157. ranjit, k. (2011). research methodology: a step-by-step guide for beginners. new delhi: sage. robert, c. m. (2004). survey methodology. new jersey: a john wiley & sons, inc. tichapondwa, s. (2013). preparing your dissertation at a distance: a research guide. vancouver: virtual university. zulu, h. (2015). energy statistics in zambia. lusaka: department of energy. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. 35 © 2021 by the authors; licensee asian online journal publishing group economy vol. 8, no. 2, 35-48, 2021 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2021.82.35.48 © 2021 by the authors; licensee asian online journal publishing group trade liberalization and economic growth: the scenario of the mint economies innocent. u. duru department of economics, renaissance university ugbawka, enugu state, nigeria. email: iud3x@yahoo.com tel: +234-8154827934 abstract this study investigated the impact of trade liberalization on economic growth for mexico, indonesia, nigeria and turkey from 1986 to 2020. the autoregressive distributed lag bounds approach to cointegration and toda and yamamoto causality test were utilized for this study. the long-run results revealed that there is no relationship between trade liberalization and real gross domestic product per capita except for mexico and in this situation, the significance level was at 10%. the results of the causality test showed that no causality was detected between real gross domestic product per capita and trade liberalization for mexico and indonesia. a bidirectional causality between real gross domestic product per capita and trade liberalization was found for nigeria whereas a unidirectional causality from trade liberalization to real gross domestic product per capita was revealed for turkey. the no causality results for mexico and indonesia means that the policy objectives of trade liberalization and economic growth can be pursued independently in both economies. in addition, the bidirectional causality detected for nigeria suggests that the policy objectives of trade liberalization and economic growth can be pursued together in nigeria. furthermore, the unidirectional causality from trade liberalization to real gross domestic product per capita found for turkey implies that she employs trade liberalization policies effectively for objectives of economic growth, thus trade liberalization causes economic growth. keywords: trade liberalization, economic growth, cointegration, ardl, toda and yamamoto multivariate causality, nigeria. jel classification: c22; f19; o50. citation | innocent. u. duru (2021). trade liberalization and economic growth: the scenario of the mint economies. economy, 8(2): 35-48. history: received: 19 october 2021 revised: 22 november 2021 accepted: 14 december 2021 published: 27 december 2021 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. competing interests: the author declares that there are no conflicts of interests regarding the publication of this paper. transparency: the author confirms that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ...................................................................................................................................................................................... 36 2. literature review and theoretical framework ........................................................................................................................ 36 3. methodology and model specification........................................................................................................................................ 38 4. data presentation, analysis and discussion of results ........................................................................................................... 40 5. conclusion and policy implications ............................................................................................................................................. 43 references .............................................................................................................................................................................................. 43 appendices ............................................................................................................................................................................................. 44 mailto:iud3x@yahoo.com http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ https://www.doi.org/10.20448/journal.502.2021.82.35.48 https://orcid.org/0000-0001-8958-0686 https://www.doi.org/10.20448/journal.502.2021.82.35.48 https://orcid.org/0000-0001-8958-0686 https://www.doi.org/10.20448/journal.502.2021.82.35.48 https://orcid.org/0000-0001-8958-0686 economy, 2021, 8(2): 35-48 36 © 2021 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study contributes to existing literature by investigating the impact of trade liberalization on economic growth for mexico, indonesia, nigeria and turkey from 1986 to 2020. 1. introduction the link between trade liberalization and economic growth has attracted extensive research in the parlance of international economics. trade liberalization is believed to be the engine of economic growth and development in economies of the world, especially the developing ones. chile and talukder (2014) and fao (2005) maintained that liberalized international trade affects long-run economic growth. no wonder, the unrelenting and general divergences in the performance of the economy among economies, particularly developing economies has heightened the attention given to trade liberalization-economic growth nexus in recent times (lall, 2004). dollar and kraay (2001) declared that economies such as china, india, malaysia and mexico considered post1980 globalizers realized quicker rates of growth than the affluent economies. however, in a similar vein, economies that pursued a protectionist regime of trade suffered a declining rate of growth. evidence from numerous literature infers that barriers to trade decreases growth (see, for instance, (dollar, 1992; dollar & kraay, 2003; edwards, 1992; frankel & romer, 1999; sachs & warner, 1995)). however, as a result of the narrow openness measure utilized and other methodological deficiencies, rodriguez and rodrik (2000) were doubtful about the findings. food and agriculture organization (2003) argued that many economies have embarked on trade policy reforms to further open their economies and broaden their access to the international market and increase the competitiveness of export. trade liberalization campaigners are of the view that it will increase the small domestic market; accelerate the transfer of technology; encourage foreign direct investment; generate greater competition; create marketing networks; supply technical and managerial skills; increase the flow of knowledge, resources, goods and services causing higher growth of the economy (annabi, 2006; corbett & winebrake, 2008; henry, kneller, & milner, 2009; mcculloch, winters, & cirera, 2003; stone & shepherd, 2011; zhang, 2008). thus, it is not surprising that corbett and winebrake (2008) argued that many economies have witnessed shocking economic growth in the recent past as a result of their readiness to open their borders and markets to foreign investment and trade. again, krueger (1997) maintained that the swift industrialization and development in hong kong, singapore, south korea and taiwan considered as the four east asian “tigers”, is a model of beneficiaries of thriving policies of trade liberalization since the beginning of the 1960s. among the prominent features of the world economy in the last thirty-six years was that developing economies went through fast trade liberalization either individually or as a component of multilateral proposals with the world bank (wb), world trade organization (wto) and the international monetary fund (imf). hence, in the early 1980s, most developing economies were encouraged to effect trade reforms besides the structural adjustment programmes (saps), imposed by the imf, the wb and other international organizations, as a necessary step for a free-market economy. thus, in the mid-1980s and early 1990s, trade reforms were effected and trade liberalization was entrenched in nearly all the developing economies. the view on whether trade liberalization is a prerequisite for fast and sustained economic growth or not remained mixed. while some authors believe that trade liberalization is a must for fast and sustained economic growth (berg & krueger, 2003; edwards, 1993; edwards, 1997; edwards, 1998; krueger, 1990; krueger, 1998; winters, mcculloch, & mckay, 2004), others contest this assertion claiming that there is small evidence indicating that trade liberalization is meaningfully related to economic growth (harrison & hanson, 1999; rodriguez & rodrik, 2001). regardless of the programmes applied to boost openness to trade in the four developing market economies of mexico, indonesia, nigeria and turkey, regarded as mint economies, trade barriers still exist. irrespective of important trade reforms in mint economies, some disagreements concerning the role of trade liberalization in them persist. in light of the above, this study seeks to examine the impact of trade liberalization from the perspective of the mint economies. this research question was addressed in this study: what is the causal link between trade liberalization and economic growth in mint countries? the general objective of this study is to investigate the causal link between trade liberalization and economic growth in the mint countries. the rest of the paper is structured as follows. section 2 focuses on the literature review and theoretical framework. section 3 discusses the methodology. section 4 dwells on data presentation, analysis and discussion of results while the conclusion and policy implications are presented in section 5. 2. literature review and theoretical framework 2.1. empirical literature an extensive body of theoretical and empirical literature has investigated the relationship between trade liberalization and economic growth with mixed results. for instance, nduka (2013) employed the ordinary least square (ols) methodology from 1970-2008 to examine empirically the nexus between trade openness and economic growth in nigeria. the findings of the test of cointegration indicated the presence of a long-run equilibrium link between the variables. the findings indicated that trade openness had a positive and significant relationship with economic growth in nigeria. in a similar vein, mercan, gocer, bulut, and dam (2013) applied the panel data technique to investigate the impact of openness on economic growth for the fast-emerging economies of brazil, russia, india, china and turkey considered as bric-t countries from 1989-2010. the results revealed a positive and statistically significant relationship between openness and economic growth according to apriori expectations. in addition, dao (2014) applied the panel data techniques and pooled ols regression to examine the link between trade openness and economic growth for a panel of 71 countries over the globe from 1980 to 2010. the results revealed a positive and significant link between trade openness and economic growth. hamad, burhan, and stabua (2014) used the ols methodology to investigate the impact of trade liberalization on economic growth in economy, 2021, 8(2): 35-48 37 © 2021 by the authors; licensee asian online journal publishing group tanzania using annual time series data from 1970 to 2010. this period was decomposed into an era of the closed economy (1970-1985) and an era of the open economy (1986-2010). the results showed that openness to trade had a positive and significant impact on economic growth in tanzania. however, this impact was comparatively greater in the closed economy era than the era of the open economy. equally, manwa (2015) applied the autoregressive distributed lag (ardl) methodology and fixed effects panel data estimations from 1980 to 2011 to empirically examine the nexus between trade liberalization and economic growth in southern african customs union (sacu) economies of namibia, swaziland, botswana, south africa and lesotho. the findings revealed that trade liberalization measured through adjusted trade ratios, tariffs, the real effective exchange rate and trade ratios exerted an insignificant effect on economic growth in swaziland. botswana, namibia and lesotho. however, in the case of south africa, the results unearthed that trade liberalization exerted an impact on economic growth consistently. in another similar study, qazi (2015) employed the ardl methodology on data from 1971-2013 to examine the effect of financial and trade liberalization on economic growth in pakistan through the conduits of private saving and investment. the determinants of capital account liberalization were investigated in the study as well. the findings based on the equation of economic growth revealed that the index of financial liberalization, capital stock and labour force had a positive relationship with economic growth. however, the index of financial openness and openness to trade had a negative relationship with economic growth. in addition, the results showed that real deposit rate, per capita real private income, public saving and index of financial liberalization had a positive relationship with private saving in the long run. on the other hand, capital account liberalization, openness to trade and index of financial openness had a negative relationship with private saving in the long run. furthermore, the findings revealed that per capita real private income, index of financial liberalization and public investment had a positive relationship with private investment in the long run. however, real interest rates and openness to trade had a negative relationship with private investment in the long run. finally, the findings of the effect of trade liberalization/openness on capital account liberalization/openness highlighted a positive relationship between trade openness and capital account liberalization. additionally, the findings further revealed that trade liberalization and openness to trade have a positive association with financial openness. summing up, the general results revealed that the index of financial liberalization had a positive relationship with economic growth, investment and private saving. kalu, nwude, and nnenna (2016) as well utilized the classical linear regression model (clrm) from 19912013 to analyze the effect of trade openness on economic growth in nigeria. the findings showed that export and net export both had positive and significant links with economic growth. on the other hand, imports exerted a positive and significant impact on economic growth. in another similar study, (hozouri, 2016) employed the dynamic panel data methodology and data from 2000 to 2013 to examine the effect of trade liberalization on economic growth in 17 middle east and north africa (mena) countries of iran, yemen, algeria, united arab emirates (uae), bahrain, tunisia, djibouti, syria, egypt, saudi arabia, jordan, qatar, kuwait, oman, lebanon, morocco and libya. the findings revealed that the sensitivity of economic growth has a significant and negative link with tariff changes, however, its link with the volume of trade was positive. keho (2017) used the ardl methodology and the granger causality test proposed by toda and yamamoto in another related study to investigate the effect of openness to trade on economic growth in cote d‟ivoire from 1965-2014. the results revealed that openness to trade had a positive impact on economic growth in the short-run and long-run respectively. furthermore, the findings suggest a positive and strong balancing link between trade openness and capital formation in stimulating economic growth. employing the error correction model (ecm) methodology and time-series data from 1980-2016, bekele (2017) investigated the link between trade liberalization and economic growth in ethiopia. the findings showed that trade openness exerted a positive and significant impact on economic growth. in addition, moyo and khobai (2018) employed the ardl approach to cointegration and the pooled mean group (pmg) model in a similar study to investigate the link between trade openness and economic growth in southern african development cooperation (sadc) economies of botswana, lesotho, madagascar, malawi, mauritius, mozambique, namibia, south africa, swaziland, tanzania and zambia using data from 1990-2016. the results showed that trade openness had a negative effect on economic growth in the long run. in addition, using the ecm and data from 1980 to 2016, elijah and musa (2019) explored the dynamic impact of trade openness on economic growth in nigeria. the findings of the short-run and long-run indicated that openness to trade is harmful to economic growth in nigeria. additionally, ajayi and araoye (2019) employed the vector error correction model (vecm) to analyze the effect of openness to trade on economic growth in nigeria from 1970 to 2016. the findings of the test of cointegration indicated the presence of a long-run link between the variables. the results showed that openness to trade exerted a negative impact on nigeria‟s economic growth. furthermore, using the ardl methodology, duru, okafor, adikwu, and njoku (2020) examined empirically the causal relationship between trade liberalization and economic growth in nigeria from 1981 to 2018. the results showed a unidirectional causality running from trade liberalization to economic growth (trade-led growth) during the study period. evidence from the past works reviewed revealed that irrespective of many works that tried to shed light on the impact of trade liberalization on economic growth, the argument, among economists, researchers, policymakers, academics within the realm of policymaking and academia on the relationship between trade liberalization and growth is still open. based on the results of empirical studies, economies that are more outward-oriented record better performance in terms of economic growth in the long run ((dollar & kraay, 2004; edwards, 1998; frankel & romer, 1999; lee, ricci, & rigobon, 2004; sachs, warner, åslund, & fischer, 1995), among others). however, rodriguez and rodrik (2001) argued that these results had been questioned continuously based on at least two limitations: the first flaw is associated with the measurement technique of countries‟ openness to trade. on the other hand, the second flaw has to do with the methodology of estimation. furthermore, evidence shows that there is no macroeconomic study that had separated the mint countries and explored the impact of trade liberalization on their economies from the context of general equilibrium. past economy, 2021, 8(2): 35-48 38 © 2021 by the authors; licensee asian online journal publishing group researches merely confronted this debate from a cross-country context. this part of the investigation is novel. thus, the nexus between trade liberalization and economic growth to the best of my knowledge has been generally unnoticed and unstudied for the mint countries. this study fills this gap in knowledge by investigating the impact of trade liberalization on economic growth for the mint economies. the dependence of mint countries on trade, the dearth of research on the issue in the context of mint economies and the methodological flaws previously spotted provide the rationalizations for embarking on this study. in addition, the study made a methodological contribution through the use of the autoregressive distributed lag methodology that makes it possible for the short-run and long-run effects of trade liberalization on economic growth to be ascertained. 2.2. theoretical framework in the contention of thindwa and seshamani (2014), three theories account for the gains of trade liberalization to countries. these are the comparative advantage theory proposed by david ricardo, heckscher-olin (h-o) neoclassical factor endowment theory of trade and the endogenous growth theory. the endogenous growth theory would form the theoretical foundation for this study. this is based on the premise that the new growth theory or the endogenous growth theory proposed by romer (1986); lucas (1988); romer (1990); grosman and helpman (1991) and barro and sala-i-martin (1997) is the main theoretical platform employed by academics for analyzing the link between trade liberalization and economic growth. the comparative advantage theory proposed that there would be the realization of benefits from trade if every country concentrates on the production of the goods in which it has a comparative advantage (salvatore, 2007). the benefits from trade are decomposed into static and dynamic gains. in the opinion of thindwa and seshamani (2014), „‟static gains from trade stem from the fact that countries have different factor endowments and therefore, the opportunity cost of production varies between countries‟‟ (p.964). however, dynamic gains from trade stem from the increased output of resources. labour is the only input of production in the ricardian comparative advantage theory. the right of entry to export markets is increased through international trade, and economies would benefit if increasing returns are presumed to hold. these benefits from trade could accrue to the mint economies under the platform of trade liberalization through the enhanced right of entry to international markets. the foreign reserves of the mint countries and by implication its import cover could be improved through the foreign exchange gotten from trade. improved output of labour, attainment of ground-breaking knowledge and technology could spur dynamic gains. the main limitation of this classical model is that it is a static model based on one input of production. thus, it is subjected to restrictions on how the economy operates today. the h-o model builds upon the ricardian model of comparative advantage. however, it added extra input of production. the land was incorporated as a second input of production to reflect the endowment of resources. it believes that economies can embark on international trade by exporting products in which they have a comparative advantage. in the contention of this model, comparative advantage is expressed in terms of factor abundance and intensity in a given country. thindwa and seshamani (2014) maintained that „‟a country has a comparative advantage if it has a particular resource in abundance and if the ratio of that resource to others is high in production (factor intensity)‟‟ (p.965). hence, salvatore (2007) claimed that a state has a comparative advantage in manufacturing a product that employs the resource that shows these features. trade between economies and resources concentration in the manufacturing of comparatively few products breeds a high standard of living for the economies concerned. the mint economies are labour-abundant countries as most emerging economies with an endowment of natural resources. based on these resources, the mint countries have engaged formal and informal labours together to work on these resources in developing their economies. the endogenous growth theory postulates that growth results from domestic factors in an economy such as innovation, knowledge and investment in human capital. investment in these internal factors would be of great benefit to economies of the world. this is partly based on the premise that economies of scale in production can stem from such decisions. reduction in the alterations of prices paves way for effective distribution of internal resources to different sectors of the economy. however, howitt (1998) maintained that externalities resulting from the engagement of advanced technology in manufacturing in economies of the globe are responsible for economic development. the mint economies employ resources internal to their economies for the promotion of economic growth. hence, on the ground of theory, the mint countries are expected to realize gains from trade in particular and attain economic growth and development in general as a result of trade liberalization and openness. however, the condition in these mint countries may not be in line with theoretical expectations. this is based on the premise that there are other determinants of economic growth like trade liberalization. thus, from the standpoint of macroeconomics, trade liberalization may not be the significant element influencing economic growth. however, a principal limitation of the endogenous growth theory is that it has continued to rely on some long-established neoclassical assumptions that are repeatedly unsuitable for emerging economies (todaro & smith, 2015). despite this limitation, it had continued to be the main model of choice among academics in the analysis of the link between trade liberalization and economic growth. 3. methodology and model specification this study used annual data from 1986-2020 to examine the nexus between trade liberalization and economic growth in mint countries. the data were obtained from world bank world development indicators (wdi) database. the datasets are depicted in table 1, table 2, table 3, and table 4 respectively in the appendix. the dependent variable is the real gross domestic product (gdp) per capita in constant 2015 us$. the time series characteristics of the variables were checked for unit root using the augmented dickey-fuller (adf) test. the goodness of fit and model adequacy of our specification was checked through diagnostic and stability tests. the autoregressive distributed lag (ardl) bounds test to cointegration suggested first by pesaran and shin (1999) and advocated by pesaran, shin, and smith (2001) was utilized to estimate the economic growth equation. following hozouri (2016) with modifications, the economic growth equation that would be estimated to establish the association between trade liberalization and economic growth in mint economies is stated in equation 1 as: economy, 2021, 8(2): 35-48 39 © 2021 by the authors; licensee asian online journal publishing group (1) based on economic theory, gross fixed capital formation and openness to trade are expected to be positive. however, general government final consumption expenditure is expected to be negative. iterating equation 1 into the ardl framework yields: ∑ ∑ ∑ ∑ where p denotes the lag length, δ represents the difference operator, α0 is the drift, ɛt is the error term, ø1, ø2, ø3 and ø4 are coefficients of short-run dynamics while 1, 2, 3 and 4 are coefficients of the long-run relationship. thus, equation 2 is the base equation for measuring the short-run and long-run links among the variables. the technique of the bounds test requires employing the f-test to ascertain the existence of a long-run link in levels between rgdppcap and its determining factor. the specification of this test is as follows: (absence of long-run relationship among the variables) against the parameters: (presence of long-run relationship among the variables) the hypothesis stated above is judged through asymptotic critical value bounds of the f-statistic proposed by pesaran et al. (2001). for instance, if the calculated f–statistic is lower than the i(0) critical values bound, the null hypothesis of the absence of a long-run link between rgdppcap and its determinants cannot be rejected. on the other hand, if the calculated f–statistic is greater than the i(1) critical values bound, the alternative hypothesis of the presence of a long-run link in levels between the dependent variable and the independent variables will be accepted. additionally, if the f–statistic falls between the i(0) and i(1) critical values bounds, the test is inconclusive. if the presence of a long-run relationship in levels between the dependent variable and independent variables was not established, the process terminates. however, if the presence of a long-run relationship was established between the variables in the model, the short-run and long-run estimates of the economic growth model would be measured. based on equation 3, the long-run elasticities can be calculated using ols. ∑ ∑ ∑ ∑ the last step would be the estimation of short-run elasticities. the estimates of the short-run were obtained through an ecm. ∑ ∑ ∑ ∑ ) where ø1, ø2, ø3 and ø4 in equation 4 are the parameters of the short-run dynamics, π is the speed of adjustment and ecmt-1 is the error correction term. the parameter π is expected to be negative and significant to corroborate the long-run link between the dependent variable and the independent variables. table-1. adf test results. country variable augmented dickey-fuller (adf) level first difference i(d) mexico rgdppcap -5.0764*** i (0) gfcf -2.4626 -6.2528*** i (1) open -0.6965 -4.9125*** i (1) ggovfce -0.5261 -5.0627*** i (1) indonesia rgdppcap -3.9512*** i (0) gfcf -1.7972 -3.4376** i (1) open -2.6699 -8.7883*** i (1) ggovfce -2.5230 -6.1109*** i (1) nigeria rgdppcap -3.7055*** i (0) gfcf -1.5707 -4.6706*** i (1) open -3.5378*** i (0) ggovfce -0.7973 -4.9806*** i (1) turkey rgdppcap -6.1037*** i (0) gfcf -1.7972 -3.4376** i (1) open -2.6699 -8.7883*** i (1) ggovfce -2.2298 -6.1676*** i (1) note: ** and *** indicate statistical significance at 1% and 5% levels. economy, 2021, 8(2): 35-48 40 © 2021 by the authors; licensee asian online journal publishing group 4. data presentation, analysis and discussion of results 4.1. results of augmented dickey-fuller (adf) test. the adf unit root results are depicted in table 1. the results revealed that most of the series were stationary in first differences. on the other hand, some series such as rgdppcap for all mint economies and open for nigeria were stationary at levels. evidence from table 1 shows that the application of the ardl methodology is justified since the variables of interest were integrated at different orders. table-2. diagnostic results country test type of statistic test statistic p-value mexico breusch-godfrey serial correlation lm test ramsey reset test jarque-bera normality test heteroskedasticity test: arch 𝜒2 f 𝜒2 𝜒2 0.4763 16.1527 7.1447 9.7094 0.7881 0.0007 0.0281 0.6414 indonesia breusch-godfrey serial correlation lm test ramsey reset test jarque-bera normality test heteroskedasticity test: arch 𝜒2 f 𝜒2 𝜒2 7.8331 33.5222 2.5720 13.7343 0.0199 0.0000 0.2764 0.3180 nigeria breusch-godfrey serial correlation lm test ramsey reset test jarque-bera normality test heteroskedasticity test: arch 𝜒2 f 𝜒2 𝜒2 0.6018 0.2083 4.3560 9.8542 0.7402 0.6533 0.1133 0.6287 turkey breusch-godfrey serial correlation lm test ramsey reset test jarque-bera normality test heteroskedasticity test: arch 𝜒2 f 𝜒2 𝜒2 10.4453 0.8033 0.8882 15.8064 0.0054 0.3813 0.6414 0.2003 4.2. results of diagnostic tests even though there was no cointegration among the variables for nigeria and turkey, diagnostic tests were executed based on the estimated short-run models. however, for mexico and indonesia that we considered both long run and short run models based on the results of the bounds tests, diagnostic tests were also executed. all the results were reported in table 2. based on the results, none of the models had problems of heteroscedasticity. except for mexico's economic growth model, the jarque-bera normality test revealed that the residuals were normally distributed for the growth models of indonesia, nigeria and turkey. the histogram for the normality of residuals for the mint economies are depicted in figure 1a, figure 1b, figure 1c, and figure 1d respectively in the appendix. in addition, the results revealed that the growth models for mexico and nigeria had no problems of serial correlation. however, the economic growth models for indonesia and turkey had problems of serial correlation. furthermore, the results of the ramsey reset test shows the possibility of the growth models not being correctly specified for mexico and indonesia. this is because the probability values of 0.0007 and 0.0000 against the ramsey regression equation specification error test (reset) test for mexico and indonesia respectively were less than the suggested 5 per cent level of significance. hence, the null hypothesis that the model was correctly specified was rejected. however, the economic growth models for nigeria and turkey were correctly specified. table-3. bound test results. country f-statistics significance level lower critical value bound i(0) upper critical value bound i(1) mexico 3.9648 1% 5% 10% 5.17 4.01 3.47 6.36 5.07 4.45 indonesia 4.4956 1% 5% 10% 5.17 4.01 3.47 6.36 5.07 4.45 nigeria 1.3850 1% 5% 10% 5.17 4.01 3.47 6.36 5.07 4.45 turkey 2.2671 1% 5% 10% 5.17 4.01 3.47 6.36 5.07 4.45 note: critical value bounds for the f-statistic from pesaran et al. (2001). 4.3. results of bound test table 3 depicts the results of the bounds f-test. for mexico and indonesia, the f-values falls between the lower critical value bound i(0) and the upper critical value bound i(1). thus, the test was considered inconclusive. however, considering the empirical illustration as depicted in table 2, the f-statistic obtained for mexico (3.9648) and indonesia (4.4956) falls between the lower critical value bound i(0) and the upper critical value bound i(1). hence, we considered both long-run and short-run models for mexico and turkey. on the other hand, the calculated f statistics for nigeria and turkey falls below the lower critical value bound i(0). this implies the absence of a long-run relationship or cointegration among variables. hence, there was no estimation of the ardlecm for nigeria and turkey as a result of the absence of cointegration among the variables. however, the shortrun model was estimated for nigeria and turkey due to no cointegration among variables. economy, 2021, 8(2): 35-48 41 © 2021 by the authors; licensee asian online journal publishing group table-4. results of short-run estimates for the short-run model. country: nigeria dependent variable: rgdppcap variable coefficient std. error t-statistic prob. rgdppcap(-1) 0.2539 0.2085 1.2177 0.2375 rgdppcap(-2) 0.2117 0.2192 0.9661 0.3455 gfcf -0.3211 0.2129 -1.5080 0.1472 gfcf(-1) 0.2466 0.3262 0.7560 0.4585 gfcf(-2) -0.3519 0.2883 -1.2208 0.2364 open 0.0349 0.0914 0.3812 0.7071 open(-1) 0.1498 0.1030 1.4542 0.1614 open(-2) -0.1546 0.0897 -1.7246 0.1000 ggovfce -0.4772 0.6641 -0.7185 0.4807 ggovfce(-1) 0.5943 0.8779 0.6769 0.5062 ggovfce(-2) -0.4240 0.6371 -0.6655 0.5133 c 22.2635 14.7968 1.5046 0.1481 r-squared 0.4962 adjusted r-squared 0.1940 schwarz criterion 6.2160 f-statistic 1.6418 durbin-watson stat 1.8389 prob (f-statistic) 0.1579 country: turkey rgdppcap(-1) 0.0057 0.2270 0.0251 0.9802 rgdppcap(-2) -0.0165 0.2103 -0.0785 0.9382 gfcf -0.5234 0.8925 -0.5865 0.5641 gfcf(-1) 1.7294 1.2253 1.4115 0.1735 gfcf(-2) -1.0741 0.6625 -1.6213 0.1206 open -0.0660 0.1237 -0.5335 0.5996 open(-1) -0.0643 0.2269 -0.2833 0.7798 open(-2) 0.1848 0.1704 1.0849 0.2909 ggovfce -2.5242 1.7138 -1.4728 0.1564 ggovfce(-1) 1.7028 2.2886 0.7441 0.4655 ggovfce(-2) -0.1501 1.4973 -0.1002 0.9212 c 6.7454 20.7135 0.3257 0.7481 r-squared 0.3017 adjusted r-squared -0.1173 schwarz criterion 6.7699 f-statistic 0.7200 durbin-watson stat 2.1620 prob (f-statistic) 0.7167 note: ***, ** and * denote significance at 1%, 5% and 10% respectively. 4.4. results of the short-run model because there was no cointegration among the variables for nigeria and turkey, the short-run model was estimated for both countries. the estimated coefficients for real gdp per capita at first lag were positive and statistically insignificant for both nigeria and turkey. the insignificance of this estimate means that the real gdp of the previous year does not impact on real gdp of the current year in the short run. in addition, the estimates of gross fixed capital formation and general government final consumption expenditure for nigeria and turkey were negative and statistically insignificant. the insignificance nature of these estimates suggests that both gross fixed capital formation and general government final consumption expenditure do not impact economic growth in the short run. based on the results of the short-run model reported in table 4, openness to trade utilized as a proxy for trade liberalization had a positive and insignificant impact on economic growth for nigeria in the short run. the insignificant estimate implies that it does not have an impact on nigeria's economic growth in the short run. however, in the case of turkey, openness to trade exerted a negative and insignificant relationship with economic growth in the short run. table-5. long-run estimates for economic growth model. country gfcf open ggovfce c mexico 0.4828 [0.8912] (0.3833) 0.2771 [1.7578*] (0.0941) 0.5150 [0.5168] (0.6109) -19.1853 [-1.1727] (0.2547) indonesia 0.0076 [0.0375] (0.9705) 0.0374 [0.3002] (0.7672) 1.1617 [1.2604] (0.2220) -7.5152 [-0.5173] (0.6106) note: probability values are in bracket ( ). t-statistics are in [] * denote significance at 10% level. 4.5. results of estimated long-run coefficients the estimated long-run coefficients for gross fixed capital formation was positive and statistically insignificant for both mexico and indonesia. this results contravenes the findings of duru and ezenwe (2020); duru et al. (2020) and duru et al. (2021). the coefficient for trade openness used as a proxy for trade liberalization had a positive and significant relationship with economic growth for mexico. this implies that trade liberalization contributes to economic growth in mexico in the long run. this result is in line with the submissions of nduka (2013); mercan et al. (2013); dao (2014); hamad et al. (2014) and bekele (2017). however, it is contrary to the submissions of duru et al. (2020). however, trade liberalization had a positive and insignificant impact on economic growth in indonesia. the insignificance of this estimate implies that it does not impact economic growth in the long run. this result is contrary to the submissions of duru et al. (2021). furthermore, the coefficients of general economy, 2021, 8(2): 35-48 42 © 2021 by the authors; licensee asian online journal publishing group government final consumption expenditure for both mexico and indonesia was positive and insignificant as reported in table 5. this result finds an advocate in duru et al. (2020). table 6: results of estimated short-run error correction model. country: mexico dependent variable: rgdppcap variable coefficient std. error t-statistic prob. δ(rgdppcap(-1)) -0.0037 0.1597 -0.0235 0.9815 δ(gfcf) 1.8696 0.3566 5.2433*** 0.0000 δ(gfcf(-1)) 0.0847 0.5704 0.1486 0.8834 δ(open) 0.1223 0.1361 0.8989 0.3794 δ(open(-1)) -0.1443 0.1567 -0.9206 0.3682 δ(ggovfce) -2.2661 1.0936 -2.0721** 0.0514 δ(ggovfce(-1)) -0.0969 1.1515 -0.0841 0.9338 ecmt-1 -1.1413 0.2958 -3.8578*** 0.0010 ecm = rgdppcap + 0.4828*gfcf + 02771*open + 0.5150*ggovfce – 19.1853*c – 0.5417*d country: indonesia δ(rgdppcap(-1)) 0.4643 0.2201 2.1096** 0.0477 δ(gfcf) 0.5511 0.4227 1.3037 0.2072 δ(gfcf(-1)) 0.2538 0.3800 0.6680 0.5117 δ(open) -0.3020 0.0626 -4.8237*** 0.0001 δ(open(-1)) 0.0162 0.1016 0.1598 0.8746 δ(ggovfce) -2.0284 1.1360 -1.7856* 0.0893 δ(ggovfce(-1)) 0.2400 1.1596 0.2069 0.8382 ecmt-1 -0.9966 0.2461 -4.0494*** 0.0006 ecm = rgdppcap + 0.0076*gfcf + 0.0374*open + 1.1617*ggovfce – 7.5152*c – 0.0823*d note: ***, ** and * denote significance at 1%, 5% and 10% respectively. the results of the short-run dynamic model are illustrated in table 6. for mexico, change in gross fixed capital formation and change in general government final consumption expenditure was merely the variables that had a statistically significant effect on the change in real gdp per capita in the short run. thus, the change in the gross fixed capital formation of the previous year exerted a positive and significant effect on economic growth. in addition, change in general government final consumption expenditure had a negative and significant effect on economic growth. furthermore, change in trade openness used as a proxy for trade liberalization had a positive and insignificant impact on economic growth. however, in the case of indonesia, the first lag of the dependent variable, change in trade openness and change in general government final consumption expenditure were merely the variables that had a statistically significant effect on the change in real gdp per capita in the short run. hence, the change in the real gdp per capita of the previous year exerted a positive and significant impact on economic growth. also, changes in trade liberalization exerted a negative and significant impact on economic growth. this means that trade liberalization does not contribute to economic growth in the short run. furthermore, change in general government final consumption expenditure had a negative and significant effect on economic growth. the findings showed that all the error correction terms (ect) were negative and statistically significant. the ect measures the speed of adjustment back to long-run equilibrium as a result of a shock. for instance, for mexico, the coefficient of the lagged ect in the growth equation model was -1.1413. it is negative and statistically significant. its coefficient of -1.1413 means that 114% of the previous shock to equilibrium in the long-run economic growth was corrected by it within one year. however, in the case of indonesia, the ect coefficient of -0.9966 means that 100% of the previous shock to equilibrium in the long-run economic growth was corrected by it within one year. the ect coefficient was also negative and statistically significant. table-7. results of the granger causality test (ty augmented lags methods). sources of causation country/dependent variable rgdppcap 𝜒2 open 𝜒2 mexico rgdppcap open 2.7046 3.4141 indonesia rgdppcap open 2.3573 4.9858 nigeria rgdppcap open 10.9709*** 9.2840*** turkey rgdppcap open 1.9548 7.9540** note: *** and ** indicate significance at the 1 per cent and 5 per cent levels respectively. 4.6. the results of toda and yamamoto multivariate causality test the toda and yamamoto causality test was employed to find the causality between real gross domestic product (gdp) per capita and trade openness. the results of the causality test are illustrated in table 7. in the case of mexico, the findings revealed that there was no causal relationship between real gdp per capita and openness to economy, 2021, 8(2): 35-48 43 © 2021 by the authors; licensee asian online journal publishing group trade. thus, the findings implied that there is no causal link between trade liberalization and real gdp per capita in mexico. just like mexico, there was no causal relationship between trade liberalization and real gdp per capita for indonesia. unlike indonesia and mexico, a bi-directional causal relationship between real gdp per capita and trade openness was detected for nigeria. for turkey, a unidirectional causal relationship from trade openness to real gdp per capita was identified. this shows that trade liberalization promotes economic growth in turkey. our causality results for nigeria is in line with the submissions of nwinee and olulu-briggs (2016) and nduka, chukwu, ugbor, and nwakaire (2013). however, it contradicts the findings of yakubu and akanegbu (2018) and tyopev (2019). 5. conclusion and policy implications this study investigated the link between trade liberalization and economic growth in the mint economies using time series data from 1986-2020. the ardl methodology and the toda and yamamoto multivariate causality test were utilized in this study. the long-run results revealed that trade openness had no impact on real gdp per capita except for mexico. even in this situation, trade openness became significant at the 10% level of significance. the results of the causality test showed that no causality was detected between real gross domestic product per capita and trade liberalization for mexico and indonesia. a bidirectional causality between real gross domestic product per capita and trade liberalization was found for nigeria whereas a unidirectional causality from trade liberalization to real gross domestic product per capita was revealed for turkey. the no causality results for mexico and indonesia means that the policy objectives of trade liberalization and economic growth can be pursued independently in both countries. in addition, the bidirectional causality detected for nigeria suggests that the policy objectives of trade liberalization and economic growth can be pursued together in nigeria. furthermore, the unidirectional causality from trade liberalization to real gross domestic product per capita found for turkey implies that she employs trade liberalization policies effectively for objectives of economic growth, thus trade liberalization causes economic growth. references ajayi, e., & araoye, f. 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(2008). international trade theory: capital, knowledge, economic structure, money & prices over time. berlin heidelberg: springerverlag. appendices appendix 1: data set on real gross domestic product per capita of mint economies. table-1. data on rgdppcap of mint economies. year mexico indonesia nigeria turkey 1986 -5.0968586 3.7422332 -2.5099486 4.888763818 1987 -0.3338109 2.891931495 0.52584855 7.402176226 1988 -0.7083912 3.80170995 4.5469365 0.447775659 1989 2.10829938 5.507034964 -0.7088532 -1.486309099 1990 3.20338291 5.3479457 8.93068727 7.383071281 1991 2.30201264 5.07105896 -2.164465 -0.967257707 1992 1.68311479 4.711831054 2.02582456 3.324226368 1993 0.15792316 4.760224439 -4.4570781 5.931883178 1994 3.15906427 5.839520704 -4.2328183 -6.175858761 1995 -7.8317514 6.562205374 -2.5300523 6.17718775 1996 5.07244944 6.217928008 1.63459401 5.686793303 1997 5.193558 3.189871378 0.40682595 5.886121916 1998 3.58158308 14.35055602 0.05719452 0.806059059 1999 1.24783802 0.605436819 -1.8957202 -4.750586281 2000 3.44097633 3.482210606 2.4191326 5.32213582 2001 -1.7929026 2.235179698 3.29057075 -7.147845597 2002 -1.4029391 3.090635928 12.4574682 4.890330717 2003 0.07226822 3.376532827 4.65778629 4.252446053 2004 2.49483102 3.630908791 6.48960368 8.28603301 2005 0.86952153 4.289591484 3.72162394 7.559697386 2006 2.98443254 4.107514355 3.32621788 5.620645339 2007 0.78256904 4.946468138 3.8220723 3.797987497 2008 -0.357633 4.620033675 3.97251049 -0.382922616 2009 -6.6741654 3.247328238 5.19795441 -6.027912669 2010 3.61719033 4.812273068 5.15854535 6.919606567 economy, 2021, 8(2): 35-48 45 © 2021 by the authors; licensee asian online journal publishing group 2011 2.22716348 4.748318533 2.52532223 9.509983157 2012 2.24713983 4.606485522 1.47285123 3.093101823 2013 0.0294528 4.151428229 3.85372268 6.664883623 2014 1.54403511 3.639072303 3.51397656 3.168090824 2015 2.01903688 3.555062495 -0.0292823 4.328127771 2016 1.40302067 3.758837332 -4.1683884 1.642463409 2017 0.93145654 3.841197264 -1.7888176 5.794264413 2018 1.05031157 3.987824861 -0.6797247 1.428914877 2019 -1.1393691 3.871444142 -0.3797524 -0.40134604 2020 -9.2054 -3.10714219 -4.2601131 0.659370381 source: world bank, world development indicators database. appendix 2. data set on gross fixed capital formation of mint economies. table-2. data on gfcf of mint economies. year mexico indonesia nigeria turkey 1986 18.72587 25.551 54.94827 25.551 1987 17.54044 25.17103 50.04989 25.17103 1988 18.67873 26.99156 43.75477 26.99156 1989 17.37131 28.53473 52.48744 28.53473 1990 17.97946 30.55156 53.12219 30.55156 1991 18.73103 29.67142 48.40018 29.67142 1992 19.6226 28.00259 43.77439 28.00259 1993 20.84942 26.28067 44.47636 26.28067 1994 21.67319 27.57069 42.06784 27.57069 1995 16.35404 28.42981 37.20593 28.42981 1996 18.41382 29.60236 36.58167 29.60236 1997 19.84665 28.30768 38.42226 28.30768 1998 21.08837 25.42951 40.5534 25.42951 1999 21.11672 20.13876 38.278 20.13876 2000 21.48889 19.85085 34.04928 19.85085 2001 19.9337 19.67266 30.03794 19.67266 2002 19.26942 19.42916 26.76866 19.42916 2003 19.7779 19.50606 28.3709 19.50606 2004 20.47646 22.44862 26.06325 22.44862 2005 20.70371 23.64051 24.96612 23.64051 2006 21.54334 24.13099 26.1665 24.13099 2007 21.94191 24.94694 20.18004 24.94694 2008 23.16439 27.69859 18.85977 27.69859 2009 22.12647 31.11477 21.11545 31.11477 2010 21.5827 30.99941 16.81501 30.99941 2011 22.27391 31.30745 15.67631 31.30745 2012 22.84044 32.71963 14.21112 32.71963 2013 21.25247 31.96578 14.16873 31.96578 2014 20.99786 32.51674 15.08353 32.51674 2015 22.43071 32.81193 14.82718 32.81193 2016 22.80226 32.57773 14.72496 32.57773 2017 22.09217 32.16064 14.71562 32.16064 2018 22.0425 32.2885 19.01838 32.2885 2019 20.66706 32.34713 24.62523 32.34713 2020 18.78994 31.73343 28.64594 31.73343 source: world bank, world development indicators database appendix 3. data set on trade openness of mint economies table-3. data on open of mint economies. year mexico indonesia nigeria turkey 1986 29.60622 41.00954 9.135846 41.00954 1987 31.26232 46.97425 19.49534 46.97425 1988 38.79034 47.25456 16.94061 47.25456 1989 38.32965 49.08188 34.18262 49.08188 1990 38.5197 52.89186 30.92474 52.89186 1991 35.78654 54.83956 37.0216 54.83956 1992 35.5535 57.42743 38.22739 57.42743 1993 27.82791 50.52339 33.71975 50.52339 1994 30.70997 51.8771 23.05924 51.8771 1995 46.32102 53.95859 39.52838 53.95859 1996 50.4192 52.26474 40.25773 52.26474 1997 48.77736 55.99386 51.46101 55.99386 1998 50.99612 96.18619 39.27861 96.18619 1999 50.61797 62.94391 34.45783 62.94391 2000 52.43268 71.43688 48.9956 71.43688 2001 47.16607 69.79321 49.6805 69.79321 2002 46.69791 59.07946 40.03517 59.07946 2003 50.20569 53.61649 49.33496 53.61649 economy, 2021, 8(2): 35-48 46 © 2021 by the authors; licensee asian online journal publishing group 2004 53.48615 59.76129 31.89587 59.76129 2005 53.93813 63.98794 33.05946 63.98794 2006 56.09272 56.65713 42.56657 56.65713 2007 56.79528 54.82925 39.33693 54.82925 2008 57.77703 58.5614 40.79684 58.5614 2009 55.96777 45.51212 36.05871 45.51212 2010 60.76032 46.70127 43.32076 46.70127 2011 63.46968 50.18001 53.27796 50.18001 2012 65.76725 49.5829 44.53237 49.5829 2013 63.76488 48.63737 31.04886 48.63737 2014 64.92536 48.08018 30.88519 48.08018 2015 71.08909 41.93764 21.33265 41.93764 2016 76.06221 37.42134 20.72252 37.42134 2017 77.11574 39.3555 26.3476 39.3555 2018 80.5633 43.07431 33.00783 43.07431 2019 77.91529 37.44878 34.02388 37.44878 2020 77.98212 33.19059 25.39979 33.19059 source: world bank, world development indicators database. appendix 4. data set on general government final consumption expenditure of mint economies table-4. data on ggovfce of mint economies. year mexico indonesia nigeria turkey 1986 8.756565 11.24248 1.929236 7.588005 1987 8.358128 9.424605 1.632709 7.822874 1988 8.484909 8.976333 1.552698 7.612643 1989 8.327433 9.389376 1.315222 9.343364 1990 8.430745 9.534441 1.220141 10.96102 1991 9.115903 9.138088 1.220982 12.41925 1992 9.942875 9.516266 2.047629 12.92502 1993 9.114783 9.023312 2.148452 12.89387 1994 9.466826 8.114181 1.769021 11.65737 1995 8.55116 7.829064 1.166196 10.7858 1996 8.119714 7.566959 0.911235 11.57077 1997 8.261602 6.842805 0.912571 12.25939 1998 8.543129 5.693508 1.375668 10.61322 1999 9.178512 6.604457 1.383378 12.66856 2000 9.515219 6.531995 2.123442 11.92866 2001 9.881126 6.889059 1.990621 12.64592 2002 10.37772 7.257458 1.340488 12.83567 2003 11.03379 8.129486 0.951747 12.59042 2004 10.48729 8.321868 4.787637 12.3152 2005 10.52171 8.109508 4.544547 12.18597 2006 10.34442 8.627169 5.125842 12.90753 2007 10.40538 8.34647 9.44834 13.38969 2008 10.72952 8.423781 9.428957 13.59629 2009 11.91696 9.589178 8.649948 15.65786 2010 11.77136 9.005915 8.8481 14.87456 2011 11.77708 9.058677 8.572152 13.60036 2012 11.94673 9.248788 8.228178 14.12612 2013 12.19139 9.51772 7.155219 14.01838 2014 12.19496 9.425026 6.464486 14.01998 2015 12.3172 9.749414 5.935159 13.80517 2016 12.01041 9.52781 5.384282 14.73321 2017 11.6166 9.120571 4.403315 14.38026 2018 11.57089 9.021232 5.604329 14.68642 2019 11.35833 8.809677 5.572002 15.52729 2020 12.75341 9.289052 8.707691 15.24316 source: world bank, world development indicators database economy, 2021, 8(2): 35-48 47 © 2021 by the authors; licensee asian online journal publishing group appendix 5a: graph of diagnostic test for mexico 0 1 2 3 4 5 6 7 8 -5 -4 -3 -2 -1 0 1 2 3 series: residuals sample 1988 2020 observations 33 mean 3.42e-15 median 0.459148 maximum 2.600107 minimum -4.535895 std. dev. 1.776660 skewness -1.067945 kurtosis 3.796305 jarque-bera 7.144671 probability 0.028090 figure-1a. histogram for normality of residuals for mexico. source: extract from e-views econometric software. appendix-5b. graph of diagnostic test for indonesia. 0 1 2 3 4 5 6 7 -4 -3 -2 -1 0 1 2 3 series: residuals sample 1988 2020 observations 33 mean -2.56e-15 median 0.171742 maximum 2.808352 minimum -4.472006 std. dev. 1.727399 skewness -0.675743 kurtosis 3.209787 jarque-bera 2.571969 probability 0.276378 figure-1b. histogram for normality of residuals for indonesia. source: extract from e-views econometric software. appendix-5c. graph of diagnostic test for nigeria. 0 1 2 3 4 5 6 7 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 series: residuals sample 1988 2020 observations 33 mean 3.35e-15 median -0.216977 maximum 8.592356 minimum -4.120166 std. dev. 2.761376 skewness 0.706850 kurtosis 4.081396 jarque-bera 4.355951 probability 0.113271 figure-1c. histogram for normality of residuals for nigeria. source: extract from e-views econometric software economy, 2021, 8(2): 35-48 48 © 2021 by the authors; licensee asian online journal publishing group appendix-5d. graph of diagnostic test for turkey. 0 1 2 3 4 5 6 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 series: residuals sample 1988 2020 observations 33 mean -2.79e-15 median 0.433369 maximum 6.621809 minimum -9.331744 std. dev. 3.642632 skewness -0.399565 kurtosis 3.085635 jarque-bera 0.888172 probability 0.641410 figure-1d. histogram for normality of residuals for turkey. source: extract from e-views econometrics software. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. 26 © 2021 by the authors; licensee asian online journal publishing group economy vol. 8, no. 2, 26-34, 2021 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2021.82.26.34 © 2021 by the authors; licensee asian online journal publishing group does terms of trade matter for economic growth? a focus on natural resourcerich sub-saharan african countries nzeh innocent chile1 benedict i. uzoechina2 millicent adanne eze3 chika p. imoagwu4 ozoh joan nwamaka5 ( corresponding author) 1department of economics, renaissance university, ugbawka, enugu state, nigeria. 1email: nzechile@yahoo.com tel: +234-8034222084 2department of economics, nnamdi azikiwe university, awka, anambra state, nigeria. 2email: ib.uzoechina@unizik.edu.ng tel: +234-8063304867 3school of business and social sciences, abertay university, dundee, united kingdom. 3email: ezemillicent@gmail.com tel: (+44)7459452103 4,5department of economics, nnamdi azikiwe university, awka, anambra state, nigeria. 4email: cp.imoagwu@unizik.edu.ng tel: +234-8035774516 5email: jn.ozoh@unizik.edu.ng tel: +234-8066678226 abstract the contention that deteriorating terms of trade exists in countries that rely heavily on the exploitation and export of natural resources motivated us in this study. we therefore sought to investigate the impact of terms of trade on economic growth in natural resource-rich sub-saharan african countries. we carried out the study using annual series that span a period of 1990-2019 under the framework of panel random and fixed effects. our findings indicate that a long run relationship exists between gdp and the explanatory variables used in the study. results also show that, while cross-section random effects indicates that terms of trade positively impacts on gdp, period fixed effects shows that terms of trade negatively impacts on gdp even though it is not significant. results of our study also show that in all the models, labour force total and fdi have positive impact on gdp, while trade openness impacts on gdp negatively. we therefore recommend that the ssa natural resource-rich countries should diversify their economies away from the traditional natural resources base. also human capital should be improved through sound education and training, while all the bottlenecks that constrain the inflow of foreign direct investment should be dismantled. keywords: natural resources, gdp, random effects, fixed effects, terms of trade, labour force, fdi. jel classification: n57; o40; c33; f10; j21; f21. citation | nzeh innocent chile; benedict i. uzoechina; millicent adanne eze; chika p. imoagwu; ozoh joan nwamaka (2021). does terms of trade matter for economic growth? a focus on natural resource-rich sub-saharan african countries. economy, 8(2): 2634. history: received: 15 september 2021 revised: 18 october 2021 accepted: 12 october 2021 published: 8 december 2021 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group acknowledgement: all authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. background to the study ................................................................................................................................................................ 27 2. theoretical issues relating to terms of trade ........................................................................................................................ 29 3. methodology ..................................................................................................................................................................................... 30 4. results of descriptive statistics ................................................................................................................................................... 31 5. conclusion and recommendations ............................................................................................................................................... 34 references .............................................................................................................................................................................................. 34 mailto:nzechile@yahoo.com mailto:ib.uzoechina@unizik.edu.ng mailto:ezemillicent@gmail.com mailto:cp.imoagwu@unizik.edu.ng mailto:jn.ozoh@unizik.edu.ng http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ https://www.doi.org/10.20448/journal.502.2021.82.26.34 https://orcid.org/0000-0002-1754-7446 https://orcid.org/0000-0003-4458-7133 https://www.doi.org/10.20448/journal.502.2021.82.26.34 https://orcid.org/0000-0002-1754-7446 https://orcid.org/0000-0003-4458-7133 https://www.doi.org/10.20448/journal.502.2021.82.26.34 https://orcid.org/0000-0002-1754-7446 https://orcid.org/0000-0003-4458-7133 https://www.doi.org/10.20448/journal.502.2021.82.26.34 https://orcid.org/0000-0002-1754-7446 https://orcid.org/0000-0003-4458-7133 economy, 2021, 8(2): 26-34 27 © 2021 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study contributes to the existing literature by focusing on the link between terms of trade and economic growth in natural resource-rich sub-saharan african countries. 1. background to the study the contribution of international trade on economic growth has been emphasized since the days of classical economists such as adam smith and david ricardo. by offering opportunities for countries to export their products to other countries, international trade enables countries to earn income that is used to facilitate further, the development of the domestic economy. the growth effect of international trade is evaluated from, among other factors, the terms of trade condition facing the export price of countries and some studies have pointed to a positive link between economic growth and terms of trade. for instance, terms of trade improvement has been found to encourage higher levels of investment, thus rapid economic growth (mendoza, 1997). in corroborating this stance, easterly, kremer, pritchett, and summers (1993) find that variability in terms of trade are highly correlated with growth and this conforms to findings of studies by barro and sala-i-martin (1995) and fischer (1993). through international trade, countries can specialize in the production and export of products that they have comparative advantage. notwithstanding the gains inherent with specialization, it comes with its own drawback. this limitation puts a constraint on the developing countries whose trade relation with developed countries is usually lopsided. as noted in separate studies by prebisch and singer, developed countries specialize in the production and exports of manufactured products and services that have low substitutes and enjoy stable prices. on the other hand, developing countries, with their weak industrial base, specialize in production and exports of primary commodities that are highly competitive and which experience volatility in prices. deterioration in terms of trade is therefore among the determinants of widening income gap between developing countries and developed countries. sachs and warner (2001) observed that specialization in the production and export of primary products is a major determinant of economic outcome our study is focused on natural resource-rich sub-saharan african (ssa) countries which fall under the developing countries hypothesized to be likely faced with deteriorating terms of trade. we are motivated by the fact that rich natural resource endowments have been found to induce countries endowed with them to abandon their critical sectors by failing to diversify their economies and this tendency ends up depressing their gdp. natural resources abundant countries usually face resource-curse and dutch disease syndrome as they are rigidly stuck to the exploitation and exportation of the abundant natural resources. a study by carmignani and chowdhury (2007) has shown that undue dependence on the export of primary commodities negatively affect economic growth in ssa. irrespective of the fact that a preponderance of studies have been done on the link between terms of trade and economic growth, in literature; there is an absence of studies of such in the context of natural resource-rich sub-saharan african countries. our paper thus aims to fill this gap in literature by investigating the nexus between terms of trade and economic growth in ssa countries. 1.1. stylized facts on sub-saharan african countries by virtue of their huge natural resource deposits, the ssa countries usually export their commodities unprocessed. several theoretical views have been raised concerning the deteriorating export price of commodities in relation to industrialized goods. figure 1 below shows that congo democratic republic and mauritania are the two countries with the highest receipt of natural resources rent respectively and this is followed by nigeria. south africa and botswana are the least recipient of natural resources rent within the study period. in 2003, 2009 and 2011 through 2019 congo democratic republic was on top of other countries in her receipt of natural resources rent and in 2008 and 2010, mauritania got the highest rent. with respect to terms of trade, evidence from figure 2 below shows that nigeria has the highest terms of trade (proxied by net barter term of trade) and this is followed by mauritania and south africa respectively. it should be noted that the highest recipient of natural resources rent are hardly the countries with the highest terms of trade. a case in point here is congo democratic republic which has a high natural resources rent but has a very low terms of trade. worthy of note also is the fact that nigeria and south africa which are the most industrialized countries among the group are rarely the highest natural resources rent recipients but their terms of trade is high. the implication of this development is that commodity terms of trade in counties with huge natural resources rent deteriorates compared to countries with a relative industrial development. the fact that nigeria has the highest terms of trade within the sample period could be because of export from her huge deposit of oil couple with her relative high industrial base. figure-1. trend of natural resources rent in selected ssa countries. economy, 2021, 8(2): 26-34 28 © 2021 by the authors; licensee asian online journal publishing group figure-2. trend in net barter terms of trade in selected ssa countries. in terms of export share to gdp, figure 3 below shows that in all the years, botswana’s export share to gdp is the highest and this is followed by mauritania and congo democratic republic, respectively. figure 2 above shows that botswana, even with her high share of export to gdp, is among the countries with the least terms of trade. this implies that her terms of trade deteriorates vis-à-vis her trading partners. we also noticed that the two countries in the group with the highest gdp, namely: nigeria and south africa have a lower export to gdp. with a relatively high concentration of business activities in these two countries, the proportion of export to gdp is expectedly low as many domestic business activities not meant for export contribute to gdp. for instance, around 2014, nigeria rebased her economy by incorporating the contribution of some sectors such as the telecommunication that were hitherto not included in her gdp. consequently, the country’s gdp expanded and became the highest in africa with the period. figure-3. trend in export in selected ssa countries. with respect to the share of import to gdp, figure 4 below shows that in 2005 through 2008, mauritania’s import as a percentage of gdp is highest compared to other countries in the sample. in 2009 and 2010 as well as 2012 through 2015 botswana’s share of import to gdp was highest. evidence in figure 2 above shows that botswana’s term of trade is very low and this is owing to her high import share of gdp. sierra leone’s share of import to gdp was the highest between 2011 and 2016. in a similar vein, the import share of sierra leone to her gdp accounts for her low terms of trade within the sample period. we noticed that nigeria and south africa which are the two countries with the biggest gdp has the least share of import as a percentage of gdp. this shows that import in these countries take only a smaller portion of their relatively huge gdp. economy, 2021, 8(2): 26-34 29 © 2021 by the authors; licensee asian online journal publishing group figure-4. trend in import in selected ssa countries. 2. theoretical issues relating to terms of trade over the years, several theories have been developed to help explain the relationship between countries’ terms of trade and their economic performance. in 1950, raoul prebisch and hans singer raised a popular argument that developing countries which exported primary products and imported manufactured products had experienced both a decline in their terms of trade and depressing incomes. specifically, prebisch raised the concern over trade relationship between developed and developing countries by observing that since developing countries export more of primary products that are less competitive at the international market, the commodity terms of trade usually deteriorates in relation to industrialized goods. with a low-income elasticity of demand for primary commodities, prebisch observed that the demand for goods of this kind does not keep pace with income. by implication, developing countries tend to compete more intensely with each other for markets for their commodities. they go about this through reduction in prices; which ultimately affect their terms of trade with developed countries. if a country’s terms of trade continues to deteriorate, it implies that this country will experience a decline in the purchasing power of these exports vis-à-vis the value of goods and services imported from abroad. this viewpoint is in sync with the observation by hans singer in a separate study, thus this is referred to in the literature as the prebisch-singer thesis. in another direction, thirlwall (1979) provided an explanation for why the trade balance is linked to economic growth. thirlwall model was used to explain the export performance and import behavior in determining the longterm economic growth. it observed that by increasing foreign exchange revenue generated through export sale of commodities, such provides avenue to sustainably finance increasing imports arising from increased domestic economic activity. bruno and sachs (1985) also provided explanation for the nexus between commodity prices and economic activity. two channels were identified by bruno and sachs (1985) through which commodity prices can influence output. the first is that changes in commodity prices will shift the factor price frontier and the second is that commodity prices affect demand through real wages, employment and the world distribution of wealth. 2.1. empirical literature over the years, there has been wide interest in the study that investigates the nexus between terms of trade and economic growth. it is noteworthy however, that there has never been a uniform outcome of the appropriate link between the two as while some studies show a negative link, some indicate that terms of trade is positively related to gdp. using time series data from 1990-2008, fatima (2010) examined terms of trade behavior in pakistan. the paper finds that unfavourable terms of trade has a negative impact on economic growth of pakistan, as it ultimately reduces gross domestic product. in a study involving 94 developed and developing countries over a period of 20042008, jawaid and waheed (2011) showed that terms of trade has a significant and positive effect on economic growth. in india, jawaid. and raza (2012) using annual series spanning a period of 1980-2010, found a significant and positive long run relationship between terms of trade and economic growth. the study also found that the volatility of terms of trade has negative and significant effect on economic growth. in another cross-country study involving sub-saharan african countries, mputu (2016) investigated the nexus between terms of trade, trade openness and economic growth. under the framework of fixed and random effects models and over a period of 1980-2011, finding show that terms of trade has a positive relationship with gdp level in ssa countries in a study for china, jebran, iqbal, bhat, and ali (2018) using the framework of ardl over a period of 1980– 2013, revealed that terms of trade significantly and adversely affects economic growth in the short run as well as in the long run. the granger causality results revealed a unidirectional causality running from terms of trade to labor force. another study for pakistan by jebran et al. (2018) using the ardl and over a period of 1980-2013, showed a significant negative long-run and short-run effects of terms of trade on economic growth. this finding finds support in fatima (2010). dabas and delbianco (2019) investigates the effects of the ratio of exports/gdp and the terms of trade on growth among countries with different level of development and openness and found that terms of trade is not favourable to the growth prospects of poor countries. in a cross-country study involving developing countries, jawaid.., waheed, and siddiqui (2020) showed a mixed result. while in some countries, terms of trade has a positive impact on gdp, in others the impact is negative. another cross-country study involving some economy, 2021, 8(2): 26-34 30 © 2021 by the authors; licensee asian online journal publishing group countries in the european union by blavasciunaite, garsviene, and matuzeviciute (2020) indicated that deterioration of trade balance reduces average economic growth. 3. methodology in this study, we estimated the relationship between gdp and the regressors under the framework of the panel data models. panel data model allows a control for variables that cannot be observed or measured such as fiscal or exchange rate policies that change over time but not across entities like countries. the model uses subscript i to denote individual entities while t refers to time periods. for example, in a panel data model with yit as the dependent variable, this is denoted as i…..1,….,n across all time periods t = 1,…,t. the primary difference between panel data models and time series models is that panel data models allow for heterogeneity across groups and introduce individual-specific effects. we explored three different models in this study, namely: the pooled ols, fixed effects and random effects by comparing the estimated results of their parameters. the pooled ols can be explained below in equation 1 as follows: (1) in equation 1 above, x represents the observable characteristics such as income level and  is the coefficient of the observable parameter, while  and it are the intercept term and error term respectively. under the pooled ols, there are no unobservable individual-specific effects as the intercept captures a uniform effect for all the entities. the panel data can thus be treated as one large, pooled dataset. the implication is that, if we proceed to estimate  without accounting for heterogeneity within individual groups, the estimator will be inconsistent and biased. as a departure from the pooled ols, the fixed effects model introduces heterogeneity by assuming that individual-specific factors may impact or bias the independent variables and as such there is need to control them. the assumption is that correlation exists between individual entity’s error term and the independent variables. fixed effects remove the effect of such time-invariant characteristics in a way that it enables one to investigate the net effect of the explanatory variables on the dependent variable. fixed effects model also assumes that those timeinvariant features are unique to the individual entity and should not be correlated with other individual characteristics. each individual entity is unique; hence an error term belonging to any entity as well as the constant that captures individual characteristics should not be correlated with the others. if such should occur, the fixed effect model is not suitable because any inference drawn with the outcome of its result may be misleading. the fixed effect model is specified in equation 2 below as follows: (2) where )...1( nii  is the unknown intercept for each entity (n entity-specific intercepts), ity is the dependent variable (i = entity and t = time), itx represents the explanatory variables for each entity at t, 1 is the coefficient of the explanatory variables, it represents the error term failure to use the fixed effects model, the alternative model should be random effects model. a major distinguishing factor behind random effects model is that, unlike the fixed effects model, the changes across individual entities is assumed to be random and uncorrelated with the independent variables included in the model. the assumption under the random effects that the individual entity’s error term is not correlated with the regressors means that time-invariant variables such as fiscal or monetary policies are allowed to play a role as explanatory variables. in the fixed effects model these time-invariant variables are absorbed by the intercept. with random effect model, one can generalize the inferences beyond the sample used in the model, however; the problem with this model is that some variables may not be available such that it may lead to omitted variable bias in the model. the random effects model is specified in equation 3 below as follows: (3) where it is between entity error term and it is within entity error term beyond specifying the model linking economic growth and terms of trade, we considered other variables such as trade openness, capital and labour which are equally important determinants of economic growth. our model specification is a panel data model modified from mputu (2016) and equation 4 below captures the model (4) where itgdp = gross domestic product (a proxy for economic growth) in year t for country i. o = intercept term itnbtot = net barter terms of trade ( a proxy for terms of trade) in year t for country i. itfdi = foreign direct investment in year t for country i. itgfcf = gross fixed capital formation in year t for country i. itlft = labour force total in year t for country i. ittopen = trade openness in year t for country i. it = between entity error term. it = within entity error term. economy, 2021, 8(2): 26-34 31 © 2021 by the authors; licensee asian online journal publishing group 3.1. data and sources we used annual dataset in this study covering a period of 1990-2019 and the time period considered is informed by data availability of some of the variables included in the study. all the data were sourced from the world bank’s world development index data bank. the countries selected in our study were informed by the grouping done by the economic commission for africa in her 2011 report that grouped sub-saharan african countries on the basis of resource-rich, resource-poor and landlocked countries. the countries that fall under resource-rich which we included in our study are: nigeria, south africa, botswana, congo democratic republic, sierra leone and mauritania. we used gdp at constant 2010 us$ to proxy economic growth. following mputu (2016) we used net barter terms of trade index (2000 = 100) as an indicator for terms of trade. net inflows at current us$ was used to represent foreign direct investment. gross fixed capital formation (% of gdp) was used to represent gross fixed capital formation and trade openness was calculated as the ratio of the sum of export and import. we logged gdp and fdi in excel package before including them in the estimation. 4. results of descriptive statistics table 1 below displays the results of descriptive statistics of the variables used in the study. evidence from the results indicate that the mean value of gdp, net barter terms of trade, gross fixed capital formation, labour force total, foreign direct investment and trade openness are: 10.41935, 104.6052, 23.09278, 6.742246, 8.486756 and 11.64456, respectively. the variable with the highest mean is net barter terms of trade with a standard deviation of 41.44478. on the other hand the variable with the lowest mean value is labour force total with a standard deviation of 0.727383.in terms of the range, the variable that exhibited the highest range is net barter terms of trade, indicating that the variable experiences volatility within the study period. the test of skewness shows that all the variables we applied in the study are skewed to the right, while they also exhibited platykurtic in their kurtosis. the jarque bera statistics show that with probability values of the variable which are less than 5 percent, the series are normally distributed. table-1. descriptive statistics. gdp nbtot gfcf lft fdi topen mean 10.41935 104.6052 23.09278 6.742246 8.486756 11.64456 median 10.21180 100.0000 21.31350 7.130176 8.622676 11.82139 maximum 11.67867 224.6432 93.54746 7.800901 9.994977 13.22011 minimum 9.113214 0.000000 0.000000 5.632815 5.020713 9.545307 std. dev. 0.848263 41.44478 12.89481 0.727383 1.000305 1.003765 skewness 0.193410 0.080522 1.061048 -0.057413 -0.942510 -0.382608 kurtosis 1.546182 4.282272 7.097017 1.307929 3.911547 1.966956 jarque-bera 15.27671 11.27355 143.6997 19.41495 29.59348 11.15598 probability 0.000482 0.003564 0.000000 0.000061 0.000000 0.003780 sum 1687.935 16946.04 3741.030 1092.244 1374.855 1886.419 sum sq. dev. 115.8477 276544.9 26770.45 85.18280 161.0982 162.2147 observations 162 162 162 162 162 162 4.1. results of panel unit roots in order to confirm the stationarity of the series used in the study so as to avoid the problem of the results being spurious, the panel unit root tests we conducted are presented in table 1 and 2 below. to carry out the tests, we utilized the levin, lin & chu (llc), im, pesaran and shin (ips), augment dickey fuller-fisher (adf-fisher) and phillp-perron-fisher (pp-fisher) tests in this study. we decomposed the test into two sections. one section comprised of ips, adf-fisher and pp-fisher deals with the null hypothesis of the existence of unit root for individual countries and the other section, comprising llc deals with the existence of unit root for all the countries pooled together. in table 2, the results at level indicate that gross fixed capital formation, foreign direct investment and trade openness achieved stationairy at level, ie, i(0) under the llc. also, under ips and adffisher, gross fixed capital formation and foreign direct investment attained stationarity at level. lastly, under the pp-fisher, gross fixed capital formation and trade openness achieved stationarity at level. the results so far indicate that we cannot continue the analysis based on the outcome of unit root test at level. this is because we cannot reject the null hypothesis of no unit root on all the variables. table-2. result of panel unit root at level. common unit root individual unit root series llc ips adf-fisher pp-fisher gdp 1.65685(0.9512) 4.80080(1.0000) 0.69790(1.0000) 0.16116(1.0000) nbtot 0.56658(0.7145) 0.84922(0.8021) 6.88317(0.8652) 8.56876( 0.7393) gfcf -2.11267(0.0173)* -2.20526(0.0137)* 22.7924(0.0295)* 35.0049(0.0005)* lft 1.50505(0.9338) 3.91597(1.0000) 1.44229(0.9999) 3.95019(0.9843) fdi -3.24064(0.0006)* -2.01848(0.0218)* 23.1447(0.0265)* 17.7510(0.1235) topen -1.94754(0.0257)* 1.22607(0.8899) 6.30656(0.8998) 18.8968( 0.0910)** note: * and ** signify significant levels at both the 5% and 10% respectively. since not all the series achieved stationarity at level, we proceeded to investigate their stationarity at first difference as shown in table 3 below. from the results, only labour force total did not achieve stationarity under llc, while other series became stationary at the 5 percent level. under the ips, adf-fisher and pp-fisher, all the series achieved stationarity at the 5 percent level. therefore, after first difference, all the series we employed in the study became i(1). economy, 2021, 8(2): 26-34 32 © 2021 by the authors; licensee asian online journal publishing group table-3. result of panel unit root at first difference. common unit root individual unit root llc ips adf fisher pp-fisher ∆gdp -3.72235(0.0001)* -4.68957( 0.0000)* 45.6192( 0.0000)* 57.0196( 0.0000)* ∆nbtot -5.00232(0.0000)* -6.55118(0.0000)* 63.6629(0.0000)* 111.065(0.0000)* ∆gfcf -6.92952( 0.0000)* -7.65763( 0.0000)* 76.5362( 0.0000)* 104.383( 0.0000)* ∆lft -1.23676(0.1081) -2.56349( 0.0052)* 27.1787(0.0073)* 49.0163(0.0000)* ∆fdi -4.67977(0.0000)* -7.08865( 0.0000)* 69.4274( 0.0000)* 189.935( 0.0000)* ∆topen -7.02833(0.0000)* -6.09969(0.0000)* 59.0359(0.0000)* 87.9075(0.0000)* note: * and ** signify significant levels at both the 5% and 10% respectively. 4.2. panel co-integration test having confirmed that the series do not have unit root, we went ahead to conduct a co-integration test to ascertain whether there is a long-run association or equilibrium among the series. we employed the kao cointegration test to achieve this. the kao test is based on the test of significant of the residual under the null hypothesis of no co-integration. from the result in table 4, the coefficient of the residual is -0.107656 with a tstatistic of -2.680084 and p-value of 0.0083 which is lower than 5 percent. consequently, we cannot accept the null hypothesis, thus meaning that a long-run equilibrium exists among the variables. table-4. kao co-integration result. kao residual co-integration test series: gdp nbtot fdi gfcf lft topen dependent variable: d(resid) sample: 1990 2019 null hypothesis: no co-integration variable coefficient std. error t-statistic prob. resid(-1) -0.107656 0.040169 -2.680084 0.0083 4.3. results of panel models with the result showing that the series are co-integrated, we present and discuss the estimated results of the coefficients of the parameters in all the models. we decided to estimate a pooled ordinary least square (ols) which we present for comparison sake. next we present the panel fixed and random effects results. however, before that, we have to decide on which panel estimation technique is preferable. that is, between random and fixed effects techniques which one is more appropriate? to evaluate this, we employed the hausman’s chi-square statistic. the hausman test is conducted under the assumption that the random effect is being uncorrelated with the explanatory variables. under the null hypothesis that the error term does not have any correlation with the explanatory variables, the random effect is more appropriate if it passes this test. as a guide to this test, we tested for both the period random effect and the cross-section random effect. these tests are displayed in table 5 below and the results show that under the cross-section test, random effect is more appropriate as we cannot reject the null hypothesis of the error terms not being correlated with the explanatory variables. however, at the 5 percent level and under the period effect, fixed effect technique is more appropriate since we have every reason to reject the null hypothesis. thus, we can estimate a cross-section random effect model to obtain the parameter estimates. table-5. the hausman test. hausman test for cross-section random effect test summary chi-sq. statistic chi-sq. d.f prob cross-section random 5.210925 5 0.3907 hausman test for period random effect test summary chi-sq. statistic chi-sq. d.f prob period random 9 .840208 5 0.0799 since the result of the hausman test for period random effect indicates that we cannot accept the null hypothesis, we have to consider estimating a fixed effect model. however, in order to apply the appropriate model under the fixed effect, we have to conduct a joint significance test of the fixed effects estimates in least squares specifications. this test is based on the null hypothesis that there is no presence of cross-section fixed and period fixed effects. if the chi-square is significant, we reject the null hypothesis that the effects are redundant. from the result in table 6 below, we cannot reject the hypothesis of non-existence of period effect as the p-value of the estimate is 0.9731 which is higher than the 5 percent level. consequently, we are going to estimate period fixed effects in order to obtain the parameter estimates. table-6. fixed effect tests. cross-section fixed effects test effects test statistic d.f. prob. cross-section f 836.145048 (5,151) 0.0000 cross-section chi-square 543.743498 5 0.0000 period fixed effects effects test statistic d.f. prob. period f 0.460889 (29,127) 0.9913 period chi-square 16.210469 29 0.9731 the results presented in table 7 below show that under the pooled ols, net barter terms of trade negatively and significantly influences gdp. we also find that gross fixed capital formation, labour force total and foreign direct investment are all positively related to gdp, even though the effect of gross fixed capital formation is not economy, 2021, 8(2): 26-34 33 © 2021 by the authors; licensee asian online journal publishing group significant. trade openness is however found to negatively influence economic growth. theoretically, most of the pooled ols results certify the apriori expectations, however; since the model does not accommodate the heterogeneity associated with the individual cross-sections, these results cannot be used for policy formulation. table-7. pooled ols results. variables coefficient std. error t-statistic prob. constant 4.974968 0.335272 14.83861 0.0000 nbtot -0.000134 0.000793 -0.169252 0.8658 gfcf 0.003117 0.002184 1.427330 0.1555 lft 1.198399 0.060505 19.80652 0.0000 fdi 0.311343 0.037975 8.198546 0.0000 topen -0.458218 0.043779 -10.46654 0.0000 r2 0.865834 f-stat. 201.3470 prob.(f-statistic) 0.000000 dw2 0.265694 under the cross-section random effect results in table 8 below, net barter terms of trade positively and significantly impact on gdp. this result is a complete departure from the result of the pooled ols result. the implication of the result is that favourable terms of trade lead to improvement in the economic growth of a country. thus, as the ssa natural resource-rich countries export their abundant natural resources and other commodities, their terms of trade improves which leads to improvement in their gdp. this result finds support in the finding by mputu (2016). finding also indicates that gross fixed capital formation is significant and negatively influences gdp. the pooled ols result for gross fixed capital formation shows that it does not have significant impact on gdp. the negative link between gross fixed capital formation and gdp finds support in a separate study by nzeh (2020) for nigeria which is one of the biggest economies in the group. one plausible reason why gross fixed capital formation influences gdp negatively could be owing to the fact that the countries comprising this group are less industrialized such that the capacity utilization of these fixed inputs is negligible. we found labour force total to positively influence gdp, but fdi does not have a significant effect on gdp even though the link is positive. the result of labour force finds conformity in mputu (2016) and ayadi (2017) and it shows the importance of labour productivity on economic growth. we guess that the non-significance of fdi on gdp could be due to the fact that these countries are less developed industrially as they rely mainly in the export of primary products. also, as noted by ayadi (2017) the hostile business environment which deters the inflow of investment could be the reason. trade openness is found to have a negative impact on gdp and this finds support in mputu (2016) and ayadi (2017). as observed by mputu (2016) resource curse hypothesis can be validated by this result as the countries hardly diversify their economies but only rely on export of abundant natural resources. under the period fixed effect result in table 8, we find net barter terms of trade to negatively impact on gdp even though this impact is not significant. this result is similar to the result of pooled ols, except that the size of the coefficient differs. the result shows the effect of period of time on the link between terms of trade and gdp. it is a common knowledge that primary export products which mainly account for the export of the countries in our sample usually experience volatility from time to time. it is the exogenous shocks in the price of these commodities that usually leads to the unfavourable terms of trade. we find gross fixed capital formation to insignificantly impact on gdp which is in line with the pooled ols result. results for labour force and fdi follow theoretical expectation as they impact positively on gdp. also, result of trade openness is in conformity with findings by ayadi (2017) and mputu (2016) as it negatively impacts on gdp. what is perhaps revealing in the results is that the results for gross fixed capital formation and net terms of trade in both period fixed effects and pooled ols are similar except that only the size of the coefficients of their parameter estimates differs. we found that the coefficients of the parameter estimates under the pooled ols are higher than that of the period fixed effects. table-8. results of cross-section and fixed effects: gdp as the dependent variable. cross-section random effect results variables coefficient std. error t-statistic prob. constant 0.468267 0.667024 0.702025 0.4837 nbtot 0.000467 0.000196 2.381779 0.0184 gfcf -0.001113 0.000658 -1.691667 0.0927 lft 1.487516 0.127710 11.64762 0.0000 fdi 0.002909 0.009883 0.294384 0.7689 topen -0.011371 0.029759 -0.382102 0.7029 r2 0.848083 f-stat. 174.1756 prob(f-statistic) 0.000000 dw2 0.157922 period fixed effect results variables coefficient std. error t-statistic prob. constant 5.116940 0.444825 11.50327 0.0000 nbtot -0.000197 0.001023 -0.192922 0.8473 gfcf 0.002374 0.002548 0.931740 0.3532 lft 1.193007 0.100098 11.91842 0.0000 fdi 0.329744 0.051529 6.399170 0.0000 topen -0.478658 0.061924 -7.729717 0.0000 r2 0.878609 f-stat. 27.03548 prob.(f-statistic) 0.000000 dw2 0.291087 economy, 2021, 8(2): 26-34 34 © 2021 by the authors; licensee asian online journal publishing group 5. conclusion and recommendations in this study, we investigated the nexus between terms of trade and economic growth in sub-saharan african natural resource-rich countries over a period of 1990-2019. we employed random and fixed effects panel models in the study along with pooled ols which we used for the sake of comparison. findings of our results indicate that a long run relationship exists between gdp and the explanatory variables used in the study. we also noted that the models used in the study do not exhibit similar results. for instance, while cross-section random effect indicates that net barter terms of trade positively impact on gdp, result of period fixed effect and pooled ols show that net barter terms of trade negatively impacts on gdp even though it is not significant. also, gross fixed capital formation is positively linked to gdp both under the pooled ols and period fixed effect even though the result is not significant. results of our study also show that in all the models, labour force total and fdi have positive link with gdp while trade openness negatively influences gdp. the positive impact of net barter terms of trade on gdp under the cross-section random effect is in tune with the export-led growth hypothesis, while the negative link between net barter terms of trade and gdp under the period fixed effects shows the existence of resourcecurse and dutch disease hypotheses. the implication of the period fixed effects is that period volatility in the export price of ssa countries usually deteriorates their terms of trade. the period fixed effects result that shows a negative link between terms of trade and gdp finds support in the result of the link between trade openness and gdp which indicates negative link in all the models. with respect to our findings, we recommend that the ssa resource-rich countries should diversify their economies away from the traditional natural resources base. this will assist these countries in effectively utilizing their fixed capital to enhance productivity. human capital has been found to impact positively on gdp as evidence of our study has supported this with labour force total found to positively impact on gdp. on grounds of this, we recommend that efforts should be geared towards improving the labour force through sound education and training. foreign direct investment has been found not to contribute to growth; we advise that conducive environment necessary for attracting foreign investment should be put in place. this requires institutional upgrading to remove all bottlenecks that hamper fdi inflows. in another dimension, we recommend a gradual migration from the production and export of consumer products to capital goods which are more competitive in the international market. this will help in improving the terms of trade of these countries and thus reduces the impact of exogenous shocks in the prices of the export of primary products. in terms of modeling the link between gdp and terms of trade in these countries, both period and cross-section fixed and random effects should be explored in order to get better results. references ayadi, f. s. (2017). resource endowment and economic growth in selected african countries. journal of management and social sciences, 6(2), 284-302. barro, r. j., & sala-i-martin, x. (1995). technological diffusion, convergence, and growth. national bureau of economic research working paper 5151. blavasciunaite, d., garsviene, l., & matuzeviciute, k. (2020). trade balance effects on economic growth: evidence from european union countries. economies, 8(3), 1-15. available at: https://doi.org/10.3390/economies8030054. bruno, m., & sachs, j. d. (1985). economics of worldwide stagflation. cambridge, massachusetts: harvard university press. carmignani, f., & chowdhury, a. (2007). the role of primary commodities in economic development: sub-sahara africa versus the rest of world. united nations economic commission for europe, discussion paper series, no. 2007.7. dabas, c., & delbianco, f. (2019). exports, terms of trade and economic growth: evidence from countries with different level of openness. journal of reviews on global economics, 8, 327-336. available at: https://doi.org/10.6000/1929-7092.2019.08.28. easterly, w., kremer, m., pritchett, l., & summers, l. h. (1993). good policy or good luck? journal of monetary economics, 32(3), 459-483. fatima, n. (2010). analyzing the terms of trade effect for pakistan. pakistan institute of development working paper no. 59. fischer, s. (1993). the role of macroeconomic factors in growth. journal of monetary economics, 32(3), 485-512. available at: https://doi.org/10.1016/0304-3932(93)90027-d. jawaid, s. t., & waheed, a. (2011). effects of terms of trade and its volatility on economic growth: a cross country empirical investigation. transition studies review, 18(2), 217-229. available at: https://doi.org/10.1007/s11300-011-0201-7. jawaid., s. t., & raza, s. a. (2012). effects of terms of trade and its volatility on economic growth in india. mpra paper no. 38998. jawaid.., s. t., waheed, a., & siddiqui, a. h. (2020). terms of trade and economic growth in developing country: evidence from bilateral and commodity level analysis. journal of chinese economic and foreign trade studies, 13(1), 1-19. available at: https://doi.org/10.1108/jcefts-07-2019-0035. jebran, k., iqbal, a., bhat, k.-u., & ali, a. (2018). effect of terms of trade on economic growth of china. emerging economy studies, 4(2), 157168. available at: https://doi.org/10.1177/2394901518795068. mendoza, e. g. (1997). terms-of-trade uncertainty and economic growth. journal of development economics, 54(2), 323-356. available at: https://doi.org/10.1016/s0304-3878(97)00046-1. mputu, c. l. (2016). terms of trade openness and economic growth in sub-saharan africa., an m.sc thesis submitted to the department of economics, st. cloud state university. nzeh, i. c. (2020). public debt and economic growth in nigeria: investigating the optimal threshold level. asian development policy review, 8(2), 112-127. available at: https://doi.org/10.18488/journal.107.2020.82.112.127. sachs, j. d., & warner, a. m. (2001). the curse of natural resources. european economic review, 45(4-6), 827-838. thirlwall, a. p. (1979). the balance of payments constraint as an explanation of international growth rate differences. bnl quarterly review, 32(128), 45-53. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. 10 © 2021 by the authors; licensee asian online journal publishing group economy vol. 8, no. 1, 10-15, 2021 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2021.81.10.15 © 2021 by the authors; licensee asian online journal publishing group nutrition for pre-school children in africa and asia: a review analysis on the economic impact of children’s malnutrition chukwuemeka valentine okolo1 bartholomew onyekachi okolo2 nneka nancy anika3 ( corresponding author) 1school of economics and finance, xi’an jiaotong university, china. email: okolojunior@outlook.com tel:+86-15619087303 2department of biochemistry, university of nigeria nsukka, nigeria email: bartholomewokolo@gmail.com tel:+234(0)7039486133 3educational foundations, university of nigeria nsukka, nigeria. email: nnekanancy5588@gmail.com tel:+234(0)8078693576 abstract nutrition is known to be the key driver in well-being and fitness generally, and as a driving force behind the growth of capital and child food, it is a source and a product of greater health problems, family income and living conditions. the first 1,000 days of maternal and child care concentrate on healthy physical exercise and cognitive improvement, with long-term health and economic consequences for people and economies. the research reviewed nutrition for preschool children in africa and asia and illustrated the economic effect of malnutrition in infants. the review indicated that nutrition for pre-school children in africa and asia remains insufficient to ensure enhanced economic and human growth and that each nation needs to consider how money is to be invested through the assistance resources that help the least per cent of the population to fix this gap for children and make it the most efficient investment in society. citizenship and collective efforts, particularly the voice of youth, are important forces of transformation, which must be encouraged to meet sdgs. democracy campaigns can play a crucial role in the struggle for justice for children and the family. keywords: nutrition, preschool children, africa, asian, malnutrition, economic growth. jel classification: i12; j13; d12; f63 citation | chukwuemeka valentine okolo; bartholomew onyekachi okolo; nneka nancy anika (2021). nutrition for pre-school children in africa and asia: a review analysis on the economic impact of children’s malnutrition. economy, 8(1): 10-15. history: received: 22 june 2021 revised: 26 july 2021 accepted: 20 august 2021 published: 10 september 2021 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group acknowledgement: all authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ...................................................................................................................................................................................... 11 2. review of literature ........................................................................................................................................................ 11 3. nutrition for preschool children .................................................................................................................................... 12 4. nutrition for pre-school children in africa and asian .................................................................................................. 13 5. economic impact of children’s malnutrition ................................................................................................................. 13 6. conclusion ........................................................................................................................................................................ 14 references ............................................................................................................................................................................ 15 mailto:okolojunior@outlook.com mailto:bartholomewokolo@gmail.com mailto:nnekanancy5588@gmail.com http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ https://www.doi.org/10.20448/journal.502.2021.81.10.15 https://orcid.org/0000-0003-3802-6305 https://orcid.org/0000-0003-2276-1428 https://orcid.org/0000-0003-0809-8316 economy, 2021, 8(1): 10-15 11 © 2021 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study contributes to the existing literature by investigating nutrition for pre-school children in africa and asia and the economic impact of children’s malnutrition. 1. introduction nutrition assistance and medical services are one means of tackling food challenges policies. health is widely known to be one of the key factors of global study in pleasure and life satisfaction (helliwell, wang, & xu, 2013). interventions that enhance childhood well-being have acute, long-term and intergenerational effects, complementing each other in synergy. to ensure the growth and progress of children, we need timely, accurate population data on health, protection, access to education, quality housing and environmental conservation, among other rights (clark et al., 2020). the state of the world child report 2019 has the following aims: encouraging families, children and youth to seek healthier food, encouraging children to do right with their environment, creating a safe climate for all children and mobilizing assistance systems-hygiene, water and sanitation, nutrition and social welfare. investing in nutrition for children and teenagers is an important challenge if the world meets its sustainable development commitments by 2030 (unicef, 2019). pre-school years are a crucial part of the growth and development of the child, and it is important to ensure that the eating routine of the infant during this period is well-formed and developed. the impact of evolving food habits will significantly influence the well-being of children and the entire economy during this period. malnutrition, the main public health issue for countries, impacts many children and is a primary concern in these areas (bharti & sakshi, 2016). therefore, the problem of children in developing countries is important. furthermore, enhancing the welfare of women, infants and small children increases the prospects for an infant to provide full opportunities (unaids, 2010). nutrition during pre-school years is important for child growth and development and the availability of high levels of energy for service that, in turn, can be used by healthy trained and unskilled employees to contribute to economic growth. a young child’s diet program will consist primarily of healthy foods and daily family meals, providing opportunities for good nutrition. however, children are comforted by daily meals, and eating with preschoolers can be noisy and messy. preschoolers (age 3 to 5) tend to build their eating habits and require motivation to consume nutritious meals and snacks. these kids love to read. often, they emulate the actions of adult eating. they need dietary support while they also focus on chewing and swallowing skills. for government and development institutions, the promotion of infant safety has long been a priority for public health. however, above and beyond mortality factors, the importance of health and diet to sustain child development and educational success is increasingly recognized (bundy & guyatt, 1996; van den heuvel et al., 2013). this paper examines the influence of infant schooling in pre-school children and the economic consequences of infant starvation/malnutrition in africa and asia. it is becoming apparent that health and diet challenges should be discussed for two reasons in pre-school children (less than five years of age). firstly, the world’s poorer and wealthier quintiles are over 50% death ranges, and, secondly, the overall prevalence of illness for these children reaches 30 per cent in the developing nations (jukes, 2007; unesco & jukes, 2006). moreover, the number of preschoolers worldwide is estimated at 600 million and even much higher (us census bureau, 2002). therefore, their risk of mortality is much higher, and they are preserved better in adolescence and adulthood, which is why they have a far greater risk of survival. thus, at this stage, opportunities like health, welfare, education and child development mainly determine for themselves the child’s health and well-being in its lifetime (six, 2007). different aspects of child welfare are greatly influenced by food practices and proper diet, contributing to the children’s potential health (ahmad, daw, & isa, 1996). in sub-saharan africa, infant mortality averages 173 deaths per 1,000 live births and 98 deaths per 1,000 in south asia – several times the rate of 7 deaths per 1,000 in a developed world. children’s leading killers are incredibly treating and preventable infections such as flu, diarrhea, hiv, measles and malnutrition. surveys have shown that malnutrition can cause stunting and wasting in preschool children (black et al., 2008). stunting is a result of chronic or recurrent undernutrition in utero and early infancy. child stunting will never reach full height or cognitive abilities. not only do stunted children reap less from their interests in classrooms and schooling as adults, they often are more likely than middle-aged children to become overweight and obese. wasting is a life-threatening condition attributed to inappropriate feeding and nutrient loss. characterized by rapid nutritional depletion within the short term, children who suffer from waste compromised their immunity, increasing their mortality risk, particularly if they are serious, due to the higher prevalence of chronic infections. 2. review of literature based on their socio-economic situation, population size and the urbanization in china, india, nepal and pakistan (gao et al., 2020) have investigated the nutritional status of pre-school children and children’s caregivers based on nationally significant data from the china annual diet and health inspection report, the indian national health survey and nepal demography. the nutritional situation of children and women on four continents has been vastly different. they found the prevalence of underneath nutrition and the higher prevalence of overweight/obesity in countries with higher economic status in children, especially in china, where the prevalence of overweight/obesity was substantially higher than underweight. health trends have been mixed in childbearing women, and among the four countries in this group, pakistan has a high rate of overweight/obesity, although it has the second-lowest income level. using a cross-sectional survey conducted in a semi-urban population of 220 pre-school children, mary, jerffson, and abiodun (2019) evaluated the nutritional status of pre-school children and their eating habits in southwestern nigeria and analyzed the data produced using the software social sciences statistical package (spss) and found that the overall prevalence of malnutrition was high. a significant proportion (78.2%) of children ate more than three times a day, while 96.4% of children routinely defined everyday meals and advised that parents encourage their children’s healthier eating habits. chakravarty, tatwadi, and ravi (2019) examined the intrinsic relation between stunting and its intergenerational impact on human capital from 1986 to 2017 in south asian and economy, 2021, 8(1): 10-15 12 © 2021 by the authors; licensee asian online journal publishing group sub-saharan countries. the study found that the formation of human capital starts in the early stages of childhood. in the long term, a healthy childhood has a positive relation to the production of human capital. improved diet, which affects underweight, obesity and stunting, is largely attributed to a balanced childhood. hurley, yousafzai, and lopez-boo (2016) reviewed the benefits and challenges of implementing integrated interventions on early childhood development and benefit-based nutrition-cost analysis. he found that poor nutrition and lack of early learning opportunities contribute to the loss of development potential and lifelong health and economic disparities among millions of children < 5 years of age. due to their positive impact, they advocated for the development and testing of integrated interventions. similarly, the 2007 lancet series on child development in developing countries reported that multi-component programs, including health, nutrition, and psychosocial stimulation, are likely to be the most successful in promoting and growth and development in early childhood, therefore, advocated for the development and testing of integrated nutrition and early child development interventions (black et al., 2008). black et al. (2013) analyzed the undernutrition and overweight of mother and child in low and middle-income countries. they observed that undernutrition leads to a fetal growth cap, which raises the likelihood of neonatal deaths and stunts by two survivors. they added that overweight children easily lead to obesity, diabetes and non-communicable diseases in adults. concerning initiatives for children under six, six (2007) has shown that the pre-school age group has received a low priority in developing country’s policies, services and budgets, despite all measures showing that more support is urgently needed at that time. however, the effect of the weaning period on the nutritional status of children has been observed by shamim, naz, jamalvi, and ali (2006). it has shown that various strategies are currently in place to continually implement policies aimed at investing in early childhood. still, these policies are not being fully implemented at the moment. 3. nutrition for preschool children in a 2017 survey, the costs of not growing child development in the form of mandatory pre-school and home visits are substantial and may minimize stunting to more than 10 per cent of gdp (richter et al., 2017). the lancet commission, promising to place children’s health and well-being at the forefront of the sustainable development goals (sdgs), was founded at the end of the millennium development goal and stressed child survival. from 2015 to 2020 alone, about 44 per cent of children aged 0–6 months in the world breastfed (unicef & who, 2021). while the lack of nutrition and malnutrition impacts all ages, the long-term effects of the development and well-being of small children are very important because much undernutrition takes place in the womb or the first two years of existence. the brunt of early damage lasts for both body and brain development. changes in diet and lifestyle made early by children and parents will affect their children for the rest of the lifespan. as most people achieve their optimum bone mass at 20, early childhood needs to build muscle and bone mass. children with overweight problems appear to feel exhausted and irritable, which may cause depression. overweight infants have health issues and are often unable to compete with their friends in physical exercise. this will lead to the alienation of relationships that can form poor social ties and low self-respect. in general, it is important to develop children with a healthy and nutritious diet. a child wants to be driven by opportunities to grow a well-equilibrated and balanced nutritious life. a child may have trouble ensuring they are well fed and protected without support, motivation, guidance and schedule. when young children grow up, they tend to learn about what they like and don’t want. on many occasions, this does not meet the dietary needs of the best of them. the challenge is this, as children are extremely attentive individuals, it is helpful to create safe and productive relationships. children may also be an important learning aid in food preparedness and choosing. health status is an indicator of human well-being since consuming calories and applying nutrients are the main determinants. wellness is not only a lack of illness; it is an essential condition of mental and physical well-being, as indicated by the international health organisation (who). in 1992, the rome conference on nutrition, which claimed in its world nutrition declaration and plan of action that nutritional health of all people is an essential prerequisite to population growth and a central goal for human advancement, was the relationship between the production of human nutrition resources. a healthy, well-nourished child is a necessity for healthy development. the nutritional well-being of the populace is at the same time a reflection of the achievements of both the social and economic spheres and, to a large extent, of the efficiency of the national income distribution. much of the people should be prepared to partake in this effort to ensure a permanent and effective national program for social and economic growth. the rest of the population should also be in good health and have good nourishment. nutrition plays a crucial role in human capital development. the lack of essential nutrients leads to malnutrition, affecting people’s mental and physical well-being and poor health and poor work results. furthermore, a young undernourished baby may suffer moderate to severe impairment leading to poor schooling; a frail, malnourished person may not respond well to treatment, may be permitted to spend several hours working and can continue to drain away national to family capital. investment in education, health care and other growth sectors is undermined by malnutrition, but healthy nutrition is an investment in human and social resources; the high development of human capital that ultimately forms the basis of change is the primary determinant of household and public well-being. therefore, acts that are central to the operation of the food markets boost food supply and demand, improve the quality of children, and enhance the main support systems’ role. again, healthy food is important for the health of children and for achieving the sustainable development goals. it must be at the heart of the government’s plan and backed by key actors, including civil society and the private sector. in all continents except africa, the number of children who have suffered from disorder has declined, while in all continents, the number of overweight children, including africa, has increased (unicef, 2019). young adults’ cultural and social needs, young parents, and families will be focused on creative, engaging, positive and stimulatory interaction approaches that facilitate nutritious foods. the return on nutrition investment is high. for example, in high-burden countries, every dollar that is invested in mitigating stunning yields economic returns equivalent to about us$ 18. investment in children’s nutrition is critical for the production of capital because children’s nutrition in africa and asia is necessary for growth, cognitive development, academic achievement and potential competitiveness (unicef, 2019). global figures reveal that the hunger rate appears to be alarming. the economy, 2021, 8(1): 10-15 13 © 2021 by the authors; licensee asian online journal publishing group number of kids under 5 (overweight) shocked, and waste (million) is declining too slowly. in contrast, unsustainable levels damage the lives of too many young children worldwide, 2000-2019 (unicef & who, 2021). the key objective is to free all kids from some form of malnutrition. analyzes of child hunger trends in the world bank organization show that in 2019 stunting affected an estimated 21.3% or 144,0 million children under the age of 5 worldwide, and in 2019 it appears that wasting endangers estimated lives of 6.9% or 47.0 million children under five worldwide. in 2019, the world’s highest number of children under 5.6% or 38.3 million, was unparalleled. kid rush never reaches the maximum height, and the brain never grows to peak growth potential. they face behavioural challenges in school, obtain limited support as adults, and are hindered by social inclusion, which is a big downside. children with waste are less resistant and susceptible to long-term delays and have an increased risk of mortality, especially in cases of extreme waste. while malnutrition takes various forms, it ultimately has the same preventive route: proper nutrition of the mother before and during pregnancy or lactation; successful breastfeeding in the first two years; balanced, varied and nutritious early childhood food; a safe climate, including basic health, water, hygiene, sanitation and opportunities. these main components are supported by a community in which children are free of all forms of hunger. global and international statistics on infant hunger by unicef, who and the world bank show that we are still far from the world of hunger. the joint forecasts published in march 2020 include indices of dramatic and obesity in children under 5 years of age, extreme obesity and overweight, which indicate a lack of progress in achieving 2025 goals for the 2030 world health assembly. main dietary strategies that have been proven to be successful in reducing underweight, stunting, and low birth weight are: pre-natal; better maternal diet and well-being to eliminate low birth weight and stunt later in life before and after infancy increase maternal longevity. post-natal; safety, encouragement and advancement of optimal breastfeeding; avoidance and effective clinical care of infections (including diarrhea, hiv, measles, tuberculosis); management of extreme and mild acute malnutrition; avoidance and control of selected micronutrient deficiencies: vitamin a, iodine, iron-folic acid, zinc; psychosocial stimulation; healthy lifestyle; 4. nutrition for pre-school children in africa and asian in 2012, the sixty-fifth world health assembly (wha) approved the maternal, infant, and young child nutrition (miycn) systematic implementation strategy (who, 2017). as a result, there has been some progress in achieving global nutrition targets in the african region. for example, the global targets for under-five overweight and exclusive breastfeeding for infants each have 20 countries to meet them, while under-five waste has 12 countries on course, while under-five stunting has eight countries on the course (who, unicef, & unfpa, 2015). despite being reasonably well off against other countries, africa continues to face the burden of malnutrition among its under-five population. the estimated overweight incidence of the five-under-age population is 4.9%, the second-lowest in all countries. the breathtakingly low amount in europe is 30%, double the world average of 21.9%. on the other hand, pollution in the african region is 7.1% lower than the global average of 7.3%. in africa, 43.4% of children under six months old breastfeed, while the country’s overall low weight incidence is 13.7% lower than the total global average of 14.6% (organization, 2015). african governments should take measures to mitigate and eliminate under-nutrition, among other things, by ensuring optimum conditions for safe infancy and children, improving water and sanitation supplies, and delivering adequate food in classrooms. progress has been made in the asian field to the attainment of global nutrition targets. for example, global expectations for under-five overweight and under-five stunting each of the 12 countries on track to meet them, under-five obesity has 11 countries on track, infant-only breastfeeding has seven countries on track, female diabetes has six countries on track, while low birth weight and male diabetes each have one country on their way. however, in women of reproductive age, male obesity and female obesity, not one country in the world is on target to meet the targets of anaemia. 38 countries worldwide do not have adequate evidence to measure their success toward these global targets reliably. asia faces a challenge of hunger in its population of under-five. the reported prevalence of overweight is less than 5.2 per cent lower than the worldwide average of 5.9 per cent. the prevalence of stunting in the under-five is 22.7%, higher than the global average of 21.9%. the prevalence of waste in asia is also 9.4% higher than the global average of 7.3%. about 42.3 per cent of children under six months of age are breastfed in the asian world, while the world’s total low birth weight rate of 17.3 per cent is higher than the global average of 14.6 per cent. 5. economic impact of children’s malnutrition malnutrition von grebmer et al. (2009) is a general term for several factors that influence health due to inadequate or unbalanced food consumption or insufficient food intake. it applies to under-nutrition (calorie deprivation) and over-nutrition (excessive food consumption due to energy requirements). one of the key threads of malnutrition is the continuing scourge of undernourishment. despite declines in certain parts of the world, undernutrition deprives many children of the energy and nutrients they need to grow well. it is associated with just under half of all deaths of children under five years of age each year (black et al., 2013). malnutrition in conflict areas is not limited to extreme hunger. worldwide, children face various kinds of malnutrition that go beyond undernutrition. many nations are grappling with the double burden of famine. undernutrition in small children and later-life obesity contribute to an increased risk of chronic diseases such as hypertension and diabetes. in one world, both sides of the same malnutrition coin will be on a debilitating view and most likely in the same houses, classrooms and playgrounds. malnutrition does not only lead to malnutrition and disease. it also challenges the fundamental right to a healthy life and negatively affects economic prosperity by growing health care costs and incurring reductions in productivity. productivity losses are due to decreased physical and academic capacity in undernourishment, while obesity, missing labour days, diminished productivity at work, mortality, and permanent disability come into play. the effect of these costs can be tremendous on the country’s gross domestic product (gdp). the estimated annual gdp losses due to low weight, slow childhood growth, and micronutrient economy, 2021, 8(1): 10-15 14 © 2021 by the authors; licensee asian online journal publishing group deficiencies are 11% in asia. the overall economic burden of obesity is estimated to be usd 2 trillion or 2.8% of global gdp – about the same economic effects as smoking or wars. at the same time, the projected effect of multiple causes of malnutrition on the global economy may be as high as us$ 3.5 trillion per year or us$ 500 per person. the most convincing connection between food and the economic growth of a nation is human resources. the world bank published the human capital index in 2018, underlining that this new age needs countries to invest urgently in their population to succeed in future economies. the human capital index is a cumulative metric, a factor in children’s growth, years of schooling and stunting. it also made it possible to accept that malnutrition is often directly responsible for human capital shortages. at the microeconomic point, a 1% decrease in adult height due to childhood stunting is estimated to equal a 1.4% decline in a person’s productivity. undernutrition impacts pupil success at school due to disease-related disabilities, which result in diminished intellectual ability and inadequate cognitive growth. this means a higher chance of going to school at a later age, rehearsing, leaving school and ultimately reaching a lower standard of education (currie & vogl, 2013). governments are the main source of our mutual responsibility for these problems of child malnutrition. they play a crucial role in funding children’s projects, ensuring efficient implementation of care and maintaining sufficient social security for families. both sectors play a part in fostering children’s welfare and well-being, and there is strong evidence of the need for multi-sectoral intervention for children (kuruvilla et al., 2014). there are several aspects in which malnutrition may affect the child’s economic opportunities and, finally, broader socioeconomic growth. stunting has been related to impaired cognitive performance and lower educational outcomes in the first 1000 days. data from a host of countries shows that undernourished children spend less time at school, generally attributable to impaired brain growth and learning, injury or injury later in life, and are more likely to repeat stages. there are growing awareness and evidence that action to reduce malnutrition pays off and is much needed. in the interests of our well-being and our societies, both now and in the future, countries need to take on many-sided hydrates that are malnutrition. however, malnutrition and its negative impacts on health, education, and development contribute to social and economic losses for individuals and society. the overall burden of malnutrition is often due to higher expenditure on health services, inefficiencies in schooling and reduced efficiency. in summary, the cost of undernutrition-related production is proportional to the lack of human resources suffered by a nation due to a lower level of schooling among undernourished inhabitants, a lower output of manual labour faced by people suffering from stunting, and a reduction in economic ability due to a higher number of malnourished deaths. 6. conclusion early investments in children’s health, schooling and development have accrued gains for their potential children and community as a whole over a child’s lifetime. effective nations invest in their children to protect their rights, as can be seen by countries that have done better over the last few decades on health and economic issues. good quality diet and a balanced lifestyle would affect young children for the remainder of their lives. children are highly good at early development and continue to adopt the behaviours and techniques they carry into adulthood. apart from the habits and patterns that have been developed, children who do not get the right nutrition when they develop can often suffer from physical illness. obesity, osteoporosis, reduced muscle density, hair thickness and texture improvements, fatigue, irritability, and type 2 diabetes are among the most common concerns for malnourished children. preschool 3-5 years is a critical opportunity to build safe lifestyle patterns that can last a lifetime. preschoolers appear to grow in spurts, and their appetites can be unpredictable. this is possible because if parents give a healthy choice, they will make a realistic decision for their children. unique breakdowns of foods, meats, vegetables, fruit and dairy products are like babies, differing in height, age and sex. calcium consumption is a crucial component that is essential for young pre-school children to develop. calcium is required to keep the bones and teeth solid, stable and successful. the world health organisation and unicef advocate breastfeeding babies within 1 hour of birth, breastfeeding exclusively during the first 6 months of development, and breastfeeding children up to 2 years of age and beyond. beginning at 6 months, breastfeeding should be paired with a healthy, age-appropriate supply of solid, semi-solid and soft foods (killen, 2005). there are widely accepted guidelines to target children for sustainable growth (sdg). state policymakers can set up a high-level structure or choose a particular agency to coordinate work with and children through sectors, build an environment of child-friendly services and determine how these services affect children. heads of state and government should set up a surveillance mechanism to track child care expenditure by using this instrument to raise domestic resources from the poorest segments of society to optimize engagement through fiscal instruments. public agencies at the right level, national academics and research bodies should adopt policies to enhance the processing of sdg data via country-based information systems and citizens’ data and openness to determine children’s health, equity and carbon emissions. local authorities should set up a multi-sectoral commission to combine health and social care programs for children and other stakeholders where appropriate. unicef child development ambassadors and those worldwide should draw together nations and societies to adopt child-friendly care and sustainability policies, promoting ambitious carbon reductions to secure the environment for the next millennium. children’s health, rights and sustainable development leaders should represent their perception of the sdgs as children and their potential risks of greenhouse gas emissions, especially in high-income countries. forums on sharing ideas and feedback should be coordinated to highlight children’s right to a safe future and the environment. global authorities on children’s well-being and children’s welfare should endorse implementing new recommendations to the un convention on the protection of the child to shield children from abusive market practices. country leaders at the un should work together to create a coordinated, essentially multi-sectoral un system to remove division and silo and place child participation at the core of the sdgs. the who and unicef leaders should consult with the heads of other un agencies to prepare concerted action to assist countries in economy, 2021, 8(1): 10-15 15 © 2021 by the authors; licensee asian online journal publishing group adopting focused, aggressive sdg policies and collaborate with international agencies to help countries exchange momentum and best practice. references ahmad, z., daw, w. k., & isa, a. r. (1996). breastfeeding and weaning practices in rural communities of kelantan. malaysian journal of nutrition, 2(2), 148-154. bharti, j., & sakshi, p. (2016). nutritional status and school eating pattern of adolescents. asian journal of home science, 11(1), 226-231. available at: https://doi.org/10.15740/has/ajhs/11.1/226-231. black, r. e., allen, l. h., bhutta, z. a., caulfield, l. e., de onis, m., ezzati, m., & rivera, j. (2008). maternal and child undernutrition: global and regional exposures and health consequences. the lancet, 371(9608), 243-260. available at: https://doi.org/10.1016/s0140-6736(07)61690-0. black, r. e., victora, c. g., walker, s. p., bhutta, z. a., christian, p., de onis, m., & martorell, r. (2013). maternal and child undernutrition and overweight in low-income and middle-income countries. the lancet, 382(9890), 427-451. available at: https://doi.org/10.1016/s0140-6736(13)60937-x. bundy, d., & guyatt, h. 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(2020). double burden of malnutrition and nutrition transition in asia: a case study of 4 selected countries with different socioeconomic development. advances in nutrition, 11(6), 1663-1670. available at: https://doi.org/10.1093/advances/nmaa064. helliwell, j. f., wang, s., & xu, j. (2013). world happiness: trends, explanations and distribution. world happiness report 2013, 8–37. retrieved from: http://worldhappiness.report/ed/2013. hurley, k. m., yousafzai, a. k., & lopez-boo, f. (2016). early child development and nutrition: a review of the benefits and challenges of implementing integrated interventions. advances in nutrition, 7(2), 357-363. available at: https://doi.org/10.3945/an.115.010363. jukes, m. (2007). impact of early childhood health and nutrition on access to education in developing countries. paediatrics and child health, 17(12), 485-491. available at: https://doi.org/10.1016/j.paed.2007.09.006. killen, b. (2005). the millennium development goals for health: rising to the challenges. bulletin of the world health organization, 83(11), 876-877. kuruvilla, s., schweitzer, j., bishai, d., chowdhury, s., caramani, d., frost, l., & adam, t. (2014). success factors for reducing maternal and child mortality. bulletin of the world health organization, 92, 533-544. available at: https://doi.org/10.2471/blt.14.138131. mary, o. o., jerffson, o. k., & abiodun, o. j. (2019). nutritional status and eating patterns of preschool children in a community in southwest nigeria. nigerian journal of nutritional sciences, 40(2), 30-37. organization, w. h. (2015). world health statistics 2015: monitoring health for the sdgs sustainable development goals (vol. 3). world health organization. in cnr-isti technical report. richter, l. m., daelmans, b., lombardi, j., heymann, j., boo, f. l., behrman, j. r., & dua, t. 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(2019). the state of the world’s children 2019. children, food and nutrition: growing well in a changing world (pp. 258). mexico; tanzania: education resources information center. unicef, & who, w. b. g. (2021). joint child malnutrition estimates. world health organisation, 24(2), 51–78. us census bureau. (2002). us summary: 2000 (vol. 7): us census bureau. van den heuvel, m., hopkins, j., biscaro, a., srikanthan, c., feller, a., bremberg, s., & williams, r. (2013). a comparative analysis of early child health and development services and outcomes in countries with different redistributive policies. bmc public health, 13(1), 113. available at: https://doi.org/10.1186/1471-2458-13-1049. von grebmer, k., nestorova, b., quisumbing, a., fertziger, r., fritschel, h., pandya-lorch, r., & yohannes, y. (2009). 2009 global hunger index: the challenge of hunger: focus on financial crisis and gender inequality. ifpri brief. retrieved from: http://www.ifpri.org/publication/2009-global-hunger-index. who. (2017). nutrition in the who african region isbn. in nutrition in the who african region (pp. 85): who press. who, unicef, & unfpa, w. b. (2015). trends in maternal mortality 2010 2015, who (pp. 92): world health organization. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. http://worldhappiness.report/ed/2013 http://worldhappiness.report/ed/2013 http://www.ifpri.org/publication/2009-global-hunger-index http://www.ifpri.org/publication/2009-global-hunger-index 110 © 2020 by the authors; licensee asian online journal publishing group economy vol. 7, no. 2, 110-118, 2020 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2020.72.110.118 © 2020 by the authors; licensee asian online journal publishing group does an external governance framework enhance the performance of pakistan's banking sectors? foreign ownership as moderator shoaib ali1 hafiz muhammad naveed2 abubakar khaliq3 ( corresponding author) 1school of management, jiangsu university, zhenjiang, china. 2school of finance and economics, jiangsu university, zhenjiang, jiangsu province, china. 3 hailey college of commerce, university of the punjab, lahore, pakistan. abstract this study would determine how external governance structure improves the performance of listed banks in pakistan with the return on assets (roa), return on equity (roe), earnings per share (eps) and dividend payout ratio (dpr) estimates. the study concerned external corporate governance with the presence of foreign ownership as a moderator. the sample design of the study is listed banks in pakistan stock exchange (psx) from 2009 to 2018 with the availability of foreign ownership data. the data are gathered from financial statements, shareholding trends, and the credit rating agencies pakistan (pacra). the panel data approach (fixed and random effect model) was reversed to serve a different research objective and the study goals. the results showed that the external mechanism of governance performs an important part in the transparency and efficiency of the banking sectors. the banks could also increase foreign investment if they get better external governance mechanisms. this work will help commercial banks resolve the issues and improve compliance with the corporate governance code, and devise strategies for better functioning. this research is inconsistent as none defined the governance of the external system with the moderator presence in pakistan. keywords: external governance, performance, foreign ownership, banking system, pakistan. jel classification: e58; g21; g32; g34. citation | shoaib ali; hafiz muhammad naveed; abubakar khaliq (2020). does an external governance framework enhance the performance of pakistan's banking sectors? foreign ownership as moderator. economy, 7(2): 110-118. history: received: 18 september 2020 revised: 12 october 2020 accepted: 26 october 2020 published: 9 november 2020 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group acknowledgement: all authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction .................................................................................................................................................................................... 111 2. literature review .......................................................................................................................................................................... 112 3. methodology design ..................................................................................................................................................................... 113 4. results and discussions ................................................................................................................................................................ 114 5. conclusion ....................................................................................................................................................................................... 116 references ............................................................................................................................................................................................ 116 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2020.72.110.118&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ https://www.asianonlinejournals.com/index.php/economy/article/view/2316 https://orcid.org/0000-0002-3528-7422 https://orcid.org/0000-0002-7319-354x economy, 2020, 7(2): 110-118 111 © 2020 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study contributes to existing literature by determining how external governance structure improves the performance of listed banks in pakistan with the return on assets (roa), return on equity (roe), earnings per share (eps) and dividend payout ratio (dpr) estimates. 1. introduction the organization's main goal is to figure out the issues and then seek to minimize the challenges of implementing corporate practices and mitigating misunderstandings. the poor corporate governance system and globalization of the capital markets have disrupted governance the monetary market both domestically and internationally (sohail, rasul, & fatima, 2017). in a company, the investors and consumers may be in the same place, and they could partner with multiple countries. the control board should be at the top level determined and check the efficiency of how issues can be solved because they can be detrimental to financial institutions. several theories about (i.e. stakeholder, signaling, and resource dependency, etc.) play an important role in the establishment of a successful stockholder-management relationship. the responsibility of stakeholder concerns that executives and organizations struggle because of personal gains and poor governance structure. wijnberg (2000) defined a community or individual as stakeholders who may affect the success of the aims or priorities of the organization. corporate governance has the function of offering an assurance that managers are working to boost the returns of shareholders. the theory of stakeholders is the opposite the philosophy of the agency and its manager are seen as a participant rather than an entity. organizational performance and shareholder satisfaction are the main relationships that explain long term organizational effectiveness (donaldson & davis, 1991). another use is the resource dependency theory, which demonstrates a lack of all the institution's resources and expertise needed to achieve the desired results and achieve organizational objectives. hence, it relies on the resources and hardships of an organization that exceeds the central agency's capacity (reitz, 1979). the theories outlined above suggest an organizational governance framework that improves the firms' efficiency. the agency issues insolvency root for different organizations (i.e. worldcom and enron) and this purpose (such as the blue-ribbon committee; the federation for economic cooperation and growth or the oecd; the cadbury group; the king committee; the european surveillance dealers' federation or the easd and the banking supervisory group of basel) clarified the criteria and principles for the management of issues. such groups aim to strengthen the corporate governance foundations for a monitoring framework to come up with corporate governance. however, deals with business management's privileges and responsibilities, the organization, and the interests of the stakeholders. banks are classified as intermediaries, which gather money from depositing investors, lend it, and verify on their behalf. levine (2003) argued that heavy dependence on the banking industry is the driving force of economic growth in developing countries although arun and turner (2004) described, that in the underdeveloped monetary markets, banking sectors are the most-vital basis of financing for the mainstream of the organizations and core collection for the economic reserves. hence, the worth of banking sectors in the economy and the breakdown of the banking sectors will straight disturb the monetary flow of the economy (banerjee, 2005). the banking institutions and external governance create an operative situation among the management, stakeholders, investors, and creditors for the sake of improving its success. in pakistan, the system of governance code for banks was first introduced in 2003 by the state bank of pakistan (sbp), but subsequently, it was updated and acquired a new governance framework with improvements from 2009 to 2011. pakistan is an emerging country and its banking industry is faced with problems including high-interest rates, equity inflows or outflow, the narrow scope of commodities, indiscriminate consumption and pledge loans, undiversified managerial budges, and union intervention in forecasting, poor decision-making, weak human means allocations, and weak external operations. the predictors and experts analyzed that the main reason for the poor performances of the firms is the lack of a comprehensive corporate governance mechanism. the prior research was concentrated on financial or non-financial sectors to evaluate corporate governance's relationship to firm performance. this study focuses on the effect that the governance process has on the viewpoint of the banking institutions. the banking sector and the corporate governance structure are explained by the banks themselves. a wider corporate governance view should be enforced attributable to banking organizations, affecting both creditors and stakeholders (mullineux, 2006). the shortcomings of the governance system contribute to financial fraud and powerlessness. according to a report banking institutions with poor regulations were exhausted (peni & vähämaa, 2012). this has explained that insufficient corporate governance will adversely cause problems with the economic list of a country (sharma & rathi, 2014). governance mechanisms fragile and wide-open participation in financial represent obstacles to financial market regulation at home. financial organizations are facing many problems recently in a global environment without governance. there are still issues with the essence of banking, the regulatory process, shareholders, creditors, and forecasters. this research intends to examine the impact of governance mechanism on the performance of listed banks in pakistan. there are distinct codes of a governance mechanism for commercial institutions while sbp articulates in the shape of prudential regulations. this research contributes some novelty to the current literature. first of all, the data establish more expressive, comprehensive, and the target population of the study is private banks identified in psx, the sampling technique is purposive. we have taken steps from the conventional framework of the earlier literature and, regardless of how internal governance is determined, we have used external structures to protect minority shareholders (pms), financial transparency, external auditors, and foreign ownership as moderators. 1.2. objectives of the study • to assess the effect of pms on the performance of banks with the moderator of foreign ownership. economy, 2020, 7(2): 110-118 112 © 2020 by the authors; licensee asian online journal publishing group • to identify the impact of financial transparency on the performance of banks with the moderator of foreign ownership. • to analyze the effect of external auditors relating to bank performance with the moderator of foreign ownership. figure-1. theoretical framework. the paper is managed as follows. in unit 2 we elaborate theoretical analysis for the encouragement of external governance mechanisms and engaged empirically hypotheses to test. unit 3 consists of a description of the target population, as well as the firms’ aspects that are considered in our study. in unit 4 their results regressed explanations with a panel data approach (fixed and random effect model). finally, unit 5 states our conclusive remarks. 2. literature review there are significant facts concerning the value of governance mechanisms in banking institutions. the governance mechanism would be capable to decrease seize of bank reserves and encourage bank competency (caprio, laeven, & levine, 2007). the banking sectors have been contributed positively to the performance of the firms (eldomiaty & choi, 2011). banking institutions in germany as features universal banking system are operating financing institutions in comparison with capital markets. there is a need to involve more part of the governance mechanism to maintain positions of lenders, major stakeholders, underwriters, corporate position holders, stock exchange position holders, and communicating vote rights by the minority of shares (lowengrub, luedecke, & melvin, 2004). tulepova (2017) argued that in a circumstance of huge credit-ship where organizations depend on credit from financial sectors, banking institutions can perform governance roles by analyzing the organization's actions, annually audit, and enforce penalty payments. thus, the comprehensive governance mechanism of banking institutions enhances the chances that banks will exceed sound governance mechanisms over other organizations. this study analysis defines the connotation of corporate governance and the performance of banking institutions. the monetary power of an organization is closely associated with good corporate governance. ownership structure, legal underlay with pms, financial disclosure, and external auditors are constructive measures that have a major impact on the operations of banking firms' results. 2.1. protection of minority shareholders there has been the practice that conflicts of compensation occur between the shareholder minority and the majority of shareholders. this is a legal defense framework for the pms and its stock trading on the capital markets. corporate governance relating to investigation approvals, economic position, conditions on the capital market, independent statutory structures, managing the economy theory aspects, institutional growth, investment frameworks, and pms testimonials (bai, liu, lu, song, & zhang, 2006). there are also disputes about the relevant pms standard. different types of experts have different opinions when addressing pms. coffee and schwartz (1981) emphasized several important points about pms imitation procedures, such as mismanagement and harassment prevention. it also reduces the risks involved in the corporate administration of service payments. according to fischel and bradley (1986) concerns about the validity of criminal prosecutions are imitative about pms. they also encouraged managers to work collectively for pms and other firms, while many instruments for corporate governance initiatives require explicit disclosure statements from management for minority shareholder litigation. a minority of stockholder’s usefulness because they do not perform the minimal level in determining the indemnity for a useful outcome. the investigators do not present an empirically valid approach to measures the weak institutional return flow as it does not yield reliable pms behavioral results (thompson & thomas, 2004). h1= pms positively increases the performance of the banks with foreign ownership as a moderator. 2.2. financial transparency public confidence is reduced from financial institutions that have a negative effect on social, economic trends which actions towards poor results (cadbury, 2011). procedural accountability and facts reveal critical and essential aspects of the governance process (damodaran, 2007). corporate governance is a set of principles for promoting transparency, honesty, morals, ethics, equity, duty, and accountability in the policies and practices of the board of directors of the company. granof (2003) also clarified that the corporate structure fulfills the role of authority, guiding principles, participation, honesty, respect for shareholders' rights, processes, practices, governance policies, financial transparency, accuracy, and performance access results. the financial accountability economy, 2020, 7(2): 110-118 113 © 2020 by the authors; licensee asian online journal publishing group and confidentiality of current-state data are central to corporate processes. corporate governance codes exist, group trust with knowledge revealing is called an exchange feature to detect the institution's functioning. the prior research information presented and considered non-binding which is used to appease creditors and capital markets (healy & palepu, 2001). in addition to this, there is a negative relationship between financial transparency and organizational performance (chen, chung, lee, & liao, 2007). on the other side, the correlation between financial transparency and organizational growth is positive (bai et al., 2006). organizational performance can possible to increase if it achieves a good credit rating, which enhances its fame, and more stockholders engage for investment (lukas & basuki, 2014). h2= financial transparency positively associated with the performance of the banks with foreign ownership as moderators. 2.3. external auditors an addition to the governance mechanism is external auditors which can control administrative unrestricted activities. watts and zimmerman (1983) explained that on the base of stakeholder theory, an external audit decreases instruction inequality between the director and the operator and reduces conflicts of interest. botez (2009) identified the primary function of the international accounting standard (ias) for external auditing is to restore the competencies to trust users in the assessment of financial statements to preserve the accountability environment and to satisfy stakeholders. ias will enhance control and timely auditing of financial data during ias through banks and corporate decision-makers, and the use of processes in decision making. afify (2009) there is confirmation that coverage and reporting rates reduce asymmetries between internal and external information and increase marketplace performance. al-ajmi (2008) also indicated that it is necessary to look at the possibilities and risks for negative payments during an argument and elimination of the financial market bad rumors about performance. the reducing number of tests carried out by coordinating to internal auditors, especially those concerned for external auditing that is the main function (abbott, parker, & peters, 2012). a study has a significant effect on the internal investigators working with external auditors. it is also considered to have implications that would lead to improvements in the financial statement audit report being reviewed, which is prepared by external auditors. timely operations conducting audit procedures and audit-related tasks. the prior research between external audit and earnings management revealed a poor relationship with external auditors and a huge risk (becker, defond, jiambalvo, & subramanyam, 1998). h3= external auditors positively increase the performance of the banks with foreign ownership as moderator. 2.4. foreign ownership the ownership structure has different predictions which include foreign ownership, government ownership, ownership concentration, and managerial ownership, etc. but this research focused on foreign ownership as a moderator. earlier studies have examined the multi-measurements ways of connection between ownership structure and performance. institutional ownership has a significant positive association on performance (badrul & shahid, 2012). the organization without managerial ownership executes less efficiency than those organizations that use more managerial ownership. on the other side, foreign ownership plays a vital role in financial firms’ performance. also, foreign stockholder looks to choose huge cash organizations with large stocks of their reserves in large organizations (dahlquist & robertsson, 2001). bokpin (2013) argued banks that have domestic ownership are low profit-maker but as compared those banks who have foreign ownership are making huge profits. foreign ownership has a positive relationship with financial institutions (dahlquist & robertsson, 2001). the foreign investors play an efficient role in growing countries and create a leading environment (micco, panizza, & yañez, 2007). international corporations have a new framework, regulations, and standards that do not exist in the domestic market until the national banking system functions better (bris, brisley, & cabolis, 2008). they also clarified that when international investors participate, the firm's profitability and credibility improve. 3. methodology design 3.1. description of data this research entirely focused on quantities sources from the listed banks on the pakistan stock exchange (psx), excluding foreign banks due to data unavailability. the data is collected from the state bank of pakistan (sbp) website, annual report of banks, the shareholders' patterns, and pakistan credit rating agency (pacra) from 2009 to 2018. a total of 23 commercial banks was listed in psx during the study. thus, banks with insufficient data were removed from the study. so, the final sample of data comprised 22 listed banks with 204 firm annual observations. this research looks at the external governance structure and econometric model used for the target population in the explanatory variables. 3.2. structure of variables we assess the external governance process with the pms, financial transparency, and the external auditor to check the relationship on organizational performance with roa, roe, eps, and dpr. in addition to this, we also measure the effectiveness of the commercial bank’s performance with foreign ownership as a moderator. two control variables as bank size and leverage are included in the regression to control the bank definite elements that may change the performance of firms. operationalization definitions of these variables are listed in table 1. 3.3. econometric assessment the data in this research include banks with 204 observations from 2009 to 2018. this research was applied to the panel data approach (fixed or random effect model) for the analysis of the results. the morckhausman (1978) test used when the model with the fixed effect is an accurate or random-effect model to an assortment of activity (moussa & aymen, 2014). economy, 2020, 7(2): 110-118 114 © 2020 by the authors; licensee asian online journal publishing group table-1. variable development interpretations. variables names kind of variables short-form proxies return on assets dependent roa return after tax proportion to total assets. (al-saidi & al-shammari, 2013). return on equity dependent roe return after tax proportion to stockholder’s equity. (badrul muttakin & shahid ullah, 2012) earning per shares dependent eps return after tax proportion to numbers of common stocks. (sheikh. & karim, 2015) dividend payout ratio dependent dpr total dividends proportion by net return. (mason, franks, & broyles, 1980) protection of minority shareholders explanatory pms if the stocks are exchanged on the stock market then 1, otherwise 0. (bai et al., 2006) financial transparency explanatory ft reflects score advertised by the organizations in the market for its stable financial situations. (bai et al., 2006) external auditors explanatory eaud represented as if the bank is inspected by the external auditor 1, otherwise 0. foreign ownership moderator fown evaluated from financial statements of banks (stockholder scheme). bank size control bs “natural logarithm of the total assets”. leverages control lev “ratio of total liabilities to total assets” (sheikh. & karim, 2015) 3.3.1. unmoderated estimates to analyze the above stated hypothesis, four equations are developed, which are given below: first model: roait = α0+ β1i.pmsit+ β2fintrit+ β3i.exaudit+β4forownit+ β5bnksizit+ β6levgsit+ πit second model: roeit = α0+ β1i.pmsit+ β2fintrit+ β3i.exaudit+β4forownit+ β5bnksizit+ β6levgsit+ πit third model: epsit = α0+ β1i.pmsit+ β2fintrit+ β3i.exaudit+β4forownit+ β5bnksizit+ β6levgsit+ πit fourth model: dprit = α0+ β1i.pmsit+ β2fintrit+ β3i.exaudit+β4forownit+ β5bnksizit+ β6levgsit+ πit 3.3.2. moderated estimates four equations are developed with moderator, which are given below: first model: roait = α0+ β1i.pmsit+ β2fintrit+ β3i.exaudit+β4forownit+ β5bnksizit+ β6levgsit+ β7i.pms*forownit+ β8fintr* forownit+ β9i.exaud* forownit+ πit second model: roeit = α0+ β1i.pmsit+ β2fintrit+ β3i.exaudit+β4forownit+ β5bnksizit+ β6levgsit+ β7i.pms*forownit+ β8fintr* forownit+ β9i.exaud* forownit+ πit third model: epsit = α0+ β1i.pmsit+ β2fintrit+ β3i.exaudit+β4forownit+ β5bnksizit+ β6levgsit+ β7i.pms*forownit+ β8fintr* forownit+ β9i.exaud* forownit+ πit fourth model: dprit = α0+ β1i.pmsit+ β2fintrit+ β3i.exaudit+β4forownit+ β5bnksizit+ β6levgsit+ β7i.pms*forownit+ β8fintr* forownit+ β9i.exaud* forownit+ πit 4. results and discussions 4.1. hausman test information the morckhausman (1978) introduced differentiation both the fixed and the random-effect model. for the data analysis, a combination of time series and cross-sectional data was also used, and by applying the time series and cross-section observation, panel data identify accurate and reliable results that can add some valuable information in research. the panel data approach calculates the impact that is not observable in pure time series knowledge (mason et al., 1980). the panel data were selected for more accurate results from the banking sector and minimizes the biases. a conclusion that p<0.05 as evidence that there are two models dissimilar enough to reject the null hypothesis at the conformist level of significance, there is to reject and simulate of random effects in place of a fixed-effect model. as a modal estimation, the hausman test was employed for each experiment to decide if the fixed effect model is the correct one, or if the model is better for the random effect. table-2. hausman test elucidation. models variables chi p-value accept or reject fixed or random model first roa 4.09 0.218 h0: accept random second roe 1.89 0.914 h0: accept random third eps 5.1 0.305 h0: accept random fourth dpr 59.14 0.001 h0: reject fixed economy, 2020, 7(2): 110-118 115 © 2020 by the authors; licensee asian online journal publishing group according to the test standards table 2 shows that model first, second, and third accept the null hypothesis (h0) and the random model is applying. but on the other side, the fourth model rejects the h0 and fixed effect random effect model applies. table 3 showing a combined summary of statistics and correlation matrix. the mean roa is 9.01% and roe is 43.12%. similarly, the mean of eps and dpr are rs.1.90 and 6.92 respectively. this percentage is a little high in commercial banks than other non-financial institutions and other variables are showing low percentage results as compared to sheikh, wang, and khan (2013); sheikh. and karim (2015); sohail et al. (2017). besides that, the matrix of correlations showing there is no severe multicollinearity among these variables. 4.2. correlation matrix and statistics table-3. descriptive statistics and correlation matrix. variables mean sd roa roe eps dpr pms ft eaud fown bs lev roa 0.0901 0.4209 1 roe 0.4312 0.7038 0.745** 1 eps 1.9012 2.0945 0.567** .456** 1 dpr 6.9231 1.9341 0.614** .546** .767** 1 pms 0.0340 0.2304 -0.317* -.322* -.657** -.510** 1 ft 0.2035 0.5902 -0.108 -0.139 -0.14 -.326** -0.044 1 eaud 1.2091 0.2684 -0.003 -0.142 -0.104 -0.024 0.0 -0.182 1 fown 0.6102 0.0236 .465** .234* .276** .297** -.317** .203* .331** 1 bs 8.5024 2.7649 0.191 .351** .268** .273** 0.061 0.055 -.235* -0.184 1 lev 2.0612 1.3876 -.341** -0.063 -0.19 -.305** 0.065 .216* -0.057 -.357** .239* 1 note: **correlation is significant at the 0.01 level (2-tailed). *correlation is significant at the 0.01 level (2-tailed). the results of table 4, the first model designates that the pms has a negative impact on roa. it indicates that pms does not participate to increase firm performance. this is useless to pms because they do not play any part in putting organizational performance inducements (thompson & thomas, 2004). further, for the sake of motivation to act positively with a minority of stakeholders and other companies that may play a positive role in firm performance. the financial transparency indicates negative and insignificant measurements on roa. financial transparency and company results have a negative relationship (chen et al., 2007). financial transparency does not play a part to enhance firm performance. the external auditor shows a positive and insignificant relationship on roa. the more external auditors reveal objection about the trustworthiness of financial information which is communicated via the financial statements of banks. a prior study between external audit and earning management showed a negative relationship and a huge risk with external auditors (becker et al., 1998). after regressed moderation, pms shows positive and insignificant relationship on roa, which means the participation of foreign ownership can increase the efficiency of banking institutions. table-4. effect of the external governance framework on banking sector performance. variables first model roa coefficient probability second model roe coefficient probability third model eps coefficient probability fourth model dpr coefficient probability pms -0.505* 0.274 -7.252 0.077 -7.654** 0.114 0.000 0.691 ft -0.013 0.040 -0.951 0.087 0.150 0.086 0.273 0.108 eaud 0.145 0.215 -2.326 0.024 0.745 0.063 -15.62* 0.256 bs 0.142 0.103 3.330** 0.115 1.576*** 0.020 -26.10 0.054 lev -0.026 0.037 -0.336 0.045 -0.083 0.003 0.457 0.010 fown -0.017 0.034 -0.306 0.282 0.589*** 0.012 -3.230 0.021 fownpms 0.002 0.007 -0.021 0.558 -0.033 0.052 2.506 0.023 fownft 0.001* 0.001 0.017 0.091 -0.019** 0.423 -0.003 0.201 fowneaud -0.010 0.026 0.081 0.129 -0.176 0.231 3.398* 0.432 constant 2.901 45.67 4.240 153.7 wald chi2 30.41 40.74 160.2 6.41 note: standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1. financial transparency indicates positive and significant measurement on roa, which indicates through foreign ownership financial transparency plays an important role in the advancement in banks' performance. financial transparency is measured positively on firm performance (bai et al., 2006). the external auditor reveals a negative and insignificant association on roa. it shows that the participation of foreign investment and the capability of disclosing is essential to restrict banking performance. it is most valuable that an external auditor should retain his client sovereignty (lennox, 1999). the results of the second model indicate that pms effects on roe negative and insignificant. it explains considering pms does not generate profit for the firm. wei-qi (2010) highlighted, to produce pms interest, the focus must be pay on disciplining a firm when it issues any material or annual report. the effect of financial transparency on roe is negative and insignificant, that would be banks do not have enough consideration to maximize the profit. besides this, there is one negative measurement of financial transparency on organizational efficiency (chen et al., 2007). the external auditor has a negative insignificant measurement of roe. based on this result external auditors do not participate in incremental return for banks. on the other hand, external auditor has a positive relation with co-audit (boulila taktak & mbarki, 2014). therefore, after regressed moderation, pms has negative insignificant relation on roe, which shows even participation of foreign investors does not increase banks' performance. in addition to this, it is normally argued that foreign investors demand a high quality of information because of their fame (d'souza, nash, & megginson, 2005). the financial transparency has a positive insignificant impact, which shows that cooperate foreign investors economy, 2020, 7(2): 110-118 116 © 2020 by the authors; licensee asian online journal publishing group play a significant side. so, external auditors have a positive impact and indicate that they participate in the advancement of the firm return. the results of the third model, show that pms has a negative and significant effect on eps. it highlights that focusing on pms does not improve earnings on shares. the specialists would not suggest the easy way that analyses the poor flow value of organizations as it would not offer positive outcomes for the benefit regarding pms (thompson & thomas, 2004). whereas, financial transparency has positive and insignificant relation with eps, which explains the credibility of banks plays a vital role to maximize the return on shares. transparency of functioning and revelation of key information are the basic dimensions of governance mechanism (bushman, piotroski, & smith, 2004; damodaran, 2007). the external auditor on eps is a positive and significant effect, which reveals that it increases profit on shares effectively. so, after running moderation pms has a negative insignificant impact on eps, which examines that after engaging foreign investors do not enhance return on shares. financial transparency has a negative significant role and indicates that it does not improve return on shares with foreign ownership. the external auditors have negative effects and reveals that they with foreign investors do not enhance return on shares. therefore, the external auditors have a negative relationship with organizational efficiency (boulila taktak & mbarki, 2014). the outcomes of the fourth model show that pms has a positive and insignificant relation on dpr. it interprets that pms plays an important role in the retained amount in the firm and help to pay its debts. pms also reduces the costs of the agency fees found in the management of companies. besides, financial transparency affects dpr positively and insignificantly, it highlights that transparency must help banks to pay off their outstanding. financial transparency has a positive connection with the success of organizations (bai et al., 2006). the external auditor has negative and significant relation on dpr, it means that it does not help to firm for reserve. sometimes it causes an imbalance between firms and external audit firms (bennecib, 2004). while regressed moderation, pms has positive and insignificant relation on dpr which examines that foreign investors are more vigilant in observing activities than with domestic investors (ferreira & matos, 2008). aggarwal, erel, ferreira, and matos (2011) examined that foreign investors also play a valuable role in enhancing governance mechanisms, particularly in countries with the protection of weak stakeholders. the financial transparency has a negative impact and shows that it does not take part in retained firm debt even with foreign investors. the information provided is deemed non-binding and can be used to accommodate the financial system and investment firms (healy & palepu, 2001). the external auditors have positive significant relation and they paid the efficient debt of the firm with the engagement of foreign investors. external auditors are another governance mechanism that restrains administrators’ non-compulsory activities. in brief, the positive and negative impact of explanatory variables before and after moderation on banking performance shows that instead of weak governance mechanism in-country external governance seems to have a worthwhile impact on the performance of banks. aggarwal et al. (2011) explained that foreign stakeholders also play an effective role in the activities of upgrading governance structures, especially in countries with weak governance practices. 5. conclusion the study analyzed the effect of the external governance structure on the commercial bank’s performance in pakistan. the panel technique has regressed as the sample design includes 23 listed banks in psx from 2009-2018. the study examined four models to inspect the relationship of external mechanisms on banking sectors. this research intended to investigate the components of governance mechanism that source to upgrade the efficiency of banking institutions. the findings investigated that pms does not play a considerable part in the performance even with foreign ownership (anderson, chi, & liao, 2019; shan, 2013; thompson & thomas, 2004). the foreign stakeholders also play an effective role in the advancement of governance mechanism activities, especially in those countries that have weak governance practices aggarwal et al. (2011). the financial transparency direct and moderation shows the same results which enhance the improvement of the performance of banks (bai et al., 2006; chen et al., 2007). furthermore, the external auditors show mixed results in four models which is to retrieve user confidence in the financial statement the transparency ecosystem should be maintained, and stakeholders satisfied (botez, 2009). in sum, it comes up with the motivation to supervise performance practices in banking sectors. although the external auditor's ability to show reservations has obstructive effects on the manager's tact. in addition to this, results indicate that instead of weak governance mechanism there is still governance measures considerably affect the bank performance in pakistan. bank administrators, depositors, prospect shareowners, should consider the value of these measures although making forecasting or decisions. furthermore, legislative authorities should follow some important measures to apply regulations for productive governance mechanisms in the country. we have explained the impact of some external governance analyses regarding the performance of banks listed in the psx. so, there is still a need to examines the impact of some other governance variables like separation of ceo, committee designs, rights, and responsibility of shareholders on the profit of banking sectors. the external governance can also check by including international banks that are working in pakistan but not included in this study due to data unavailability. references abbott, l. j., parker, s., & peters, g. f. 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(2000). normative stakeholder theory and aristotle: the link between ethics and politics. journal of business ethics, 25(4), 329–342. available at: https://doi.org/10.1023/a:1006086226794. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. http://www.semanticscholar.org/paper/the-impact-of-ownership-structure-on-ceo http://www.semanticscholar.org/paper/the-impact-of-ownership-structure-on-ceo 78 © 2020 by the authors; licensee asian online journal publishing group economy vol. 7, no. 1, 78-86, 2020 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2020.71.78.86 © 2020 by the authors; licensee asian online journal publishing group monetary policy changes and inflationary pressure in nigeria isiwu george duhu1 azike lawrence chike2 ngwu jerome chukwuemeka3 ( corresponding author) 1,2,3department of economics, enugu state university of science and technology, enugu, nigeria. abstract achieving price stability has continued to be one of the major macroeconomic policy objectives of successive governments in nigeria. this is because, inflation rate, as measured by changes in consumers price index (cpi), has continued to be on the increase despite the implementation of monetary policy measures to control it. therefore, the main objective of this study is to analyze the impact of monetary policy changes on inflationary pressure in nigeria. this is to identify whether inflationary pressure in nigeria is a monetary phenomenon or not. annual time series data on changes in inflation rate, broad money supply, net domestic credit, monetary policy rate, real gdp growth rate (real output) and exchange rate were collected from central bank of nigeria (cbn) statistical bulletin, 2018 issue. to analyze the data, autoregressive distributed lag (ardl) model, applying bounds test, was adopted. the empirical results show that monetary variables (broad money supply, net domestic credit, monetary policy rate) have insignificant impact on inflation both in the short run and long run respectively. real output has the expected negative sign and its impact on inflation is significant both in the short run and long run. this implies that inflation in nigeria is more of output than monetary phenomenon. it is recommended that nigeria should invest more in agricultural sector since more output is sourced from the sector. this will help to reduce food (price) inflation in the country. keywords: inflation, monetary policy, real output, price stability, money supply, quantity theory of money, ardl. jel classification: e59. citation | isiwu george duhu; azike lawrence chike; ngwu jerome chukwuemeka (2020). monetary policy changes and inflationary pressure in nigeria. economy, 7(1): 78-86. history: received: 9 april 2020 revised: 18 may 2020 accepted: 22 june 2020 published: 13 july 2020 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group acknowledgement: all authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ...................................................................................................................................................................................... 79 2. literature review ............................................................................................................................................................................ 79 3. methodology ..................................................................................................................................................................................... 81 4. presentation and discussion of results ...................................................................................................................................... 82 5. summary, conclusion and recommendations ........................................................................................................................... 85 references .............................................................................................................................................................................................. 85 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2020.71.78.86&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ https://www.asianonlinejournals.com/index.php/economy/article/view/1879 https://orcid.org/0000-0001-9981-4802 https://orcid.org/0000-0002-9823-941x https://orcid.org/0000-0002-3325-1127 https://www.asianonlinejournals.com/index.php/economy/article/view/1879 https://orcid.org/0000-0001-9981-4802 https://orcid.org/0000-0002-9823-941x https://orcid.org/0000-0002-3325-1127 https://www.asianonlinejournals.com/index.php/economy/article/view/1879 https://orcid.org/0000-0001-9981-4802 https://orcid.org/0000-0002-9823-941x https://orcid.org/0000-0002-3325-1127 https://www.asianonlinejournals.com/index.php/economy/article/view/1879 https://orcid.org/0000-0001-9981-4802 https://orcid.org/0000-0002-9823-941x https://orcid.org/0000-0002-3325-1127 https://www.asianonlinejournals.com/index.php/economy/article/view/1879 https://orcid.org/0000-0001-9981-4802 https://orcid.org/0000-0002-9823-941x https://orcid.org/0000-0002-3325-1127 economy, 2020, 7(1): 78-86 79 © 2020 by the authors; licensee asian online journal publishing group contribution of this paper to the literature the empirical works reviewed in nigeria neither included real output nor conducted any test to identify whether inflation is a monetary phenomenon in the country or not. it is this limitation that motivated this study. 1. introduction 1.1. background of the study inflation represents a persistent increase in the general price level in an economy. this tendency results to general loss of purchasing power of the currency which causes serious discomfort for the consumers, investors, producers and government. this results in corruption because individuals and groups resort to illegal methods to compensate for the loss in their purchasing power (isiwu & aminu, 2018). hence, one of the policy objectives of monetary policy in nigeria is to achieve price stability. price stability does not imply that all prices are stable or fixed. the emphasis is on maintaining a relatively stable and not an absolute price level. thus, price stability operationally represents an inflation rate between 0 and 3% (fischer, 1993). this is because, according to fischer (1993) macroeconomic stability, including inflation control, is a must for economic growth. therefore, combining quantitative and qualitative aspects, meltzer (1997) states that price stability implies an inflation rate so close to zero (0), which is an important factor in long term planning and notes that 3 percent inflation is too high for this objective. in this regard, monetary authorities in nigeria apply discretionary power to influence the money stock and interest rate to make money either more expensive or cheap, depending on the prevailing economic conditions in order to achieve price stability. therefore, monetary policy in nigeria involves the management of interest rate and exchange rate, money supply and the level of liquidity in the system in order to achieve the desired level of aggregate demand, the rate of inflation, output and employment (ogwuma, 1997). the central bank of nigeria (cbn) has been made to focus on the target growth rate of money supply, first through the credit guidelines before 1985. however, since the implementation of the structural adjustment program (sap) in 1986, the focus shifted to marketdirected policy. the adoption of sap changed the monetary policy implementation approach in nigeria with more emphasis on the power of the market forces for policy effectiveness. thus, effective monetary policy must be built on consistent commitment to low inflation. it is against this background that the focus of this study is to empirically analyze the impact of monetary policy changes on inflationary pressure in nigeria. 1.2. statement of the problem high rate of inflation in nigeria has continual to attract national discourse among scholars and policy makers for more than five decades since independence in 1960. hence, achieving price stability has continued to be one of the major macroeconomic policy objectives of the successive governments in nigeria over the years. following the introduction of sap in nigeria in 1986, price stability has been the major concern for the monetary authorities. this is because inflation rate, as measured by changes in consumers price index (cpi), has continued to be on the increase. the central bank of nigeria (cbn) statistical bulletin, 2018 shows that in 1980s (1985 – 1989), inflation rate averaged 26.06 per cent. following this increase, an indirect monetary policy tool, the open market operation (omo), was introduced in 1993 as a control measure for achieving price stability. however, in 1990s (1990 – 1999), inflation rate averaged 30.17 per cent. it decreased to 13.27 per cent in 2000s (2000 – 2009) and then decreased further to 11.66 per cent for the period 2010 – 2018. this decrease, however, still maintains double digit as opposed to single-digit inflation rate, which the monetary authorities in the country have been targeting. similarity, net domestic credit to the economy has continued to be on the increase. it averaged 5.15 per cent for the period 1985-1989 and then increased to 37.58 per cent for the period 1990 – 1999, 52.77 per cent for the period 2000 – 2009 and then declined to 13.36 per cent for the period 2010 – 2018. in the same vein, changes in broad money supply (m2) averaged 15.62 per cent for the period 1985 – 1989, 31.62 per cent for the period 1990 – 1999 and 32.18 per cent for the period 2000 – 2009. it declined to 8.40 per cent for the period 2010 – 2018. these developments appeared to have lent credence to the monetary theory that inflation is a monetary phenomenon. such conclusion assumes that other determinants of inflation are neither significant nor relevant. hence, this study analyzes the impact of monetary policy changes [broad money supply (m2), monetary policy rate, net domestic credit to the economy, exchange rate and real gdp (real output)] on inflationary pressure in nigeria for the period 1985 – 2018. this is to identify whether inflation is a monetary phenomenon in nigeria. this period (1985 – 2018) is chosen because cbn started publishing data on monetary policy changes in 1985. this is indicated in various issues of the cbn statistical bulletin. 1.3. objectives of the study specifically, this study intends to: (i) analyze the impact of monetary policy changes on inflationary pressure in nigeria. (ii) identify whether inflation is a monetary phenomenon in nigeria. 2. literature review 2.1. theoretical literature 2.1.1. monetary theory of inflation the monetarists hold the view that inflation is a monetary phenomenon. the earliest explanation of this approach is found in the quantity theory of money. the transaction version of this theory is attributed to fisher (1911). the fisher’s famous equation of exchanged is expressed as: mv = pq (1) economy, 2020, 7(1): 78-86 80 © 2020 by the authors; licensee asian online journal publishing group where, m is the quantity of money, v is the income velocity of money, p is the average price level and q is the total output of goods and series. specifically, v = pq/m (2) thus, the quantity theory is based on the proposition that the velocity (v) is stable. therefore, if money supply (m) increases, with the velocity remaining stable, the total spending (pq) will rise. this implies that money is the key determinant of aggregate demand. however, the modern quantity theorists led by friedman (1956) hold the view that inflation is always and everywhere a monetary phenomenon, which arises from a more rapid expansion in the quantity of money than in real output. their reason is that money is used to purchase not only the final output (q) but also intermediate products. their transaction version of the equation of exchange is expressed as: mvt = pt (3) where, t represents total transactions and vt is the transaction velocity, which is defined as being equal to pt/m. the above equation is regarded as an identity which must always hold no matter the level of economic activity. therefore, monetarists maintain that monetary policy is a more portent instrument than fiscal policy in economic stabilization. 2.1.2. keynesian theory of inflation the keynesians hold the view that money does not matter and as such fiscal policy is a more powerful tool for economic stabilization. according to keynes (1936) the increase in aggregate demand is the source of demandpull inflation. when the aggregate demand exceeds the aggregate supply at full employment, inflationary gap sets in. hence, the larger this gap, the more rapid the inflation; keynes used the notion of inflationary gap to show price inflation. the keynesian chain of causation between changes in nominal income and prices is indirect one through the rate of interest. when the quantity of money increases, it first affects the interest rate, which tends to fall. a fall in interest rate will in turn increase investment, which will raise aggregate demand. a rise in aggregate demand will affect output first and not prices as long as there are unemployed resources. the keynesian theory holds the view that prices are determined by non monetary factors. however, at the beginning of the 1980s, this theory lose credibility and monetary theory held high by economists such as milton friedman, karl brunner and alton meltzer, who suggest that monetary regulation can stabilize the economy. 2.2. empirical literature several studies have been carried out at both international and national levels on the nexus between monetary policy and inflation dynamics. de grauwe and polan (2005) examined the link between money supply and inflation in 160 countries using 30 years of data range. the results show that inflation is a monetary phenomenon and that the link between inflation and money growth rate is positive and much stronger only in countries with high inflation rates. in a similar study, bernanke (2006) tested the quantity theory (qt) of money using data from united states of america for the period 1961 – 1988. the result shows that there is a positive significant relationship between price changes and changes in the quantity of money. aikaeli (2007) examined the relationship between money supply and inflation in tanzania for the period 1994 – 2006. applying garch model in the analysis, the result shows that it takes a period of 7 months for fluctuations in money supply to have an impact on inflation rate in tanzania. ndanshau (2010) also in tanzania, adopted autoregressive distributed lag (ardl) model on quarterly data for the period 1967 – 2005 to analyze the role of money in explaining inflation dynamics in the country. employing m0, m1 and m2 as monetary aggregates, the result failed to identify any relationship between money and inflation. the conclusion drawn is that money is of less importance in determining inflation in tanzania. in another study, ndanshau (2012) included budget deficit to analyze the impact of changes in monetary policy on inflation rate in tanzania. applying granger causality test and vector error connection (vec) model to estimate the data set, the result indicates that changes in monetary policy regime have an influence on inflation rate in tanzania. contrary to the finding by ndanshau (2012); ayubu (2013) examined the degree to which inflation is as a result of monetary phenomenon in tanzania. in the study, money supply was compared with other potential determinants, which includes output, exchange rate, and international oil price. applying the structural vector autoregressive (svar) and vec models for the period 1993 q4 – 2011 q4, the empirical results show that inflation in tanzania is more of an output factor than monetary phenomenon. alemu, mulugeta, and wassie (2016) examined the share of money supply in explaining the dynamics of inflation in ethiopia for the period 1994/75 – 2014/15. applying the johansen method of cointegration and granger causality test, the empirical results indicate that money supply, real gdp, trade openness, real exchange rate, budget deficit and nominal deposit rate variables are important in explaining the long run dynamics of inflation. money supply was estimated to impose the dominant effect towards validating the classical quantity theory. dany-knedlik and gracia (2018) investigated the evolution of inflation dynamics in the five largest association of south east asian nations (asean) economies (indonesia, malaysia, the philippines, singapore and thailand) for the period 1997 – 2017. basing the analyses on country – specific philips curves, the result indicates evidence of forward – looking, dynamic and a better anchoring of inflation expectations consistent with the improvements in monetary policy framework in the country. at the national level, many empirical studies have equally been conducted. in a study on the relationship between money supply, inflation and output in nigeria, chimobi and uche (2010) employed cointegration and granger causality techniques. the results indicate that money supply has significant causal effect on output and inflation. it is also found that there is no cointegration relationship between money supply, output and inflation. nenbee and madume (2011) investigated the impact of monetary policy on macroeconomic stability in nigeria for the period 1970 – 2009. using cointegration and error correction (ecm) techniques, the results show that 47 economy, 2020, 7(1): 78-86 81 © 2020 by the authors; licensee asian online journal publishing group per cent of total variations in the model are attributed to changes in money supply, minimum rediscount rate and treasury bills rate. the conclusion drawn is that inflation is not always a monetary phenomenon. onwuchukwu (2004) investigated the impact of monetary policy on inflation control in nigeria, covering the period 1970 – 2010. applying the method of ordinary least squares (ols) on inflation rate (department variable) and bank rate, liquidity ratio and broad money supply (m2) as independent variables, the results show that all the variables, except exchange rate, are statistically significant in explaining changes in inflation in nigeria. obi and uzodigwe (2015) assessed the dynamic linkage between money supply and inflation in ecowas member states, west african monetary zone (wamz) and west african economic monetary union (waemu) for the period 1980 – 2012. applying panel regression, the random effect model for ecowas member states shows that the impact of money supply on inflation is effective in the current and first period. the impact is effective in the first period for wamz while waemu experiences that impact in the current period. the significant country – specific effects on the variables implies that the objective of macroeconomic convergence is yet to be achieved in the zone. tamunonimim (2016) empirically examined the effectiveness of monetary policy in controlling inflation in nigeria for the period 1985 – 2012. the study modeled inflation rate as a function of monetary policy rate (mpr), treasury bills rate (tbr), savings rate (sr), prime lending rate (plr), maximum lending rate (mlr), growth of narrow money (m1), broad money (m2), net domestic credit (ndc), net credit to government (ncg) and credit to private sector (cps). applying the ols method, the results show that mpr, tbr, mlr and ndc are not significant in explaining changes in inflation rate while sr, m1, m2.mcg and cps are statistically significant. it is evident that the empirical studies reviewed above on the link between monetary policy and inflation dynamics have produced mixed results. some studies have found that inflation is a monetary phenomenon (alemu et al., 2016; bernanke, 2006; chimobi & uche, 2010; de grauwe & polan, 2005). conversely, some studies have found that inflation is not a monetary phenomenon (aikaeli, 2007; ayubu, 2013; ndanshau, 2010; nenbee & madume, 2011). moreover, most of the studies in nigeria failed to include real output proxied by real gdp (onwuchukwu, 2004; tamunonimim, 2016). it is the above discrepancies that motivated and provoked this study. 3. methodology this study adopted autoregressive distributed lag (ardl) model, applying bounds test, in estimating the data set. the choice of this model is guided by the fact that it is applied irrespective of the order of integration of the variables; whether they are i(0) or i(1) (pesaran, shin, & smith, 2001). moreover, the model is suitable for small sample size and most importantly, it has the advantage of generating long run and short run results simultaneously. 3.1. data and definition of variables this study used annual time series data covering the period 1985-2018 on the following variables. inflation rate (infr). this is proxied by percentage change in consumers’ price index (cpi). cpi best represents inflation of the country due to the less developed nature of the economy, where the largest share of spending goes to consumption of final goods and services. broad money supply (m2). this is the principal independent variable and the most preferred monetary aggregate; m2 is estimated to have the highest correlation with inflation compared to other monetary aggregates (aikaeli, 2007). net domestic credit (ndc). this is one of the monetary policy variables that affect inflation. monetary policy rate (mpr). this is the cbn’s official interest rate policy. when this rate changes, all other interest rates change in the same direction. real gdp growth rate (rgdpr). this is used as a measure of changes in real income or real output. exchange rate (exr). this is the national currency (naira) per us dollar, that is, ₦/$. this represents the foreign sector and captures international transmission of inflation. 3.2. model specification this study adopted the model used by ayubu (2013) with some modifications; net domestic credit to the economy and monetary policy rate are included in the current study. the long run relationship between changes in inflation rate and independent variables (m2, ndc, mpr, rgdpr, and exr) is specified below: infrt = β0+ β1m2t+ β2ndct + β3 mprt + β4rgdprt + β5expt +μt (4) where, infr, m2, ndc, mpr, rgdpr, and exp are as defined in 3.1 above. β0 is the constant intercept while β1 β5 are the coefficients of the variables respectively. μ is the error term and t is the time period. 3.3. economic a priori of the variables the coefficient of m2 (β1) is expected to be positive; an increase in money supply will increase inflation and vice versa. the coefficient of ndc (β2) is expected to be positive; an increase in net domestic credit will increase inflation and versa. the coefficient of mpr (β3) can be negative or positive. the coefficient of real output, rgdpr (β4) is expected to be negative; an increase in real output will reduce inflation and vice versa. the coefficient of exr (β5) can be positive (showing currency depreciation) or negative (showing currency appreciation). 3.4. estimation techniques to estimate and analyze the data, augmented dickey and fuller (1979) and phillips and perron (1988) unit root tests were conducted before the application of ardl approach to cointegration. this is to ensure that none of the variables is integrated into order two [i,(2)], which is the condition for the application of ardl model. economy, 2020, 7(1): 78-86 82 © 2020 by the authors; licensee asian online journal publishing group after the unit root tests, ardl bounds test procedure was conducted to determine the long run relationship between changes in inflation rate and independent variables. following (pesaran et al., 2001) the ardl format of equation 4 above becomes: infrt = o + ∑ 1 rt – i + ∑ 2 2t – i + ∑ 3 t – i + ∑ 4 t – i + ∑ 5 rt – i + ∑ 6 t – i + λ1infrt + λ2m2t + λ3ndct + λ4mprt + λ5rgdprt + λ6exrt + t (5) where, t is the time period, is first difference operator, β0 is the constant, β1 β6, with summation signs, represent the short run dynamics, while λ1 λ6 represent the long run coefficients, respectively. ps are the optimum lags order selected by akaike information criteria and is the error term. when cointegration between inflation rate (dependant variable) and independent variables exists, the error connection model (ecm), which measures the short run dynamics or adjustment of the cointegrated variables towards their equilibrium values, has to be estimated. the general error correction representation of equation 5 becomes: infrt = o + ∑ 1 rt – i + ∑ 2 2t – i + ∑ 3 t – i + ∑ 4 t – i + ∑ 5 rt – i + ∑ 6 t – i + ecmt + t (6) for a stable system, the coefficient of ecm (ө), which measures the speed of adjustment of the dependent variable to the value implied by the long run equilibrium relationship, is expected to be fractional negative and significant. to test for the existence of cointegration, the null hypothesis of no cointegration among the variables, defined by: ho: λ1= λ2= λ3= λ4= λ5= λ6 = 0 is tested against the alternative: h1: λ1= λ2= λ3= λ4= λ5= λ6 0 f test was conducted for the bounds test. this test has two sets of critical values; one set assumes that all variables are of order i (0) and the other assumes that they are i(1). if the computed f statistic falls above the upper bound critical value, which corresponds to i (1), the null hypothesis of no cointegration is rejected. if it falls below the lower bound, which conesponds to i(0), the null hypothesis is not rejected. if it falls between the two bounds, the result is inconclusive. the order of lag was selected by the akaike information. criteria. 3.5. post estimation tests the robustness residual tests conducted include, jarque-bera (for normality test), lagrange multiplier (lm) test for serial correlation, breusch-pagan-godfrey test for heteroscedasticity and ramsey reset test for model specification. 4. presentation and discussion of results 4.1. descriptive statistics table-1. result of descriptive statistics. variable mean median standard deviation skewness kurtosis observations infr 19.694 12.100 18.924 1.675 4.685 34 m2 23.589 20.480 15.739 0.557 2.318 34 ndc 30.869 15.565 56.688 2.440 12.132 34 mpr 13.662 13.500 3.890 0.745 4.734 34 rgdpr 4.955 5.400 3.812 0.383 2.628 34 exr 99.012 115.255 86.462 0.684 2.893 34 the result of the descriptive statistics presented in table 1 above shows that exchange rate has the highest mean of 99.012, followed by net domestic credit (30.869), broad money supply (23.589) and inflation (19.694). real output has the least mean of 4.955. exchange rate has the highest standard deviation of 86.462 and hence, more variable. real output has the least standard deviation of 3.812 and hence, it is less variable. the values of the skewness for all the variables are different from zero (0) and the values of their respective kurtosis are different from 3. these indicate a non-normal distribution for the series. 4.2. unit root tests to avoid the problem of spurious regression, which is associated with time series data, unit root tests were conducted. augmented dickey – fuller (adf) and philips-perron (pp) statistics were adopted to determine the stationary status of the variables. the results of adf and pp unit root tests are presented in table 2 below. table-2. results of adf and pp unit root tests. adf unit root test result pp unit root test result variables constant constant & trend constant constant & trend inference infr -5.230659(0.0002)* -5.331126 (0.0012*) -7.518778 (0.0000)* -7.186417 (0.000)* i (1) m2 -3.438498(0.0166)**-3.756007 (0.0322)** -3.398155 (0.0183)** -3.704699 (0.0361)** i (0) ndc -5.70273 (0.0000)* -5.605770 (0.0003)* -5.750796 (0.0000)* -5.639814 (0.0003)* i (0) mpr -7.939559 (0.0000)* -7.83861(0.0000)* -8.052707(0.0000)* -7.948975(0.0000)* i(1) rgdpr -7.605874(0.0000)* -4.603335(0.0000)* -13.79743 (0.0000)* -17.42948 (0.0000)* i(1) exr -4.039880 (0.0038)* -4.264177 (0.0102)* -3.99351 (0.0043)* -4.100729 (0.0150)* i (1) note: * and ** implies rejection of the null hypothesis @ 1% and 5% critical values respectively; i(1) and i(0) show order of integration; [ ] are the p – values and the variables are as defined earlier. economy, 2020, 7(1): 78-86 83 © 2020 by the authors; licensee asian online journal publishing group the results of both adf and pp unit root tests show that broad money supply (m2) and net domestic credit (ndc) are stationary at levels, that is, they i (0) process. this implies that they do not contain unit root. on the other hand, changes in inflation rate (infr), monetary policy rate (mpr), real output (rgdpr) and exchange rate (exr) are stationary at first difference, that is they are i(1) process. therefore, they contain unit root. the existence of unit root in most variables paves way for further investigation on the nature of the long run relationship among the variables. 4.3. cointegration the results of the unit root tests from augmented dickey-fuller and philips-perron statistics show that the series contain a mixture of i (0) and i(1) variables. therefore, ardl approach becomes the most appropriate procedure for testing for cointegration between the dependent variable (inflation rate) and independent variables (money supply, net domestic credit, monetary policy rate, real output and exchange rate). the result of ardl, applying bounds testing procedure, is presented in table 3 below. table-3. result of ardl bounds test. ardl bounds test date: 05/27/20 time: 11:39 sample: 1987 2018 included observations: 32 null hypothesis: no long-run relationships exist test statistic value k f-statistic 3.939702 5 critical value bounds significance i0 bound i1 bound 10% 2.26 3.35 5% 2.62 3.79 2.5% 2.96 4.18 1% 3.41 4.68 the result of the bounds test presented above shows that the value of f statistic is 3.939702. since this value is greater than the upper bound, i(1), critical value of 3.79 at 5 per cent level of significance, the null hypothesis of no cointegration is rejected. this implies that there is long run relationship between inflationary pressure and monetary policy changes. the existence of cointegration among the variables necessitates testing for the short run and long run impact of monetary policy changes (money supply, net domestic credit, monetary policy rate, real output and exchange rate) on inflationary pressure in nigeria. 4.4. presentation and discussion of ardl short run and long run results table-4. ardl short run and long run results. ardl cointegrating and long run form dependent variable: infr selected model: ardl(2, 0, 0, 1, 0, 0) date: 05/27/20 time: 11:46 sample: 1985 2018 included observations: 32 cointegrating form variable coefficient std. error t-statistic prob. d(infr(-1)) 0.465302 0.174586 2.665176 0.0138 d(m2) 0.137106 0.200482 0.683881 0.5009 d(ndc) 0.015412 0.046754 0.329638 0.7447 d(mpr) -1.032745 0.809355 -1.276010 0.2147 d(rgdpr) -1.420887 0.640996 -2.216686 0.0368 d(exr) -0.056380 0.036986 -1.524359 0.1411 cointeq(-1) -0.757393 0.178052 -4.253775 0.0003 cointeq = infr (0.1810*m2 + 0.0203*ndc + 0.9705*mpr -1.8760 *rgdpr -0.0744*exr + 18.9716 ) long run coefficients variable coefficient std. error t-statistic prob. m2 0.181023 0.278854 0.649168 0.5227 ndc 0.020349 0.062104 0.327656 0.7461 mpr 0.970465 1.053042 0.921582 0.3663 rgdpr -1.876024 0.921553 -2.035721 0.0535 exr -0.074439 0.042950 -1.733172 0.0965 c 18.971627 17.622865 1.076535 0.2929 the above results show that changes in broad money supply (m2) have positive impact on changes in inflation rate both in the short run and long run. this conforms to a priori expectation. in the short run, an increase in money supply by 1 per cent increases inflation by 13.71 per cent while in the long run, an increase in money supply by 1 per cent increases inflation by 18.10 per cent. however, the impact of changes in money supply on inflation is insignificant both in the short run and long run as indicated by the probability values of 0.5009 and 0.5227 economy, 2020, 7(1): 78-86 84 © 2020 by the authors; licensee asian online journal publishing group respectively. this finding agrees with the findings of aikaeli (2007) and ndanshau (2010) in the empirical literature. the results also show that net domestic credit has positive impact on inflation both in the short run and long run. this conforms to a priori expectation. however, the impact is insignificant as indicated by the probability values (0.7447 and 0.7461) respectively. this finding agrees with the finding of tamunonimim (2016) who finds that net domestic credit is not significant in explaining inflationary changes in nigeria. monetary policy rate has negative impact on inflation in the short run and positive impact in the long run. however, its impact in both short run and long run is insignificant. this finding agrees with the finding of tamunonimim (2016) who finds that monetary policy rate is not significant in explaining inflationary changes in nigeria. the change in signs from negative in the short run to positive in the long run indicate policy shift. its insignificance implies that interest rate channel of monetary policy is less effective in dealing with the long run process of inflation in nigeria. the real output has negative and significant impact on changes in inflation rate both in the short run and long run. the negative sign is in line with the a priori expectation. this implies that real output is more important in explaining the long run dynamism of inflation than monetary variables. this finding agrees with the finding of ayubu (2013) in tanzania. exchange rate has negative and insignificant impact on inflation both in the short run and in the long run. the negative impact shows appreciation of naira. however, the appreciation is not significant to boost economic activity because of the import-dependent nature of the nigerian economy. this finding agrees with onwuchukwu (2004). the error correction term, which measures the speed by which short term deviations in inflation model can converge back to, or diverse from its long run equilibrium, is -0.757391. it is correctly signed, fractional and significant. the negative and significant impact imply that any short term distortions in the inflation model could be corrected; the short term deviations could converge to long run equilibrium at the annual speed rate of 75.7 per cent. this shows a high speed of adjustment to equilibrium after a shock. 4.5. robustness tests the diagnostic tests carried out for the robustness of the model include, breusch-godfrey lm test for serial correlation, breush-pagan-godfrey test for heteroscedasticity, ramsey reset test for model specification and jarque-bera test for normality. table-5. results of the robustness tests. breusch-godfrey serial correlation lm test: f-statistic 1.070199 prob. f(2,21) 0.3609 obs*r-squared 2.959876 prob. chi-square(2) 0.2277 heteroskedasticity test: breusch-pagan-godfrey f-statistic 0.791576 prob. f(8,23) 0.6153 obs*r-squared 6.908472 prob. chi-square(8) 0.5465 scaled explained ss 9.997517 prob. chi-square(8) 0.2652 ramsey reset test equation: untitled specification: infr infr(-1) infr(-2) m2 ndc mpr mpr(-1) rgdpr exr c omitted variables: squares of fitted values value df probability t-statistic 1.925938 22 0.0671 f-statistic 3.709238 (1, 22) 0.0671 0 1 2 3 4 5 6 7 8 9 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 35 40 45 series: residuals sample 1987 2018 observations 32 mean 7.11e-15 median -0.080155 maximum 40.90533 minimum -22.05792 std. dev. 11.50138 skewness 0.984752 kurtosis 6.602533 jarque-bera 22.47626 probability 0.000013 figure-1. jarque-bera normality test histogram. from the results of the above tests, the probability values for lm test, heteroscedasticity and ramsey reset tests are greater than 0.05 respectively. this implies that there is no serial correlation problem; the residuals are economy, 2020, 7(1): 78-86 85 © 2020 by the authors; licensee asian online journal publishing group homoscedastic; and that the functional form of the model is well specified. however, the probability value of jarquebera is lower than 0.05, which indicates that the residuals are not normally distributed. be that as it may, the normality assumption may not be very crucial in large data sets (gujarati & porter, 2009). 5. summary, conclusion and recommendations 5.1. summary and conclusion this study examines monetary policy changes and inflationary pressure in nigeria. the objective is to analyse the impact of monetary policy changes on inflationary pressure in nigeria so as to identify whether inflation is a monetary phenomenon in the country. annual time series data on changes on inflation rate, broad money supply, net domestic credit, monetary policy rate, real gdp growth rate and exchange rate were collected for the period 1985-2018 from cbn statistical bulletin, 2018 issue. to analyse the data, autoregressive distributed lag (ardl) model was adopted. the empirical results show that changes in broad money supply (m2) have positive but insignificant impact on inflationary pressure in nigeria both in the short and long run. it is also found that net domestic credit has positive impact on inflation in nigeria. however, its impact is not significant, implying that it is not significant in explaining inflationary pressure in nigeria. monetary policy rate (the cbn interest rate) has negative impact on inflation in the short run and positive impact in the long run. however, its impact in both the short run and long run is insignificant and the change of sign indicates policy shifts. the real output has negative and significant impact on inflation both in the short run and long run. this implies that real output is more important in explaining the long run dynamism of inflation in nigeria than monetary variables. the results also show that exchange rate has negative and insignificant impact on inflation both in the short and long run. the error correction term, which measures the speed of adjustment to equilibrium after a shock, is correctly signed (negative) and significant. this implies that short term deviations in inflation model will converge to long run equilibrium at the annual speed rate of 75.7 percent. the conclusion drawn is that since real output is more important in explaining the long run dynamism of inflation than the monetary variables, inflation in nigeria is more of output than monetary phenomenon. 5.2. recommendations based on the findings emanating from this research, the following recommendations are made. real output is found to be significant both in the short run and long run in explaining inflationary pressure in nigeria. there should be massive investment in agricultural sector since more output is sourced from this sector. improvement in agricultural productivity and hence, output will help to reduce food prices inflation. this will, in turn, explain more than half of consumer price index (cpi), which will support the process of price stabilization and growth in general. exchange rate is found to have negative impact on inflation (showing appreciation of the domestic currency), but the impact is insignificant. the insignificance impact of exchange rate arises from the fact that nigeria exports mainly primary products which have elastic demand in international market. as a result, reducing the exchange rate will only lead to more inflation. therefore, there is the need to diversify the export base of the economy. monetary policy rate is among the monetary policy instruments of cbn. its insignificance implies that interest rate channel of monetary policy is less effective in dealing with the long run process of inflation in nigeria. therefore, exchange rate, interest rate and prices should be programmed jointly because they are closely linked with money supply in an open economy like nigeria. there is the need, for further research, to incorporate the government fiscal discipline, especially with respect to deficit expenditure into the entire policy package. this is because monetary policy alone may not really be very effective means of achieving price stability in nigeria. this will help to reduce inflationary pressure in nigeria. references aikaeli, j. (2007). money and inflation dynamics: a lag between change in money supply and the corresponding inflation response in tanzania. working papers series.available at: http://dx.doi.org/10.2139/ssrn.1021227. alemu, m., mulugeta, w., & wassie, y. (2016). monetary policy and inflation dynamics in ethiopia: an empirical analysis. global journal of human-social science: (e) economics, 16(4), 45-60. ayubu, v. s. (2013). monetary policy and inflation dynamics: an empirical case study of tanzanian economy. m.sc thesi,s department of economics, university of dares salaam, tanzania. bernanke, b. s. (2006). monetary aggregates and monetary policy at the federal reserve: a historical perspective. paper presented at the the fourth ebs central banking conference, germany. chimobi, o. p., & uche, u. c. (2010). money, price and output: a causality test for nigeria. american journal of scientific research, 8(5), 78-87. dany-knedlik, g., & gracia, j. a. 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(1956). a restatement of the quantity theory of money. in m. friedman (ed.), studies in the quantity theory of money. chicago: university of chicago press. gujarati, d. n., & porter, d. c. (2009). basic econometrics (5th ed.). new york: mcgraw-hill companies inc. isiwu, g. d., & aminu, u. h. (2018). relationship between corruption and inflation in nigeria. . international journal of science and research (ijsr), 7(12), 39-46. keynes, j. m. (1936). the general theory of employment, interest and money. new york: harcourt brace. http://dx.doi.org/10.2139/ssrn.1021227 economy, 2020, 7(1): 78-86 86 © 2020 by the authors; licensee asian online journal publishing group meltzer, t. c. (1997). to conclude: keep inflation low and, in principle, eliminate it. federal reserve bank of st louis quarterly review, 79(6), 3-8. ndanshau, m. a. (2010). money and other determinants of inflation: the case of tanzania. indian journal of economics and business, 9(3), 137. ndanshau, m. a. (2012). budget deficits, money supply and inflation in nigeria: a multivariate granger causality test (1967-2010). university of dares salaam working paper, no. 04/12. nenbee, s., & madume, j. (2011). the impact of monetary policy on nigeria’s macroeconomic stability (1970–2009). international journal of economic development research and investment, 2(2), 174-183. obi, k. o., & uzodigwe, a. a. (2015). dynamic impact of money supply on inflation: evidence from ecowas member states. 10sr journal of economics and finance, 6(3), 10-17. ogwuma, p. a. (1997). an effective monetary policy for nation building. cbn bullion, 21(3), 3-10. onwuchukwu, c. i. (2004). impact of monetary policy on inflation control in nigeria. munich personal repec archive (mpra), paper no: 67087, 1-14. pesaran, m. h., shin, y., & smith, r. j. (2001). bounds testing approaches to the analysis of level relationships. journal of applied econometrics, 16(3), 289-326.available at: https://doi.org/10.1002/jae.616. phillips, p. c., & perron, p. (1988). testing for a unit root in time series regression. biometrika, 75(2), 335-346.available at: https://doi.org/10.1093/biomet/75.2.335. tamunonimim, a. n. (2016). monetary policy and inflation in nigeria. international journal of finance and accounting, 5(2), 67-76.available at: 10.5923/j. jjfa. 20160502.01. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. 76 © 2019 by the authors; licensee asian online journal publishing group economy vol. 6, no. 2, 76-81, 2019 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2019.62.76.81 © 2019 by the authors; licensee asian online journal publishing group composition and working of the sharia supervisory boards in bahrain’s islamic banks bhartesh ramprakash kasi1 najdat mahmood2 ( corresponding author) 1head of business department, college of business & financial sciences, royal university for women, west riffa kingdom of bahrain. 2associate professor, college of business & financial sciences, royal university for women, west riffa kingdom of bahrain. abstract the global islamic finance industry has grown rapidly in the last ten years recording an average growth of over 10 percent and is expected to touch usd 3 trillion by 2020. the gulf cooperation council countries, iran and malaysia; have been central to the success story of the global islamic finance industry accounting for 83 percent of the market size. even though islamic finance covers a wide range of financial service segments, 75 percent of the global islamic financial assets are held by islamic banks, which explains the general notion of equating islamic finance with islamic banking. islamic banking refers to a system of banking, which is consistent and in compliance with islamic law, also known as sharia. it is seen as an alternative to western-based banking in islamic countries. even though many islamic countries have in place a sharia supervisory and governance framework for islamic banks, it has often been commented that these frameworks are inadequate when it comes to addressing the issues and challenges confronting islamic banks today. previous researchers have specifically identified issues concerning the membership and workings of the sharia boards as one of the major challenges confronting growth of islamic banks. the purpose of this paper is to examine and comment on the constitution, composition and functioning of sharia boards within islamic banks based in the kingdom of bahrain. keywords: islamic banks, islamic finance, sharia board, sharia supervisory board, sharia scholar, bahrain. jel classification: g21; g28; g29; e58. citation | bhartesh ramprakash kasi; najdat mahmood (2019). composition and working of the sharia supervisory boards in bahrain‟s islamic banks. economy, 6(2): 76-81. history: received: 16 august 2019 revised: 19 september 2019 accepted: 22 october 2019 published: 12 december 2019 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group acknowledgement: both authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ...................................................................................................................................................................................... 77 2. literature review ............................................................................................................................................................................ 77 3. research approach and methodology ......................................................................................................................................... 79 4. findings and discussion ................................................................................................................................................................. 79 5. conclusion and direction for further research ....................................................................................................................... 81 references .............................................................................................................................................................................................. 81 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2019.62.76.81&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ https://www.asianonlinejournals.com/index.php/economy/article/view/1154 https://orcid.org/0000-0002-1429-0171 https://orcid.org/0000-0002-3639-262x https://www.asianonlinejournals.com/index.php/economy/article/view/1154 https://orcid.org/0000-0002-1429-0171 https://orcid.org/0000-0002-3639-262x https://www.asianonlinejournals.com/index.php/economy/article/view/1154 https://orcid.org/0000-0002-1429-0171 https://orcid.org/0000-0002-3639-262x https://www.asianonlinejournals.com/index.php/economy/article/view/1154 https://orcid.org/0000-0002-1429-0171 https://orcid.org/0000-0002-3639-262x economy, 2019, 6(2): 76-81 77 © 2019 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study contributes to the existing literature by examining and comment on the constitution, composition and functioning of sharia boards within islamic banks based in the kingdom of bahrain. 1. introduction the global islamic finance industry has grown rapidly in the last ten years recording an average growth of over 10% (from usd 0.639 trillion during 2007 to usd 2.2 trillion by the end of 2016) and is expected to touch usd 3 trillion by 2020. the gcc (gulf cooperation council) countries, iran and malaysia; have been central to the growth story of the global islamic finance industry accounting for 83% of the market size. even though islamic finance covers a wide range of financial service segments, 75% of the global islamic financial assets are held by islamic banks, which explains the general notion of equating islamic finance with islamic banking. the other segments of islamic finance industry includes the sukuk (15%), islamic funds (4%), takaful (1%) and microfinance (1%) (gifr, 2017). the kingdom of bahrain is considered to be the leading islamic financial market in the gulf and the mena (middle east and north africa) region, ranking number 2 among the top 15 countries in the icd-thomson reuters islamic finance development indicator (icd thomson reuters, 2017). the kingdom also hosts the region‟s largest concentration of islamic financial institutions. according to the edb (bahrain economic development board), there are 25 islamic banks in bahrain, accounting for more than 13% of the kingdom‟s total banking assets and growing from usd 1.9 billion in 2000 to usd 25.7 billion by december 2016 (bahrain, 2017). in islamic countries and in countries with large muslim populations, islamic banking is increasingly seen as an alternative to conventional or western-based banking. four factors in particular are seen as unique to islamic banking (imam and kpodar, 2010).  prohibition of interest (riba).  prohibition of maysir (games of chance) and of gharar (chance).  prohibition of haram (illegal) activities.  payment of part of bank profits to benefit society (zakat). islamic banking refers to a system of banking, which is consistent and in compliance with islamic law, also known as sharia (divine rules). sharia compliant or adhering to sharia means observing strictly what is permissible (halal) or staying away from the prohibited (haram). in order to assure an islamic bank‟s stakeholders that the bank is doing its business in a sharia permissible manner, the services of religious boards comprising sharia scholars known as sharia boards are employed (aziz, 2012; grassa, 2013). the sharia supervisory board, which is peculiar to islamic banks is considered as the principal component of the sharia governance framework (hamza, 2013). a sharia supervisory board exists in addition to the usual governance structures, but its functions are mainly to certify and monitor financial contracts, transactions, and activities of an islamic bank on behalf of stakeholders and clients to ensure that they are compliant with the sharia (alman, 2012). the risk of sharia incompliance has serious consequence on the existence and development of the islamic banks and the industry, thereby justifying the need for an effective sharia supervisory and governance framework. over the last two decades, attempts have been made in a number of countries to develop a sharia governance framework for islamic banks, in line with standards and guidelines issued by two international standard setting agencies, the accounting and auditing organization for islamic financial institutions (aaoifi), headquartered in bahrain and the islamic financial standard board (ifsb), headquartered in malaysia. 2. literature review according to the ifsb, sharia governance refers to a set of institutional and organizational arrangements through which an islamic financial institution ensures that there is effective independent oversight of sharia compliance over issuance of relevant sharia pronouncements, dissemination of information and an internal sharia compliance review (ifsb, 2009; mizushima, 2014). in line with ifsb guidelines, the supervision and governance structure in islamic banks is expected to include a sharia supervisory board (ssb), composed of qualified scholars in fiqh al muamalat appointed by shareholders and reporting to the board of directors, with the responsibility of certifying and monitoring financial contracts, transactions, and activities of a islamic bank on behalf of stakeholders and clients to ensure that they are compliant with the sharia; an internal sharia review process, carried out by an independent department to monitor, evaluate and produce reports on sharia compliance; and; periodic sharia reviews covering policies and transactions, which form the basis of the report of the sharia supervisory board. (mejia et al., 2014). garas and pierce (2010) commenting on the sharia supervision in islamic financial institutions (ifi), observed that it can assume different forms at macro and micro levels in different countries. at the macro level, sharia supervision could be conducted by national or regional sharia supreme councils and at the micro level, it can be conducted by sharia supervisory board, sharia consulting firms or a single sharia advisor. he concluded that sharia supervisory board is the most common form of supervision adopted in ifis. grassa (2015) in his paper “shariah supervisory systems in islamic finance institutions across the oic member countries an investigation of regulatory frameworks” reviewed the different practices and regulatory frameworks of shariah supervision in ifis across oic countries. the findings revealed various shortcomings in the shariah supervisory system in most oic countries which were linked to the regulatory framework, roles and responsibilities of the national shariah authority and duties and attributes of the institutional sharia boards. to bridge these shortcomings, the paper proposed recommendations which were to do with enhancing the monitoring role of national shariah authorities, improvising existing sharia governance framework particularly regulations in the area of independence of the board, number of board meeting, external sharia review, information disclosure in sharia reports and standardization of different shariah interpretations. economy, 2019, 6(2): 76-81 78 © 2019 by the authors; licensee asian online journal publishing group hamza (2013) while comparing the decentralized sharia governance model of the gulf cooperation council (gcc) and the centralized sharia governance model of malaysia, concluded that in decentralized frameworks, it is difficult to achieve consensus in sharia interpretation and manage properly the existing interest‟s conflicts, the two principal components of an effective sharia governance structure. the study emphasized the relative robustness of the centralized sharia governance system and cautions against the harmful effects of co-existence of both the systems at the same time leading to regional differences in the application of islamic finance contracts and credibility of the islamic industry. in a related study, grassa (2013) opined that “even though the southeast asian sharia governance model looks to be most efficient and effective in achieving the shariah compliant purpose than the gcc model, it cannot be considered the perfect shariah supervisory model”. hasan (2011) studied the state of sharia governance practices in malaysia, gcc countries and the uk in relation to five principle components of a good corporate governance which consist of independence, competency, transparency, disclosure and consistency. a survey questionnaire addressing the following areas general sharia governance framework, regulatory framework, role of sharia board, competence of sb, independence, transparency and confidentiality, operational procedures, general assessments of the sb; was administered to 80 ifis, for which a response rate of 39% was recorded. the findings revealed significant diversities in sharia governance practices in the sample countries and shortcomings in the governance framework for which suggestions were provided. an empirical study was undertaken by hasan (2012) to examine the influence of the dual-layer sharia governance system existing in malaysia. the findings of the study while reiterating the significant role of sharia boards and sharia review practices in a dual-governance system, pointed to the laxity through which sharia reviews were implemented by sharia boards, raising concerns about the quality of sharia reports issued by the boards, thus emphasizing the need for an external sharia audit. other significant findings of the study included the influence of the sharia board composition on the quality of decisions, influence of integrity, reputation and scholarly background of the sharia board members on accountability and independence. wardhany and arshad (2012) examined the role of sharia board governance structure specifically the responsibilities and authority of sharia board members by comparing the role of sharia board in indonesia with the role of sharia board in malaysia and brunei darussalam. findings indicate that role of the sharia board in malaysia and indonesia do not differ significantly from one another if legislative, business environment conditions and proactive government role are not factored. grassa and matoussi (2014) in their paper on “corporate governance of islamic banks: a comparative study between gcc and southeast asia countries”, compared the governance system in gcc countries and southeast asia countries using a sample of 83 islamic banks across four variable ownership structure, board of directors, shariah board and ceo attributes. their study found significant differences in corporate governance structure of ibs in gcc countries and the southeast asia countries. of particular interest was their findings on the sharia board characteristics between the two sets of countries, which were:  shariah board of ibs in southeast asian countries were slightly larger than those in the gcc ibs.  interlocking membership on the shariah board is higher in gcc ibs than in southeast asian ibs.  percentage of scholars with accounting and finance knowledge sitting on the shariah board of ibs in gcc countries is higher than those in southeast asia ibs.  shariah boards of ibs in gcc countries meet more frequently than those of southeast asia ibs.  presence of women in the shariah boards of southeast asia ibs, no woman was observed in the shariah board of gcc ibs.  the average fees of shariah boards are higher in gcc ibs than in those in southeast asia ibs. the authors attributed the several differences in corporate governance characteristics of gcc ibs and southeast asia ibs to economic, social and cultural and regulatory factors. an interesting study by funds@work during 2010 raised concerns about multiple board membership and shortage of sharia scholars, through these findings:  top 20 scholars hold 85 to 14 sb membership positions each.  top 20 scholars have 621 sb memberships; the remaining 260 scholars have 520 sb memberships.  top 10 scholars hold 450 out of 1141 total sb positions and the top 100 have 953 sb positions. farook and farooq (2013) in their paper on “sharia governance, expertise and profession: educational challenges in islamic finance”, identify significant challenges facing the islamic finance industry, viz., cost of sharia diligence process, conflict of interest, multiple board membership, sharia scholarship, sharia non-compliance risk and due process. the paper asserts that shortage of qualified sharia scholars is a major challenge that needs to be addressed through institutional, curriculum and certification process. garas (2012) undertook an empirical study to identify the relation using ols between the conflicts of interest in the sharia supervisory board (ssb) in the islamic financial institutions and six independent variables, which were the ssb executive position, the ssb remuneration, the relation between the ssb members and the board of directors (bod), and the multiple memberships in islamic funds, issuers of islamic bonds, and companies trading in capital markets. the findings indicated that four variables (ssb executive position, the relation between the ssb members and the bod, and the membership in islamic funds and issuers of islamic bonds) were significantly related to the conflicts of interest in the ssb. nomran et al. (2017) undertook an empirical study to examine whether impact of ssb characteristics on ibs performance could be affected by size effects by using a sample of 25 banks and employing the random-effects gls and gmm methods. six ssb characteristics, viz., size, cross-membership, educational qualification, reputation, experience and change in the composition; were employed as explanatory variables, of which four ssb characteristics (size, cross-membership, educational qualification and change in the composition) were found to significantly affect the performance of ibs, when no size difference was factored. the finding varied when sample were re-grouped into subsamples of large and small banks, four ssb characteristics (size, cross-membership, reputation and experience) were found to play an important role in enhancing the performance of large ibs while economy, 2019, 6(2): 76-81 79 © 2019 by the authors; licensee asian online journal publishing group only (reputation and experience) significantly affected the performance of small ibs. this findings confirmed that the impact of ssb characteristics on performance is more for large ibs than small ibs. the authors also made a contentious conclusion based on the study findings which was that there was lack of sharia governance practices in small ibs in malaysia and indonesia. mollah et al. (2017) examined whether the difference in governance structures affect the risk-taking and performance of islamic and conventional banks. using a sample of 52 islamic banks and 104 conventional banks across 14 countries, the study concluded that despite cross-country variations and a general perception of a conservative approach to risk taking, it was evidenced that governance structures of islamic banks facilitate islamic banks to undertake higher risks and achieve better performance due to product complexities and transaction mechanisms. sarea and mohd (2013) noted in their study that islamic banks in bahrain were in full compliance with aaoifi accounting standards. a similar finding was reported by hidayat and al-khalifa (2018) who observed that islamic banks in bahrain practice most aspects of sharia governance outlined in the aaoifi governance standards. in conclusion, even though many islamic countries have in place a sharia supervisory and governance framework, it has often been commented that these frameworks are inadequate when it comes to addressing the issues and challenges confronting islamic banks today (grassa, 2013; grassa, 2015; hidayat and al-khalifa, 2018). researchers (grais and pellegrini, 2006; rammal, 2006; khan, 2007; farook and farooq, 2013; hamza, 2013; hassan and mollah, 2014) have specifically raised issues concerning the workings of sharia boards and its membership, viz. shortage of qualified sharia practitioners, multiple board representation of sharia board members, potential conflict of interest, independence of sharia board, lack of standardization in sharia board rulings and sharia diligence; as some of the major issues and challenges confronting growth of islamic banks. in light of the above review, this study seeks to examine the composition and working of the sharia boards within locally incorporated islamic banks in bahrain. 3. research approach and methodology an exploratory research design was employed in this study due to paucity of primary information in research literature (hasan, 2011). based on the suggestion by creswell (2014) that studies aimed at exploring in detail a central phenomenon could benefit from purposive sampling strategies, this study used purposive sampling procedure, through which five locally incorporated islamic banks operating in the retail and wholesale segment was shortlisted (as per the cbb’s licensed list of locally incorporated islamic banks, there are six banks who operate in the retail segment). given the nature of data requirements, in-depth interview method, specifically expert interview method was initially chosen for which a semi-structured interview schedule was compiled and used to direct the expert interview. in compiling the interview schedule, the following were consulted aaoifi governance standards for ifis, no.1, ifsb guiding principles on shariah governance systems for institutions offering islamic financial services, no.10, new shariah governance module of cbb (central bank of bahrain) and findings from previous research studies in the area of shariah governance. expert interviews were conducted with two individuals, who were instrumental in providing leads for contacting the other three responding banks. individuals who responded on behalf of the responding islamic banks included members of the senior management (vice chairman, executive committee members, ceo and a senior management committee member). the study made use of descriptive data analysis and content analysis to quantify, analyse and summarize the study findings. previous research literature and relevant secondary information were accessed using proquest and internet 4. findings and discussion 4.1. profile of respondents total assets for the five banks surveyed ranged from bd 75 million to bd 1589 million; with two banks (40%) in the „above bd 1000 million‟ category and equal representation from the remaining banks in the „less than bd 100 million‟ (20%), between „bd 100 to 500 million‟ (20%) and between „bd 500 to 1000 million‟ asset categories. all the five banks surveyed were locally (bahrain) incorporated islamic banks operating in the retail (60%) and wholesale (40%) segment. individuals who responded on behalf of their banks were members of the senior management, which included vice chairman (20%), executive committee member (40%), ceo (20%) and senior management committee member (20%). in line with cbb directives and aaoifi requirements, all surveyed banks (100%) reported to have established a sharia supervisory board (ssb), the membership of which ranged from 3 members to 5 members. all surveyed banks complied with the minimum membership requirement which is 3 scholars. of the 18 members (includes 2 members with cross-membership in two banks) who made up the ssb across the five surveyed banks, 75% (12 of 16) hold a ph.d. of which, 83% was in islamic jurisprudence and 17% in islamic finance or economics; 2 hold a masters and a bachelor degree in islamic sharia / arabic literature and the remaining 2 hold a bachelors in economics / islamic jurisprudence. in terms of nationality of ssb members, 38% (6 of 16) are bahrainis and the remaining (62%) non-bahrainis, from saudi arabia, kuwait, egypt, yemen, algeria and pakistan. most of the ssb members hold multiple-ssb membership in regional and international islamic financial institutions with 3 members associated in the capacity of ssb chairman or ssb member in more than 10 ifis; 5 members associated in the capacity of ssb member in 5 to 10 ifis and the remaining (50% of the members) with multiple-ssb membership ranging between 2 and 4. further, all sharia board members in the surveyed islamic banks were male, supporting the findings of hasan (2011) that sharia boards in gcc and uk are male domains. most of the ssb members of surveyed banks have a stellar track record in terms of their qualification (scholars in fiqh-al-muamalat), experience, exposure, recognition and contribution to the islamic financial industry; thus fulfilling the aaoifi, ifsb and cbb requirements and guidelines of appointing a reputable and credible sharia board, with at-least three members, trained in various schools of islamic jurisprudence comprising of different nationalities and with varied experience. economy, 2019, 6(2): 76-81 80 © 2019 by the authors; licensee asian online journal publishing group all (100%) the surveyed banks reported to have in place a charter / terms of reference, which defines the scope of work for the ssb. there was agreement among the surveyed banks on the nature of issues stated in the charter, which includes constitution, composition, appointment and replacement of ssbs and members; duties, responsibilities and authority of ssbs, reporting and relationship structure of ssbs. again this finding is hardly surprising given the aaoifi, ifsb and cbb requirements and guidelines in this regard. to the question as to how many meetings of the ssb were convened during the last financial year and on an average how many of these meetings were attended by each ssb member, two banks reported to have convened 3 to 4 meetings of the ssb with attendance of 100% while 3 banks reported to have held between 5 and 6 meetings, with attendance of 75%. as per the new cbb regulations, ssbs have to meet at-least once on a quarterly basis and each ssb member must attend at-least three-fourths of the meetings during a calendar year to review and approve decisions relating to sharia matters. most (80%) of the surveyed banks report to offer a contract for appointment to the ssb for a minimum period of 3 years & beyond with one bank stating the same to be one year. none (100%) of the banks reported to the existence of mandatory rotation in ssb membership. further, it is also found that banks don‟t report the benefits and remuneration offered to ssb members to general assembly, which is a requirement as per the new cbb regulation sg 2.4.2. surveyed banks were asked to rate on a scale of 1 to 4 a list of 9 fitness assessment criteria‟ for individuals to serve on the ssb. none of the 9 items received either a „low‟ or „not valued‟ rating. responses ranged between „high‟ and „moderate‟ for all the 9 items. the following two items received the highest modal score of 4 – “possession of a bachelor degree in islamic sharia” and “strong proficiency in arabic”. these findings are in line with the requirements of cbb (sg 2.4.4) and ifsb guidelines (2.1) which suggest that an islamic bank must conduct a background check to verify that any person appointed as a ssb members should satisfy the following three competencies – academic qualification (holding at-least a bachelor degree in sharia including fiqh almuamalat), experience and exposure (experience in applying sharia to a bank‟s proposed activities, awareness of applicable general legal and regulatory framework, experience of making sharia pronouncement) and track record (respectable character and conduct). to the question whether the bank offers any induction / training programs for ssb members in the areas of islamic finance and accounting, 3 banks (60%) stated they sponsor their ssb members for ongoing seminars & conferences as part of their professional development. with the new cbb directive sg2.6.2, it is necessary for islamic banks to offer appropriate induction and training programs for their ssb members. this finding is more or less in line with a similar finding reported by hasan (2011) that slightly less than 60 percent of ifis provided professional training especially in the matters of finance and banking to their sharia board. to the question whether the bank assesses effectiveness of ssb and its members, all surveyed banks reported to assess the ssb as a whole and contribution of each member on an annual basis, with 40% stating they do it “to a great extent” and the other 60% stating they do it “to some extent”. this finding is in line with the guidelines of ifsb and cbb new directive (sg-2.7.1 & 2), which suggests that ibs should specify and adopt a process for assessing the effectiveness of the ssb and contribution of each member. this finding is also an improvement to a finding by hasan (2011) who concluded that a significant number of ifis don‟t evaluate or assess the performance of their sharia board. a further related question on „do you use the results of this assessment for considering re-nomination and seeking resignation of ssb members‟ produced contrasting response, where 3 banks (60%) stated they use the performance evaluation for making key decisions “to some extent” and 1 bank reported to use the evaluation “to a great extent” and one bank reporting to “not using it at all”. with respect to having standard operating procedures (sops) for holding and recording of ssb meetings and decision making process, all surveyed banks (100%) reported to have sops in the following areas request submission, holding and recording of ssb meetings, decision-making and review process of the ssb. however, 2 banks reported these sops to be not very detailed. further, all the surveyed banks (100%) reported to have in place a code of ethics and conduct for their ssb members, which is marked improvement over a related finding by hasan (2011) which indicated that 26% of sharia boards are not guided by a code of ethics. surveyed banks were asked to rate on a scale of 1 to 4, the extent to which stakeholders have access to information regarding ssb duties, decision making process, composition, competence and fatwas & reports issued by ssb. modal scores for the given responses ranged from „seldom’ (for decision making process of the ssb) to ‘most of the time’ (for composition of ssb). information on duties of ssb, competence of ssb members, publication of all fatwas / rulings / guidelines / reports issued by ssb were provided „some of the time‟. to understand the extent to which the often quoted concerns raised in research literature about composition and workings of the ssbs, banks were asked whether a list of concerns presented to them posed a challenge and if so how were they managing them.  shortage of qualified sharia practitioners in fiqh al muamalat there was a unanimous opinion that there was indeed a shortage of qualified sharia practitioners, particularly in the area of fiqh al muamalat. banks reported to managing this challenge by nominating non-bahraini to ssb boards.  sharia practitioners of different schools of thought opinions were divided among banks when asked to what extent they believe sharia practitioners of different schools of thought pose a challenge. two banks considered it a challenge while the other three opined that this diversity enriched the decision and thought process which is mutually beneficial for the industry and consumers.  level of familiarity of sharia practitioners with modern day banking services and sharia audit is limited there was a more or less a consensus among banks that most of the sharia practitioners on ssb are familiar with modern day banking services and audit requirements.  multiple board representation of sharia board members while conceding that multiple board representation of ssb members is a challenge, almost all banks were of the opinion that this doesn‟t pose a problem to banks as long as there is no conflict of interest. formation of a central sharia bureau was one of the suggestion put forth for dealing with this challenge. economy, 2019, 6(2): 76-81 81 © 2019 by the authors; licensee asian online journal publishing group  lack of standardization in sharia ruling (fatwa) there was a general agreement that lack of standardization in fatwa rulings was one of the challenges in islamic banking. however, there was references to how the industry was moving towards standardization through the involvement of cbb and aaoifi. 5. conclusion and direction for further research in conclusion it can be said that islamic banks in bahrain, in line with aaoifi requirements, ifsb guidelines and cbb‟s new sg module; have in place a sharia governance structure through a sharia supervisory board, with clear terms of reference, operating procedures and a code of professional conduct thus supporting the findings of similar studies (sarea and mohd, 2013; hidayat and al-khalifa, 2018) in this regard. however, there still seems to be lack and/or inconsistency in practices among banks concerning reporting of benefits and remuneration offered to ssb members, offering appropriate induction and training programs for ssb members and disclosing information on decision making process of ssb and publication of fatwas / reports issued by ssbs. concerns raised by previous research on shortage of qualified sharia practitioners, multiple board representation of sharia board members, potential conflict of interest, independence of sharia board, lack of standardization in sharia board rulings and sharia diligence; continue to be considered contemporary challenges, however it is noteworthy that islamic banks in bahrain have devised appropriate risk management strategies to deal with some of these issues. even though the current findings could be generalized for the islamic banking sector in bahrain, future research with larger samples or complete enumeration methodologies could look into scale and segment effect in sharia governance practices among islamic banks. further, this study didn‟t explore the role and activities of the internal sharia unit and the nature of symbiotic relations with the ssb, which can be further explored. references alman, m., 2012. shari‟ah supervisory board composition effects on islamic banks‟ risk-taking behavior. journal of banking regulation, 14(1): 134-163. aziz, a., 2012. sharia governance: challenges ahead. mpra paper no 4772, 14-15. available from https://mpra.ub.unimuenchen.de/47772/1/mpra_paper_47772.pdf. bahrain, e., 2017. bahrain for islamic finance. available from 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(imf working paper, wp/10/195, 1–18). khan, m.f., 2007. setting standards for shariah application in the islamic financial industry. thunderbird international business review, 49(3): 285-307.available at: https://doi.org/10.1002/tie.20145. mejia, a., s. aljabrin, r. awad, m. norat and w. song, 2014. regulation and supervision of islamic banks. imf working paper no. wp/14/219. washington: international monetary fund. available from: http://dx.doi.org/10.5089/9781498361590.001. mizushima, t., 2014. corporate governance and shariah governance at islamic financial institutions: assessing from current practice in malaysia. reitaku journal of interdisciplinary studies, 22(1): 59-84. mollah, s., m.k. hassan, o. al farooque and a. mobarek, 2017. the governance, risk-taking, and performance of islamic banks. journal of financial services research, 51(2): 195-219. nomran, n.m., r. haron and r. hassan, 2017. bank performance and shari‟ah supervisory board attributes on islamic banks: does bank size matter? journal of islamic finance, 6(special issue): 174-187.available at: https://doi.org/10.12816/0047348. rammal, h.g., 2006. the importance of shari‟ah supervision in islamic financial institutions. corporate ownership and control, 3(3): 204208.available at: https://doi.org/10.22495/cocv3i3c1p5. sarea, a.m. and h.m. mohd, 2013. adoption of aaoifi accounting standards by islamic banks of bahrain. journal of financial reporting & accounting, 11(2): 131-142.available at: https://doi.org/10.1108/jfra-07-2012-0031. wardhany, n. and s. arshad, 2012. the role of shariah board in islamic banks: a casestudy of malaysia, indonesia and brunei darussalam. paper pesented at 2nd isra colloqium 2012 on islamic finance in a challenging economy: moving forwar, pp: 1-22. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. 59 © 2020 by the authors; licensee asian online journal publishing group economy vol. 7, no. 1, 59-68, 2020 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2020.71.59.68 © 2020 by the authors; licensee asian online journal publishing group an analysis of the relationship among economic growth, external debt and exports in india (1970-2018) smita nath associate professor in economics, scottish church college (affiliated to the university of calcutta), kolkata, india. abstract this paper attempts to examine the relationship among debt servicing, exports and gdp for india during 1970 – 2018 using co-integration test, error correction model and granger causality test. in the bi-variate model with constant trend specification gdp and exports seem to have no long-term relationship. however, change in gdp granger causes change in exports. for the restricted constant trend specification, in the short run, gdp affects exports positively and significantly. gdp and debt services seem to have a positive and significant long-term relationship in the bivariate model. the tri-variate model including gdp, exports and debt service reveals a long term relationship among the variables where both exports and debt services affect gdp positively and significantly. gdp, exports and debt stocks do not have any long term relationship with constant trend specification, but change in gdp is found to granger cause change in exports. for the restricted constant trend specification, however, there seems to be a long term relationship among them. in the short run gdp affects exports positively and significantly. in general, results indicate a positive and significant impact of gdp on exports. a significant positive long run impact of external debt on economic growth is also observed when debt service is the indicator of external debt. the short run impacts of external debt in terms of both debt servicing and debt stocks, however, produce diverse and insignificant results. keywords: external debt, economic growth, exports, co-integration, granger-causality. jel classification: f34; 047. citation | smita nath (2020). an analysis of the relationship among economic growth, external debt and exports in india (1970-2018). economy, 7(1): 59-68. history: received: 26 march 2020 revised: 28 april 2020 accepted: 4 june 2020 published: 2 july 2020 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. competing interests: the author declares that there are no conflicts of interests regarding the publication of this paper. transparency: the author confirms that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ...................................................................................................................................................................................... 60 2. a brief survey of the literature ................................................................................................................................................... 60 3. data and methodology ................................................................................................................................................................... 62 4. trends in gdp, exports and various indicators of external debt in india ....................................................................... 62 5. relationship among external debt, exports and economic growth ................................................................................... 63 6. concluding remarks ....................................................................................................................................................................... 66 references .............................................................................................................................................................................................. 67 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2020.71.59.68&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ https://www.asianonlinejournals.com/index.php/economy/article/view/1811 https://orcid.org/0000-0002-4478-4850 https://www.asianonlinejournals.com/index.php/economy/article/view/1811 https://orcid.org/0000-0002-4478-4850 https://www.asianonlinejournals.com/index.php/economy/article/view/1811 https://orcid.org/0000-0002-4478-4850 economy, 2020, 7(1): 59-68 60 © 2020 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study contributes to exiting literature by examining the relationship among debt servicing, exports and gdp for india during 1970 – 2018 using co-integration test, error correction model and granger causality test. 1. introduction the role of external debt on the economic development of a country is one of the widely discussed topics among the academicians and policy-makers. essentially, foreign borrowing has an important contribution in the process of economic development of developing countries. it can promote growth by increasing investment and transfer of technology. developing countries often borrow from the international capital market when they suffer from deficits in the current account. but sometimes the burden of foreign borrowing itself hampers the economic development of a country. this happens when foreign borrowing is not productively used by a country, and so, the debts go on increasing without a corresponding increase in the ability to service it.1 naturally, a strand of literature on external debt is developed where the authors seek to study the relationship between external debt and economic growth of countries. however, the studies on impact of external debt on economic growth of countries provide mixed results. some studies show positive impact of external debt on economic growth while others show negative impact. a number of studies note that the impact is dependent upon the threshold level of debt of a country whereas some studies reveal no significant impact of debt.2 a borrowing country faces an adverse situation due to the presence of external debt when it is unable to raise the amount to be repaid through its own resource raising methods and/or unable to find foreign exchange required to make payments.3 different proposals are suggested in the literature. however, it is argued that since external debt has to be repaid in terms of foreign currency, debtor countries should opt for raising foreign exchange reserves. in this regard the importance of exports for a debtor country is emphasized as export performance primarily determines the debt servicing capacity of a country.4 again, it is believed that exports can affect economic growth which is embodied in the idea of export-led growth (elg). the arguments in favour of this, as explained by the literature,5 are the following. first, exports can be considered as an instrument of technology transfer and through this productivity increases for an exporter country, and so, economic growth is enhanced. second, since more foreign exchanges are available through exports, a country can import necessary capital goods for production which affects growth positively. third, exports determine the debt servicing capacity of a borrowing country. therefore, when export performance of a country is better, more external debts, and so, more resources for investment would be available. economic growth can be improved then. fourth, when exports are higher, demand for the country’s product will be higher and output will be higher. finally, it is observed that countries with better export performance usually show better growth performance. gabriele (2006) described the development of elg hypothesis starting with adam smith and david ricardo. the arguments given by the economists till modern time in favour of this theory are explained. as noted by the author a huge number of empirical studies are done to examine the validity of the hypothesis; but the results are mixed. further, an opposite causality from economic growth to exports is also observed, which is mentioned as the growth-led export (gle) hypothesis. the argument given in favour of gle hypothesis is that economic growth leads to improvement in human capital and technology. this is followed by productivity increase and reduction in cost of production. exports would increase for the country then.6 there is another strand of literature that suggests that the role of debt servicing is to be incorporated in the analysis of relationship between exports and economic growth since export revenues are used to finance debt repayment of a borrowing country.7 it can be opined that in the external debt economic growth relationship also the role of exports is important because export performance determines debt servicing capacity of a country. the relationship between external debt and economic growth is examined for india by a number of authors and some studies focus on the relationship between exports and economic growth for india.8 however, the relationship among economic growth, exports and debt servicing in india is not explored. the objective of the present study is to examine the relationship among economic growth, external debt and exports for the indian economy. for the study period 1970-2018 we attempt to examine the relationship among gdp, exports and debt servicing considering all in real terms. the rest of the paper is organized as follows. section ii presents a brief survey of the literature. data and methodology are given in section iii. section iv reveals the scenario of indian economy regarding gdp, exports and various indicators of external debt during the study period. the analysis of the relationship among the variables is presented in section v. some concluding remarks are made in section vi. 2. a brief survey of the literature there are both theoretical and empirical studies on the relationship between external debt and economic growth. but since our analysis is empirical in nature we review the empirical studies here.9 1 mahmood, arby, and sherazi (2014) explained the debt situation of the saarc countries by the vicious circle where a large fiscal deficit leads to large amount of external debt which requires large amount of debt servicing causing less domestic investment and economic growth leading to low resource mobilization and further expansion of fiscal deficit. 2 for a survey of the studies see abdelaziz, rim, and majdi (2019). 3 see woo and nasution (1989). 4 see for example borensztein and ghosh (1989); chaudhary, anwar, and tahir (2000); dhonte (1979); diwan (1990); goel (1989); hemmer (1990); parai and mohanty (1985) etc. 5 see for example ajmi, aye, balcilar, and gupta (2015). 6 a list of empirical studies, comprising both cross section and time series analysis, done in the 1970s, 1980s and 1990s is available in bahmani-oskooee and economidou (2009) where data, method used, variables included and findings are mentioned in each case. ajmi et al. (2015) also provided a survey of empirical works on elg and gle hypotheses. 7 see for example ahmed, butt, alam, and kazmi (2000). 8 see the next section for examples of such studies. 9 for examples of theoretical works see otani and villanueva (1989); bhandari, haque, and turnovsky (1990) and rodríguez-arana and zumaya (2012). economy, 2020, 7(1): 59-68 61 © 2020 by the authors; licensee asian online journal publishing group siddiqui and malik (2001) examined the debt growth relationship for south-asian countries. the results indicate that the impact of foreign debt on economic growth is positive and significant. considering panel data for sixty countries over the period 1969-98 (pattillo, poirson, ricci, kraay, & rigobon, 2003) noted that when debt is higher than the threshold level its impact on economic growth is significantly negative; but, when debt is lower than the threshold level the impact is usually positive but insignificant. dinneya (2006) addressed another aspect of the debt-growth relationship by exploring the roles of power change, quality of governance, political environment, and overall level of democratization etc. on this in the context of nigerian economy. cordella, ricci, and ruiz-arranz (2010) examined how investment and growth are affected by the level of indebtedness of countries. their study reveals that for highly indebted countries or for countries with low quality of policies and institutions investment does not seem to be affected by indebtedness whereas for less indebted countries or for countries with high quality of policies and institutions there is a negative relationship between them. similar results are obtained between economic growth and debt of countries. hwang, chung, and wang (2010) found a two-way causality between financial development and economic growth for twenty asian and latin american countries during the period 1982-2004; it is also revealed that excessive debt hinders financial sector development and thus lower economic growth. reinhart and rogoff (2010) showed that for the advanced countries no relationship between gdp growth and debt/gdp ratio is established unless the debt/gdp ratios exceed the threshold levels (90%) over the period 1946-2009. for the emerging countries also similar results are noted for the period 1970-2009. butts, mitchell, and berkoh (2012) found a positive and significant long run relationship between short term external debt and economic growth of thailand during 1970-2003 and a short run change in gdp granger causes short term debt. bal and rath (2014) from their study noted that central government debt, total factor productivity and debt services affected growth of the indian economy in the short run during 1980-2011; in the long run also a relationship between economic growth and public debt is observed. ciftçioğlu and sokhanvar (2018) for twelve central and eastern european countries for 1995-2014 noted that for eight out of twelve countries studied there is unidirectional causation from external debt to economic growth. kharusi and ada (2018) noted a significant and negative impact of debt-gdp ratio on growth rate of gdp for the period 1990-2015 in oman. using ordinary least squares method saxena and shanker (2018) found a negative impact of external debt on india’s economic growth during 1990-91 – 2015-16. abdelaziz et al. (2019) examined the impact of debt on investment and growth separately for twelve less indebted and eleven highly indebted countries using sur method. for the split models as well as for the entire sample the results indicate a negative impact of external debt on investment and growth. now we focus on the empirical studies that examine the elg and gle hypotheses. gyimah-brempong (1991) examined the relationship between export instability and economic growth of the sub-saharan countries using cross-section data during the period 1960-86. for various indices of export instability a negative relationship is found between the variables. kugler (1991) studying on six countries viz., france, japan, switzerland, uk, usa and west germany for the period 1970-87 noted support in favour of export-led growth for france and west germany only.ghatak and price (1997) examined the elg hypothesis for india during the period 1960-1992 incorporating various types of exports. it is found that at the aggregate level elg hypothesis is not supported; but at the disaggregate level for non-traditional exports elg hypothesis is supported whereas for traditional exports it is not supported. el-sakka and al-mutairi (2000) examined the relationship for the arab countries during the period 1970-99. the results indicate no long term relationship between exports and economic growth for any of the countries. in the short run countries show mixed results. chandra (2003) examined elg hypothesis for the indian economy using terms of trade as a third variable in the period 1950-1996. it finds a long run relationship among the variables and a bi-directional causation between exports and gdp. thus the study supports both elg and gle hypotheses. gabriele (2006) noted a significant relationship between growth rate of gdp and growth rate of service exports in the period 1980-2000 in a study covering one hundred and fourteen developing countries. kaushik and klein (2008) found a long term relationship among export growth, export instability, investment and economic growth in case of india during 1971-2005 and a unidirectional granger causality running from real exports to real gdp. using human development as a third variable afzal, rehman, and rehman (2009) noted support of gle hypothesis in pakistan for the period 1970-71 – 2008-09. bahmani-oskooee and economidou (2009) studied the long run relationship among gdp, stock of capital and labour, export and import for sixty two developing countries during the period 1960-99 and note that the results are country specific. in a multi-variable model sulaiman and saad (2009) observed a positive relationship between exports and economic growth of malaysia for the period 1960-2005. guru-gharana (2012) used superior granger causality test for the indian economy and the results indicate support of elg hypothesis for the period 1971-2008. the panel data analysis conducted by ndoricimpa (2014) for seventeen comesa countries during 1980-2011 showed support of elg hypothesis for two countries and support of gle hypothesis for two countries. it is also noted that elg is not supported for the countries which export primary product. sannassee, seetanath, and jugessur (2014) conducted a meta-analysis to find the reason behind mixed results among different empirical works. the study comprising eighty two studies with four hundred and forty seven observations notes that the impact of exports on growth is less for the countries with low development level. ajmi et al. (2015) studied the relationship for south african countries during 1911-2011. for linear granger causality test no relationship is found. for non-linear granger causality test using hiemstra and jones test a unidirectional causation is found from gdp to exports; again using diks and panchenko test bi-directional causation is noted. bastola and sapkota (2015) working on nepal for the period 1965-2011 found that in the short as well as long run exports affect gdp. saleem and sial (2015) from their study on pakistan find evidence of support of both elg and gle hypotheses during 1973-2013. berasaluce and romero (2017) found no causal relation of exports and fdi on gdp for the korean economy during 1980-2015. the following studies examine relationship among economic growth, external debt and exports of countries. ahmed et al. (2000) examined the causality between growth rates of economic growth and exports for each of eight economy, 2020, 7(1): 59-68 62 © 2020 by the authors; licensee asian online journal publishing group asian countries over the period 1970-1997. it is found that export-led growth hypothesis is supported by their study but when growth rate of debt servicing is included in the model the results are not uniform for the countries. for the period 1970-71 – 2007-08 afzal et al. (2009) studied the relationship among economic growth, external debt servicing and exports in pakistan. their study indicates unidirectional causalities running from gdp to exports and from debt servicing to gdp. the study made by saad (2012) for lebanon over the period 1970-2010 indicates a bi-directional causality between economic growth and external debt servicing, a unidirectional causality running from exports to economic growth and a unidirectional causality running from external debt servicing to exports. dritsaki (2013) observed that in the short run there is a unidirectional causation from exports to economic growth and from economic growth to external debt for greece during the period 1960-2011 and there is no causation from exports to external debt. in the long run also external debt depends upon economic growth. 3. data and methodology we consider four regression models. models 1 and 2 are bi-variate models whereas models 3 and 4 are trivariate models. model 1 studies the relationship between gdp and exports, model 2 examines the relationship between gdp and debt service. the relationship among gdp, exports and debt service is analyzed in model 3; model 4 explains the relationship among gdp, exports and debt stocks. data on the four variables gdp, exports, debt service and debt stocks for the period 1970 – 2018 are collected from world bank’s world development indicators 2019. data on gdp and exports at 2010 us dollars are available from world bank. since data on debt service and debt stocks are available at current us dollars, those are converted into 2010 us dollars using gdp deflators. first, logarithm of each variable is taken and then unit root test is conducted to determine the order of integration of each variable using augmented dickey-fuller (adf) test and philips-perron (pp) test where optimum lag length is determined by hannan-quinn information criterion (hqic), schwartz bayesian information criterion (sbic) and akaike information criterion (aic). when the variables in a model are found to be stationary at first difference johansen methodology is used to examine whether the variables are co-integrated i.e., to check whether there exists a long run relationship between the variables. for the cases where the variables are found to be co-integrated an error correction model (ecm) is applied to analyse the short run relationship between them. for the cases where the variables are not found to be cointegrated a vector autoregressive (var) model in first difference is used and granger causality test is done. soft ware stata has been used for the econometric computations. 4. trends in gdp, exports and various indicators of external debt in india figure 1 reveals the condition of the indian economy in terms of real gdp, real exports, debt service and total debt stocks during 1970 – 2018. figure 2 and 3 show the observations made on various ratios used as debt indicators. figure-1: trends in gdp, exports, debt stocks and external debt service (constant 2010 us$). india’s debt service as a percentage of gni remain more or less same during this period; it is around 2 per cent. the ratio of debt service to exports was 15 per cent in 1975 and in 2018 it was 11 per cent of that. not only that in some years this were very high as evident from figure 2. debt stocks as percentage of gni does not show much fluctuations, it increases from 14 in 1970 to 19 in 2018. debt-reserve ratio is also considered as an indicator of external debt. in terms of that also much fluctuation is observed during this period. mahmood et al. (2014) also pointed out that according to the traditional criteria india was within threshold levels of external debt. economy, 2020, 7(1): 59-68 63 © 2020 by the authors; licensee asian online journal publishing group figure-2. trends in debt service ratios (%). figure-3. trends in debt stocks-gni ratio and reserves-debt ratio (%). 5. relationship among external debt, exports and economic growth we first determine the order of integration of each variable considered in our study. figures 4(a) – 1(h) indicate that each variable in non-stationary at level whereas stationary at first difference. figure-4(a). lgdp. figure-4(b). first difference in lgdp. figure-4(c). lexpotrs. figure-4(d). first difference in lexports. figure-4(e). ldebetservice. figure-4(f). first difference in ldebtservice. figure-4(g). ldebtstocks. figure-4(h). first difference in ldebtstocks. economy, 2020, 7(1): 59-68 64 © 2020 by the authors; licensee asian online journal publishing group conducting augmented dickey-fuller (adf) test and philips-perron (pp) test from table 1 we note that all the variables are in fact non-stationary at level but stationary at first difference,10 where optimum lag lengths are determined by hannan-quinn information criterion (hqic), schwartz bayesian information criterion (sbic) and akaike information criterion (aic).11 table-1. unit root test results. model variable adf statistic (1% critical value) pp statistic (1% critical value) intercept lgdp 3.234 (-3.607) 4.138 (-3.594) dlgdp -6.478 (-3.600) -6.478 (-3.600) lexports 0.310 (-3.600) 0.588 (-3.594) dlexports -5.693 (-3.600) -5.693 (-3.600) ldebtservice -.974 (-3.607) -0.324 (-3.594) dldebtservice -5.569 (-4.187) -10.320 (-3.600) ldebtstocks -0.527 (-3.607) -0.201 (-3.594) dldebtstocks -3.440 (-3.607)* -4.847 (-3.600) intercept and trend lgdp -1.649 (-4.187) -2.398 (-4.168) dlgdp -8.211 (-4.178) -8.211(-4.178) lexports -1.598 (-4.178) -1.684(-4.168) dlexports -5.681 (-4.178) -5.681 (-4.178) ldebtservice -2.302 (-4.187) -4.199 (-4.168) dldebtservice -5.469 (-3.607) -10.176 (-4.178) ldebtstocks -2.231 (-4.187) -1.792 (-4.168) dldebtstocks -3.393 (-4.187) -4.794 (-4.178) note: *5% critical value is -2.94 5.1. relationship between gdp and exports model 1: lgdpt = α0 + α1lexportst + errort where lgdp and lexports are logarithm of gdp and exports respectively. table 2 presents the results of cointegration test between lgdp and lexports with constant trend specification. table-2. johansen tests for cointegration between lgdp and lexports (trend: constant). maximum rank trace statistic 5% critical value 0 12.5812* 15.41 1 1.9534 3.76 2 since, trace statistic = 12.5812 < 15.41 = critical value, we fail to reject the null hypothesis of no cointegration between the variables which indicates that lgdp and lexports are not cointegrated, that is, there is no long term relationship between them. the granger causality test results following var in first differences of the variables (dlgdp and dlexports) are shown in table 3. table-3. granger causality wald tests for dlgdp and dlexports. null hypothesis chi2 df prob > chi2 dlexports does not granger-cause dlgdp 1.1046 2 0.576 dlgdp does not granger-cause dlexports 6.5669 2 0.037 when we have the null hypothesis h0: dlexports does not granger cause dlgdp, the p-value (0.576) is more than any pre-assigned level of significance, and so, we fail to reject the null hypothesis and conclude that dlexports does not granger cause dlgdp. that is, the results indicate that dlexports will not be helpful for forecasting dlgdp. on the other hand, when the null hypothesis is dlgdp does not granger cause dlexports, the p-value (0.3) is less than 5 per cent, and so, we reject the null hypothesis and conclude that dlgdp granger causes dlexports. that is, the results indicate that dlgdp will be helpful for forecasting dlexports. table 4 presents the results of cointegration test between lgdp and lexports with restricted constant trend specification. table-4. johansen tests for cointegration between lgdp and lexports (trend: restricted constant). maximum rank trace statistic 5% critical value 0 33.3854 19.96 1 3.1104* 9.42 2 10 for ldebtservice there is a contradiction because it is found to be stationary at level according to pp test but non-stationary at level according to adf test. 11 tests are conducted for all lag lengths determined by different criteria and the results are same. however, the test statistics reported in table 1 are those for the aic criterion when sbic, hqic and aic suggest different lag lengths. economy, 2020, 7(1): 59-68 65 © 2020 by the authors; licensee asian online journal publishing group it is observed that the null hypothesis h0: r = 0 (no cointegration) is rejected, whereas we fail to reject h0: r ≤ 1. so, for restricted constant trend specification lgdp and lexports have a long term relationship. the estimated error correction model (ecm) for these cointegrated variables gives the following long run and short run relationships between the variables. the figures within brackets represent corresponding p-values. long run relationship: ectt-1 = lgdpt-1 – 0.19lexportst-1 – 20.25 (0.19) (0.0) short run relationships: dlgdpt = 0.03ectt-1 – 0.19lgdpt-1 + 0.05lexportst-1 (0.0) (0.21) (0.27) dlexports = 0.01ectt-1 + 0.93lgdpt-1 + 0.19lexportst-1 (0.48) (0.04) (0.18) when dlgdp is the dependent variable estimated adjustment coefficient (0.03) is positive and statistically significant, which implies that any deviation from equilibrium value in the short run is not corrected. the estimated coefficient of lagged lexports is positive but statistically insignificant. when dlexports is the dependent variable the estimated adjustment has expected sign but is statistically insignificant. in the short run lgdp affects lexports positively as the estimated coefficient (0.93) is positive and statistically significant. in the long run also exports positively affects gdp although the estimated coefficient is statistically insignificant. the estimated elasticity of gdp with respect to exports is 0.19. 5.2. relationship between gdp and debtservice model 2: lgdpt = β0 + β1 ldebtservicet + errort where ldebtservice is logarithm of debtservice. table 5 reveals that the null hypothesis h0: r = 0 is rejected whereas we fail to reject h0: r ≤ 1 and conclude that there seems to be a long run relationship between lgdp and ldebtservice. table-5. johansen tests for cointegration between lgdp and ldebtservice (trend: constant). maximum rank trace statistic 5% critical value 0 16.7825 15.41 1 1.9844* 3.76 2 the long run and short relationships given by the estimated error correction model for these two variables are as follows: long run relationship: ectt-1 = lgdpt-1 – 2.38ldebtservicet-1 + 26.5 (0.0) short run relationships: dlgdpt = 0.01ectt-1 – 0.19lgdpt-1 – 0.003ldebtservicet-1 + 0.05 (0.0) (0.2) (0.79) (0.0) dldebtservicet = 0.03ectt-1 + 2.37lgdpt-1 – 0.26ldebtservicet-1 + 0.01 (0.17) (0.15) (0.04) (0.89) in this case the estimated adjustment coefficients have correct signs and it is statistically significant for dlgdp equation. any short run deviation of lgdp from its equilibrium value is corrected at a speed of one per cent. in the short run debtservice is negatively affected by lagged value of it (estimated coefficient is – 0.26 and it is statistically significant). other estimated coefficients are not statistically significant in the short run. but, we get one interesting result. in the short run, lagged ldebtservice negatively affects lgdp (estimated coefficient – 0.003) whereas, in the long run, debtservice positively and significantly affects gdp (estimated coefficient 2.38). 5.3. relationship among gdp, exports and debtservice model 3: lgdpt = γ0 + γ1lexportst + γ2ldebtservicet + errort table 6 presents the cointegration test results for this model and it is found that it is clear that table-6. johansen tests for cointegration among lgdp, lexports and ldebtservice (trend: constant). maximum rank trace statistic 5% critical value 0 30.5091 29.68 1 10.7893* 15.41 2 1.9519 3.76 3 lgdp, lexports and ldebtservice are cointegrated, that is, there is a long run relationship among them. the error correction model is estimated to analyse the short run and long run effects represented by the following equations: long run relationship: ectt-1 = lgdpt-1 – 0.42lexportst-1 – 0.30ldebtservicet-1 – 9.92 (0.0) (0.0) short-run relationships: dlgdpt = – 0.09ectt-1 – 0.12lgdpt-1 – 0.0008lexportst-1 – 0.008ldebtservicet-1 + 0.05 (0.001) (0.399) (0.987) (0.502) (0.0) dlexportst = 0.01ectt-1 + 0.92lgdpt-1 + 0.20lexportst-1 – 0.04ldebtservicet-1 + 0.03 (0.89) (0.03) (0.20) (0.25) (0.33) dldebtservicet = 0.55ectt-1 + 2.40lgdpt-1 + 0.21lexportst-1 – 0.22ldebtservicet-1 + 0.01 economy, 2020, 7(1): 59-68 66 © 2020 by the authors; licensee asian online journal publishing group (0.059) (0.121) (0.702) (0.093) (0.939) the results can be interpreted in the following way. the estimated adjustment coefficients have correct signs and for dlgdp it is statistically significant also. any short run deviation in lgdp from its equilibrium value is corrected at a rate 9 per cent per year. all other estimated coefficients are statistically insignificant excepting the coefficient of lgdpt-1 for dlexports equation. it indicates a positive influence of lgdp on lexports in the short run. in the long run, however, both lexports and ldebtservice are found to be statistically significant factors determining lgdp and each one positively influences lgdp. 5.4. relationship among gdp, exports and debt stocks model 4: lgdpt = δ0 + δ1lexportst + δ2ldebtstockst + errort where ldebtstocks is logarithm of debtstocks. table 7 presents the cointegration test results for this model. it is clear that h0: r = 0 is rejected and table-7. johansen tests for cointegration among lgdp, lexports and ldebtstocks (trend: constant). maximum rank trace statistic 5% critical value 0 17.4826* 29.68 1 5.1502 15.41 2 1.3765 3.76 3 h0: r = 0 cannot be rejected. therefore, lgdp, lexports and ldebtservice are not cointegrated, that is, no long run relationship exists among them. thus, a var in first difference of the variables is conducted to study the granger causality results. table 8 presents the test results. it is noted that only dlgdp is helpful for forecasting dlexports. table-8. granger causality wald tests for dlgdp, dlexports and dldebtstocks. null hypothesis (h0) chi2 df p-value decision dlexports does not granger cause dlgdp dldebtstocks does not granger cause dlgdp dlexports and dldebtstocks do not granger cause dlgdp 1.0389 .10549 1.2127 2 2 4 0.595 0.949 0.876 h0 is not rejected h0 is not rejected h0 is not rejected dlgdp does not granger cause dlexports dldebtstocks does not granger cause dlexports dlgdp and dldebtstocks do not granger cause dlexports 6.7948 2.202 9.0833 2 2 4 0.033 0.333 0.059 h0 is rejected h0 is not rejected h0 is not rejected dlgdp does not granger cause dldebtstocks dlexports does not granger cause dldebtstocks dlgdp and dlexports do not granger cause dldebtstocks .29255 .37891 .8498 2 2 4 0.864 0.827 0.932 h0 is not rejected h0 is not rejected h0 is not rejected table 9 shows that with restricted constant trend specification lgdp, lexports and ldebtstocks are cointegrated. the ecm is then estimated to analyse the short run and long run effects represented by the following equations: table-9. johansen tests for cointegration among lgdp, lexports and ldebtstocks (trend: restricted constant). long run relationship: ectt-1 = lgdpt-1 – 0.47lexportst-1 – 0.68ldebtstockst-1 – 0.52 (0.101) (0.106) (0.915) short-run relationships: dlgdpt = – 0.03ectt-1 – 0.16lgdpt-1 + 0.03lexportst-1 – 0.003ldebtstockst-1 (0.0) (0.27) (0.49) (0.94) dlexportst = – 0.015 ectt-1 + 0.94lgdpt-1 + 0.15lexportst-1 – 0.19ldebtstockst-1 (0.25) (0.03) (0.29) (0.13) dldebtstockst = – 0.007ectt-1 + 0.49lgdpt-1 – 0.04lexportst-1 + 0.32ldebtstockst-1 (0.65) (0.34) (0.82) (0.03) the results reveal that for dlgdp equation only the estimated adjustment coefficient has correct sign and is statistically significant. the speed of adjustment is 3 per cent. in the short run, lgdp positively affects lexports and the estimated coefficient is significant at 5 per cent level. all other estimated coefficients are statistically insignificant. the short run impact of ldebtstocks on both lgdp and lexports is negative. the impact of lgdp on both lexports and ldebtstocks is positive. the impact of exports on ldebtstocks is negative and on lgdp is positive. in the long run also the estimated coefficients are not statistically significant; however, the impact of both exports and debtstocks on gdp is positive. so, similar to model 3 we find that debtstocks affects gdp negatively in the short run but positively in the long run. the impact of exports on gdp is positive in the short as well as long run. 6. concluding remarks this paper attempts to examine the relationship among external debt, exports and economic growth for the indian economy during the period 1970 – 2018. using the techniques like cointegration, error correction model maximum rank trace statistic 5% critical value 0 108.7484 34.91 1 6.8255* 19.96 2 1.4957 9.42 3 economy, 2020, 7(1): 59-68 67 © 2020 by the authors; licensee asian online journal publishing group and granger causality analysis our study considers four models. in the model with constant trend specification where gdp and exports are the variables, the results indicate that there is no long-term relationship between them. however, dlgdp granger causes dlexports; in contrast to that for the restricted constant trend specification there is a positive long term relationship (although not significant) and in the short run lgdp affects lexports positively and significantly. thus for both specifications we find a support of gle hypothesis. for the second model where gdp and debt services are the variables, the results reveal a positive and significant long-term relationship between them; in the short run, however, debt services negatively affect gdp although it is not statistically significant. the third model includes gdp, exports and debt service. the results indicate that a long term relationship exist among the variables where both exports and debt services affect gdp positively and significantly. in the short run, surprisingly, both exports and debt services affect gdp negatively although not significantly. the error correction terms have expected signs. gdp has a positive and significant impact on exports. other coefficients are not statistically significant. the fourth model is a variant of the third model where debt stock is used as an indicator of external debt. in this case with constant trend specification there seems to be no long term relationship among the variables dlgdp is found to granger cause dlexports. for the restricted constant trend specification, however, there seems to be a long term relationship among the variables. here also exports and debt stock affect gdp positively although not significantly. in this case also short run impact of debt stocks on gdp is negative and that of exports is positive but not significant. gdp affects exports positively and significantly. external debt is often used to supplement investment which is expected to impact economic growth positively. however, it can upset the process of economic growth under certain situations. the idea of export-led growth suggests that by boosting exports countries can improve economic growth; again export revenues finance repayment of external debt to foreign countries. higher levels of exports indicate better debt servicing capacity and more debts would be available from the lenders. there is a hypothesis of growth-led exports also which argues that economic growth affects exports positively. so, it can be said that external debt, exports and economic growth are inter-related in a country and it is both important and interesting to study the relationship for india. in general, results indicate that gdp has a positive and significant impact on exports in all models including exports. hence it can be said the gle hypothesis is supported in case of india for the period 1970-2018. elg hypothesis is not supported in the short run in any of the model. for model 3, where debt servicing is included, in the long run also there is a significant positive relationship between gdp and exports. for model 2 and model 3 there is a positive and significant relationship between economic growth and external debt in the long run. a significant positive long run impact of external debt on economic growth is observed in the indian economy in both the bivariate as well as trivariate model where debt service is the indicator of external debt. ahmed et al. 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(2009). an analysis of export performance and economic growth of malaysia using co-integraton and error correction models. the journal of developing areas, 43(1), 217-231.available at: https://doi.org/10.1353/jda.0.0031. woo, w. t., & nasution, a. (1989). the conduct of economic policies in indonesia and its impact on external debt. in j. d. sachs (ed.), developing country debt and the world economy. chicago: university of chicago press. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. 25 © 2020 by the authors; licensee asian online journal publishing group economy vol. 7, no. 1, 25-35, 2020 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2020.71.25.35 © 2019 by the authors; licensee asian online journal publishing group macroeconomic policies and stock market liquidity: evidence from nigeria kingsley onyekachi onyele1 eberechi b. ikwuagwu2 charity onyekachi-onyele3 ( corresponding author) 1,2,3department of banking and finance, michael okpara university of agriculture, umudike, abia state, nigeria. abstract this study investigated the effect of macroeconomic policies on stock market liquidity in nigeria using annual time series data that spanned from 1986 to 2018. specifically, the paper analyzed how monetary and fiscal policies interactions affect stock market liquidity. stock market liquidity was measured by stock turnover ratio. unit root test confirmed that the variables were of mixed integration which necessitated the application of ardl technique. the ardl bounds testing revealed that a long-run relationship existed between fiscal and monetary policies instruments, and stock market turnover ratio. in the long-run, it was found that government debt had negative and significant effect on stock market turnover ratio while monetary policy variables such as monetary policy rate and cash reserve ratio had significant effect on stock market turnover, but only the policy rate was positive. in the short-run, all the explanatory variables were significant apart from monetary policy rate which was, though, significant after one period lag and liquidity ratio which was not significant at any level. the results of the ecm suggested that stock market liquidity was affected by the interactions of fiscal and monetary policies instruments in nigeria. consequently, the paper concluded that macroeconomic policies that would enforce sustainable and efficient financial market towards improving stock market liquidity be strictly implemented. keywords: stock market, liquidity, turnover ratio, macroeconomic policies, fiscal policy, monetary policy. jel classification: c32; e44; e63; f42; g2; h50. citation | kingsley onyekachi onyele; eberechi b. ikwuagwu; charity onyekachi-onyele (2020). macroeconomic policies and stock market liquidity: evidence from nigeria. economy, 7(1): 2535. history: received: 10 february 2020 revised: 12 march 2020 accepted: 15 april 2020 published: 4 may 2020 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group acknowledgement: all authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ...................................................................................................................................................................................... 26 2. conceptual framework ................................................................................................................................................................... 27 3. theoretical review .......................................................................................................................................................................... 28 4. empirical review ............................................................................................................................................................................. 29 5. sources of data and description of model variables .............................................................................................................. 29 6. model development ........................................................................................................................................................................ 30 7. data estimation techniques ......................................................................................................................................................... 31 8. empirical results ............................................................................................................................................................................. 31 9. conclusion and policy implications ............................................................................................................................................. 34 references .............................................................................................................................................................................................. 35 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2020.71.25.35&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ http://asianonlinejournals.com/index.php/economy/article/view/1580 https://orcid.org/0000-0002-4731-6139 https://orcid.org/0000-0002-8086-1921 https://orcid.org/0000-0002-7199-7851 http://asianonlinejournals.com/index.php/economy/article/view/1580 https://orcid.org/0000-0002-4731-6139 https://orcid.org/0000-0002-8086-1921 https://orcid.org/0000-0002-7199-7851 http://asianonlinejournals.com/index.php/economy/article/view/1580 https://orcid.org/0000-0002-4731-6139 https://orcid.org/0000-0002-8086-1921 https://orcid.org/0000-0002-7199-7851 http://asianonlinejournals.com/index.php/economy/article/view/1580 https://orcid.org/0000-0002-4731-6139 https://orcid.org/0000-0002-8086-1921 https://orcid.org/0000-0002-7199-7851 http://asianonlinejournals.com/index.php/economy/article/view/1580 https://orcid.org/0000-0002-4731-6139 https://orcid.org/0000-0002-8086-1921 https://orcid.org/0000-0002-7199-7851 economy, 2020, 7(1): 25-35 26 © 2020 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study contributes to prior studies by showing that fiscal-monetary policy interactions affect financial market liquidity in nigeria for the period 1986-2018. 1. introduction an economic environment that is poorly managed is bound to deplete financial market activities (nasir, soliman, yago, & wu, 2016). unfortunately, the nigerian economy has been grouped among the most volatile economies in recent days due to lapses in macroeconomic policies, leading to a breakdown in economic activities in recent years. these economic problems have led to severe liquidity squeeze and credit crunch in the nigerian financial system. consequently, as a prominent component of the financial system, the nigerian stock market has underperformed due to its susceptibility to economic upheavals resulting from poor economic policies such as, fiscal and monetary policies (nwaogwugwu, 2018). in recent years, due to laggard implementation of fiscal and monetary policies to cushion economic vagaries, the nigerian stock market have been plagued with global financial crisis and economic recession of 2008/2009 and 2016 respectively. also, the lack of vibrant fiscal and monetary policies to shield the nigerian stock market from the adverse effects of economic crisis has led to downward trend in key performance parameters of the market as displayed in figure 1. the figure shows that during the global financial crisis (2008/2009 precisely), market capitalization which had leapfrogged from ₦5,120.90 billion in 2006 to ₦13,181.69 billion in 2007 dropped persistently to ₦7,030.84 billion in 2009, while all share index which had accelerated from 33,189.30 points in 2006 to 57,990.20 points in 2007 dropped to 20,827.17 points in 2009. likewise, due to the adverse effects of economic recession witnessed in 2016, market capitalization fell from ₦17,003.39 billion to ₦17,003.39 billion in 2015 to ₦16,185.73 billion in 2016 as the all share index crashed from 28,642.25 points in 2015 to 26,874.62 points. as a result, empirical inquiry into the relative role of fiscal and monetary policies in enhancing stock market activities in nigeria has remained an enduring issue. figure-1. trend analysis of all share index and market capitalization in nigeria. source: central bank of nigeria statistical bulletin, vol. 29, 2018. the core objective of monetary and fiscal policies is the maintenance of economic and financial stability. achieving these objectives is dependent on the effectiveness of monetary and fiscal policies coordination. fiscal policy encapsulates government revenue collection (through taxes) and spending decisions, while monetary policy is related to those decision on money supply and interest rate in an economy. the overriding objective of fiscal policy is to mitigate unemployment rate by creating an investment friendly economy where available resources are gainfully utilized for more productivity. regarding monetary policy, the all-important objective is the maintenance of price and exchange rate stability by ensuring that quantity of money supply is as prescribed by the monetary authorities. hence, it can be seen that the ultimate goal of both policies is to ensure macroeconomic stability which is required for repositioning financial markets on a sustainable growth trajectory (hsing, 2013). for instance, higher tax collection (with government expenditures remaining constant) depletes expected return of financial assets which eventually deter stock market liquidity (onoh, 2016). on the other hand, increase in public debt due to budget deficit causes surge in short-term interest rate which, in turn, reduces the value of discounted cash flow from a financial asset (like a share) and then signals a decrement in stock market liquidity (ernest, 2011). since fiscal activities could influence interest rates, monetary authorities’ interventions to moderate interest rate creates an interaction mechanism between monetary and fiscal policies (isola, somoye, babajide, & nwanji, 2018). this paper focused on the stock market amidst other segments of the financial market for several reasons. this is particularly due to the wealth effect associated with the stock market (see, nasir et al. (2016)). additionally, bhattacharya, bhattacharya, and basu (2019); ellington (2018); onoh (2016) had indicated that stock market liquidity is an important indicator of future outlook of the financial market. hence, it is established that the crucial role of stock markets hinged on the liquidity it affords investors who invest in stocks, compared to less liquid investments such as real estate. one reliable measure of stock market liquidity is the turnover ratio (abdul-khaliq, 2013; bhattacharya et al., 2019). as such, a well-functioning stock market is desirable when the turnover ratio increases; the higher the shares turnover, the more liquid company shares would be. a liquid stock market is that in which financial assets are easily purchased and sold with minimal loss of value. in general, liquidity entails the extent of trade-off existing between the price and speed at which stocks are sold. as such, a liquid market has a mild trade-off where quick selling does not cause much decline in stock prices (ellington, 2018). conversely, in a stock market that is relatively illiquid, rapid selling of financial assets would require some amount of price cut. consequently, adequate liquidity activates efficient financial intermediation which requires vibrant macroeconomic economy, 2020, 7(1): 25-35 27 © 2020 by the authors; licensee asian online journal publishing group policies to be sustained. since liquidity reflects stock market viability, several studies have advocated the use of fiscal and monetary policies instruments for its maintenance and sustenance. the pioneering studies of friedman and meiselman (1963); andersen and jordan (1968) which supported the preference of monetary policy over fiscal policy in the united states have been challenged for diverse reasons by subsequent studies like goldfeld and blinder (1972); friedman. (1977); darrat (1986) based on the premise that fiscal policy is more prominent than monetary policy. however, this has not been the case in recent literature where recent empirical works such as afonso, alves, and balhote (2019); nwaogwugwu (2018); tawfiq and tahtamouni (2018); isola et al. (2018); orekoya (2017) revealed that though fiscal policy and monetary policy might have varying effects on stock market activities, an interaction of the two policies is of utmost importance in explaining changes in stock market activities. on the other hand, a gap this study aims to fill borders on the fact that studies carried out in nigeria such as nwaogwugwu (2018); orekoya (2017) suffer from model misspecification as they failed to incorporate public debt, cash reserve ratio and bank liquidity ratio (ratio of banks’ liquid assets to its liabilities) in the fiscal-monetary policy mix as these variables are important components of macroeconomic policies (alade, 2017; ukeje, 2012). however, a vital issue that has often stressed the minds of researchers and economist alike is the discernment of how the dependence, independence and interactions between monetary and fiscal policies could drive the economy either closer or further away from its goals and objectives. obviously, one of the fundamental objectives of fiscal and monetary authorities is to foster effective and efficient economy, of which the stock market is an integral part. it is based on the foregoing that this paper investigates the extent to which stock market liquidity is being affected by fiscal and monetary policy actions in nigeria. this objective was achieved by using yearly time series data from 1986 to 2018 and autoregressive distributed lag (ardl) technique of data analysis. 2. conceptual framework the conceptual note explaining the interaction between fiscal and monetary policies as they influence productivity, prices, rate of returns and by extension stock market liquidity have been categorized into two (2) strands of literature (afonso et al., 2019; tawfiq & tahtamouni, 2018). the first strand emphasizes that the two policies are either substitutes or complements to each other. the second focuses on the competing or conflicting effect which explains both that policies move in opposite direction through the strategic fundamentals relating to the interaction between the policies based on the game theory framework (the use of mathematical models of strategic interaction among rational decision-makers). linkages between these two policies instruments towards any direction has effects on overall financial system, most especially the stock market. in a situation both policies tick towards the same direction, one would discover that either contractionary or expansionary of one policy instrument would lead to either contractionary or expansionary of the other (ellington, 2018). in the same vein, it is also averred that in a situation when both policies follow the same direction such that inflation is kept in check while counter cyclical policies are implemented, the results would be that either of the two policies will lead, while the other play the complementary role by following (nasir et al., 2016). this is because funds required by government and corporate organizations are often large hence effective macroeconomic policies (fiscal and monetary policies) would foster stock market liquidity to raise such funds required by government and companies (onoh, 2016). as indicated in the literature, the interaction between fiscal and monetary policies manifests through the effect of public inter-temporal budget constraint on monetary policy which emphasizes that government endeavour to fund her expenditures through tax collection, debt, and seignorage. here, the pitfall could be that, when confronted with laggard fiscal policy amidst a complementary role by monetary policy, there is the likelihood that the monetary policy instruments would become sluggish if fiscal system experience insolvency, thus resulting to inflationary pressure in the future. on the other hand, through the impact of fiscal policy instruments on components of monetary policy, especially the discount rate (monetary policy rate). according to chatziantoniou, duffy, and filis (2013) this effect is seen through a situation when a country’s debt profile is heavily dominated in hard currencies as exchange rate depreciation would accelerate the debt burden which will cause appreciable surge in interest rate and adverse effects on stock prices and by extension stock market liquidity. figure 2 below summarizes the conceptual framework of this paper assuming loose fiscal and monetary policies. the diagram depicted in figure 1 shows that economic actions associated with fiscal or monetary policies might effectively achieve desirable macroeconomic objectives if they are isolated. as such, a mixture of policies is emphasized, where appropriate implementation of fiscal policy is accompanied by a suitable level of monetary policy. hence, the interactions between fiscal and monetary policy fundamentals as well as interest rates (monetary policy rate/discount rate) shows that the analysis of stock market activities cannot be completely isolated from such policy influences. this is the situation as changes in either fiscal or monetary policy instruments (like government spending, taxes and discount rate) could have an instantaneously influence on interest rates and then propel investors to revalue their holdings in equity. in other words, the value of investor’s wealth (including equity holdings) which is reflected in the sum of discounted future cash flows (and/or dividends), is often affected by an expansionary or contractionary fiscal or monetary policy either be means of discount rate or expected revenue or both. consequently, it is more appropriate to carry out a concurrent analysis of both policies when investigating stock market activities. economy, 2020, 7(1): 25-35 28 © 2020 by the authors; licensee asian online journal publishing group figure-2. conceptual framework. 3. theoretical review as affirmed by agnello and sousa (2010); iacoviello (2005); bernanke and kutner (2005) monetary policy could affect stock market activities through five (5) fundamental channels, viz; the, 1) interest rates channel. 2) credit channel. 3) wealth effect mechanism. 4) exchange rate channel. 5) monetary mechanism. the first channel of monetary policy transmission is the interest rate channel which is hinged on the keynesian hypothesis that changes in in interest rate could affect cost of capital, thereby causing alterations to present value of expected cash flows of corporate organizations in the future. this implies that upward trend in interest rates might provoke a downward trend in firms’ cash flows, hence resulting to lower liquidity and stock prices. the second channel, which the wealth effect mechanism encapsulates an indirect transmission mechanism of monetary policy based on interest rate adjustment. this channel sees deliberate changes to interest rate by monetary authorities as a means through which investments as well as stock market liquidity can be controlled. here, swings in corporate investments would likely alter firms’ market value as well as their future financial status. specifically, the credit mechanism offers explanations that additional investments induces increment in future cash flows, hence accelerating the market value of firms listed in the stock market which in turn spurs stock market liquidity (onoh, 2016). on the other hand, the third channel which examined the wealth effect mechanism opined that the ability to influence stock market prices centres on the fact that higher interest rates causes stock prices to fall which automatically transmit to low market liquidity. also, the exchange rate channel explains that increased interest rate induces appreciation of domestic exchange rate, thus leading to higher imports and lower exports which negatively influence the stock market liquidity. also, the fifth approach is the monetary mechanism which is based on the tobin's q theory of investments observed that increased interest rates will result to decrease in stock valuation thereby shifting liquidity from the stock markets to the bond market thereby causing stock prices to fall. on the other hand, the theoretical stance through which fiscal policy actions affect activities of a stock market follows three major hypotheses, namely, the; 1) keynesian positive effect. 2) classical crowding out effect. 3) richardian neutrality hypothesis. the keynesian theoretical foundation centres on the application of automatic and discretionary stabilizing measures by fiscal authorities in such a manner that propels aggregate consumption, boosts economic productivity as well as accelerate stock returns. this hypothesis is based on the notion that fiscal policy instruments (government tax revenue and expenditures) positively affect the stock market. hence, policy makers utilize budget deficit, taxes as well as other discretionary measures to alter the prevailing interest rate, thereby causing significant improvement in stock market performance. regarding the classical crowding out effect, it is believed that the adverse effects of fiscal policy instruments on the real economy is transmitted to the stock market. this hypothesis shows that instruments of fiscal policy could potentially crowd out loans in the financial markets and hinder private sector investments, thereby having inverse effects on stock prices which could also affect liquidity. economy, 2020, 7(1): 25-35 29 © 2020 by the authors; licensee asian online journal publishing group with respect to the richardian neutrality hypothesis, takes a mid-point approach to affirm that fiscal policy has no individual ability to effectively influence the behaviour of stock markets and other components of the financial sector in an economy with inadequate input from instruments of monetary policy. the richardian neutrality hypothesis further states that the ability of fiscal policy to drive aggregate demand is hindered due to disequilibrium position existing between public debt and private savings of rational households. 4. empirical review the collective effect of fiscal-monetary policies on stock markets have been well established by prior empirical works in recent years. nwaogwugwu (2018) analyzed the impact of macroeconomic policies on stock market behavior in nigeria with the aid of ardl bounds testing approach. the findings showed that money supply, interest rate, government spending and taxation had statistically significant impact on the stock market in the short and the long-run. similarly, isola et al. (2018) examined the impact of fiscal and monetary policies on stock market behaviour using monthly data and ardl estimation technique. the results showed that the interaction between the two economic policies influenced stock returns in nigeria. the ardl estimation showed evidence of long-run relationship between stock returns and monetary-fiscal policy mix. also, orekoya (2017) applied structural var on quarterly time series data from 1990q1 to 2016q4 to analyzed the interacting impact of fiscal and monetary policy tools on the nigerian stock market. the study concluded that the nigerian stock market responded rapidly and significantly to fiscal and monetary policies instruments. away from nigeria, chibi, benbouziane, and chekouri (2019) analyzed the dynamic interaction between monetary and fiscal policies in algeria for the period of 1963-2017 using ardl estimation approach. the reactions between fiscal and monetary authorities indicated that fiscal policy was not responsive to monetary policy instruments during the period but monetary policy tools was responded to instruments of fiscal policy. the study concluded that fiscal policy was dominated monetary policy in algeria. similarly, tawfiq and tahtamouni (2018) discussed the impacts of the monetary and fiscal policies on stock market returns in jordan during the period 2006 to 2016. a multiple regression analysis technique was used for the data analysis. the paper revealed that there was a long-run cointegrating relationship between monetary-fiscal policies interaction and stock returns. again, nasir et al. (2016) analyzed financial markets` responses to fiscal and monetary policy interaction in the uk using vector auto-regression (var) model on monthly data from january 1985 to august 2008.the study found that equity and bond markets showed responded negatively to interaction of both policy actions. also, chatziantoniou et al. (2013) employed a svar to investigate the collective impact of monetary and fiscal policy shocks on stock market performance in germany, uk and the us. the empirical results showed that both policies influenced the stock market. it was found that the two economic policies were very significant in explaining stock market developments. in the same vein, hsing (2013) focused on analyzing the impacts of fiscal and monetary policies on stock market performance in poland during 1999.q2 to 2012.q4. the paper found that the index of poland’s stock market was not affected by government deficits but was negatively influenced by the money market rate. ernest (2011) examined the joint impact of fiscal and monetary policy instruments on the ghanaian stock market. empirical evidence from the study indicated that interaction between the two policies were transmitted to the stock market through interest rate which suggested that such policies might have simultaneous influence on stock market activities in ghana. 5. sources of data and description of model variables the dataset used for this paper included diverse macroeconomic policy indicators covering both fiscal and monetary policies as well as stock market liquidity. the dependent variable is stock market liquidity. this study followed prior empirical works such as bhattacharya et al. (2019); abdul-khaliq (2013) to proxy stock market liquidity with turnover ratio, measured as the ratio of total value of shares traded to total market capitalization. though, the turnover ratio does not reveal performance of the company behind the stock but it does supply information on how easily an investor can sell the shares of a company. additionally, the data used for the study were collated from the central bank of nigeria (cbn) statistical bulletin, vol. 29, 2018, and national bureau of statistics. with regards to fiscal policy, three kinds of variables were incorporated into the estimation model. the first is government revenue (both tax and non-tax) which happens to be one side of the policy, government expenditures which occupies the other hand of the policy and government borrowings which helps bridge the resource gap when government revenue falls short of government expenditures. fiscal policy instruments are designed by the government to influence quantum and allocation of collected revenue and expenditures towards achieving sustainable economic development and by extension stock market stability (alade, 2017). the tax revenue was expressed as a ratio of gdp to determine how well a government directs and manages its economic resources through taxation. also, government expenditures to gdp ratio was used to measure government size while government debt to gdp ratio indicated debt overhang (kenton, 2019). monetary policy is concerned with the use of monetary instruments such as the discount rate (also known as the monetary policy rate), cash reserve requirements and liquidity ratio of banks to influence overall economic activities by a central bank (ukeje, 2012). with cash reserve requirements, the central bank mandate commercial banks to hold part of their deposit liabilities as vaults with the central bank which help control bank lending, thus put supply of money on check as higher reserves limit bank loans and vice versa. the monetary policy rate on the other hand, represents the interest rate at which the central bank lends to financially sound banks thereby affecting credit supply which in turn limits or enhances stock market activities through availability of investible funds. also, bank liquidity ratio as applied to monetary policy entails the amount of liquid assets recommended by the cbn to be kept by banks in order to meet their day-to-day financial obligations, most especially, customer withdrawals (alade, 2017). consequently, an understanding of how diverse macroeconomic policy variables operate, their ability to reinforce each other, and how policy shocks might arise will help policy makers in managing policy direction. fiscal and monetary policies could reinforce one another in stimulating lower risk inherent in long-term interest rates economy, 2020, 7(1): 25-35 30 © 2020 by the authors; licensee asian online journal publishing group structure. the point of interaction between the two macroeconomic policies arises when government borrows to fund expenditures due to shortfalls in expected revenue. higher government borrowing could reach a point when the debt might be difficult to repay. hence, under this condition, the central bank might be forced to monetize the debt by embarking on seignorage, leading to excess liquidity with the attendant lower interest rate which automatically cause a downward trend in stock market liquidity as low interest rates signals low returns, hence stock market liquidity is influenced. under this circumstance, the monetary authorities should notify the fiscal authorities of the impacts of public borrowing on reaching their monetary objectives (of which stock market liquidity is one). 6. model development the theoretical framework of this study encompasses representative household facing income constraint, utility and preferences as presented in equation 1: u = ∑ u( ) (1) equation 1 above shows that with efforts aimed at maximizing utility of household (u), maximization of various streams of consumption (c) as well as leisure (l); e0 is the expectations operator (rational expectations) based on policy makers observing all macroeconomic variables; (0; 1) denotes the discount factor, while u is immediate utility function while and are consumption and leisure levels at time t. it is assumed here that the said household portfolio contains two varieties of financial assets i.e. stock(s) and public bonds (b). the household wealth is acquired via two sources to make up financial wealth, that is, an amalgam of income gained from financial assets (stocks and bonds) as well as non-financial wealth (h) which connotes returns on labour. therefore, the aggregate financial wealth (a) would be as stated in equation 2: a = ∑ (2) based on equation 2 above, this paper followed the theoretical model adopted by nasir et al. (2016); nasir. and soliman (2014) in which intertemporal household consumption depended on financial wealth as represented in equation 3: c = [ ( )] ≈ (3) where c represents consumption, a represents the financial wealth comprising stocks and bonds (a = ∑ ), h represents component of human wealth and y indicates value associated with expected income of labour after taxes. the coefficient of proportionality (mpc) measures the marginal propensity to consume out of financial wealth as well as income. equation 3 can be rewritten as: * + + * + = ∑ ] + * + (4) the implication of equation 4 is that the wealth elasticity of consumption ( ) is dependent on and wealth consumption ratio of each of the component j. the national income (y) equation is given by equation 5: (5) where, i denotes investments, g represents government spending, while (x-m) represents the balance of trade (exports less imports), obviously, c which denotes consumption is an integral part of national income. consequently, based on equation 5, the influence of financial wealth (a) on financial assets (such as, stocks and bonds) would be automatically transmitted to consumption. now, assuming the household invests in financial assets, let’s say stocks (s) or bonds (b) or a combination of both (which are instruments of the stock market) which are influenced by economic policies (monetary and fiscal policies), as such the relationship between monetary policy and financial wealth is expressed by equation 6: financial wealth (a) = ∑ ( ) (6) in equation 6, = expected financial wealth from stocks and bonds; and, r represents the rates of interest (monetary policy rate). for the nexus between fiscal policy and financial wealth, the specification of ardagna (2009) for the us stock market and fiscal policy was adopted as expressed below in equation 7: = ∑ ( ) (7) from equation 7, denotes the stock market and represents the fiscal stance at a certain period, let’s say time . hence, recognizing the effect of interactions between fiscal policy and monetary policy on stock market activites as stated by empirical studies such as chibi et al. (2019); tawfiq and tahtamouni (2018) equations 6 and 7 were merged. hence, the model was represented as follows: ( )( )= ∑ ( ( ) ) (8) hence, equation 8 implies that stock market activities = f( , ) having established from the theoretical framework the fiscal and monetary policies influence stock market activities, it is believed that stock market liquidity would respond to changes in such macroeconomic policies. hence, given that fiscal policy according to alade (2017) has three major components, that is, government collected tax revenue, public expenditures and government debt, while ukeje (2012) also indicated that monetary policy is transmitted through the discount rate (monetary policy rate) as well as monetary authority’s prescriptions of cash reserve ratio and liquidity ratio of deposit money banks in nigeria. hence, equation 8 was restructured to capture the aforementioned components of fiscal and monetary policies as shown in equation 9: economy, 2020, 7(1): 25-35 31 © 2020 by the authors; licensee asian online journal publishing group = + + + + + + + (9) where, = stock market turnover ratio (measure of stock market liquidity) at time t. = government collected tax revenue at time t. = government expenditures at time t. = government borrowing at time t. = monetary policy rate at time t. = cash reserve ratio at time t. = liquidity ratio at time t. = constant. = coefficients of the explanatory variables. = error term. 7. data estimation techniques the study applied autoregressive distributed lag (ardl) bounds test approach for the study. the bounds testing was used to determine if the long-run relationship between the variables in the model. if the variables are cointegrated, the long-run ardl model will be estimated and also the speed of adjustment will be found. in ardl analysis, long-run and short-run coefficients are estimated simultaneously, and model could be developed and utilized for cointegration test even if all the variables were not stationary after first differencing 1(1), or at level i.e. 1(0). ardl model is used when the variables are of mixed integration at order one, 1(1) and at level, 1(0), but none is integrated at second differencing, 1(2) (pesaran, shin, & smith, 2001). the ardl bounds testing specification of equation 9 was expressed as error correction mechanism (ecm) to test for cointegration between the variables in view. equations 10, 11 and 12 denotes the bounds test, long-run estimates and the ecm, respectively. = δo + ∑ + ∑ + ∑ + ∑ + ∑ + ∑ ∑ + + + + + + + (10) after cointegration is established, the estimation of the long-run relationship followed equation 11 below: = + + + + + + (11) equation 12 below displays the short-run relationship and the error correction mechanism: = δo + ∑ + ∑ + ∑ + ∑ + ∑ + ∑ + ∑ + + (12) where, = constant = short-run elasticities (coefficients of the first-differenced explanatory variables) = long-run elasticites (coefficients of the explanatory variables) θ = speed of adjustment = error correction term lagged for one period δ = first difference operator p = lag length before estimating the ardl model, the data were individually tested for unit root. this stage is very necessary as most macroeconomic time series contain unit root and any regression involving non-stationary series produces spurious regression output. the test for stationarity of data was done with augmented dickey fuller (adf) unit root test approach (dickey & fuller, 1979). the model adf model is specified in equation 13: = + t + + ∑ + (13) where, are lagged value of at first difference; denotes change in lagged value; δ indicates the lag length; represents first difference of and is the error term. 8. empirical results table-1. adf unit root test results. variable adf t-statistic 1% level *** 5% level ** prob. at level, i(0): tnr -2.9660 -4.2732 -3.5577 0.1569 rev -1.6357 -4.2732 -3.5577 0.7558 exp -3.5979 -4.2732 -3.5577 0.0459** dbt -2.8078 -4.2845 -3.5628 0.2052 mpr -3.746099 -4.2732 -3.5577 0.0334** crr -4.813282 -4.3239 -3.5806 0.0032*** lqr -3.239788 -4.2732 -3.5577 0.0949 at first difference, i(1): tnr -4.046886 -4.3239 -3.5806 0.0186** rev -5.069506 -4.2967 -3.5683 0.0016*** exp ---- dbt -4.6743 -4.2845 -3.5628 0.0039*** mpr ---- crr ---- lqr 6.0678 --0.0001*** note: *** prob. < 0.01 and ** prob. < 0.05. economy, 2020, 7(1): 25-35 32 © 2020 by the authors; licensee asian online journal publishing group 8.1. unit root test the preliminary test of adf unit root test was performed to confirm if the data are stationary. the results are displayed in table 1 below: the test statistics of exp, mpr and crr were greater than their respective critical values at 5% level; hence the null of unit root was rejected for the aforementioned variables. on the other hand, tnr, rev, dbt and lqr became stationary after taking their first difference at 5% level. hence, the adf test results shows that the data series were of mixed integration, that is, a combination of i(0) and i(1) variables. this circumstance necessitates the application of the ardl estimation technique (pesaran et al., 2001). 8.2. bounds testing for cointegration having established the stationarity status of the variables, the study proceeded with the ardl bounds testing to establish a possible long-run relationship among the variables understudy. here, the null hypothesis of absence of cointegration is rejected if the f-test is greater than the critical value at 5% level of the i(0) and i(1) regressors, and vice versa . the outcome of the bounds testing was presented in table 2 as shown below: table-2. bounds testing results. f-bounds test null hypothesis: no levels relationship test statistic value signif. i(0) i(1) f-statistic 9.137388 10% 1.75 2.87 k 6 5% 2.04 3.24 2.5% 2.32 3.59 1% 2.66 4.05 the bounds testing results shows that the null hypothesis is rejected at 1% level of significance as there is evidence of cointegrating relationship in the model motivated by the explanatory variables (components of fiscal and monetary policy). this implies that stock market turnover ratio (tnr), government tax revenue (rev), public expenditures (exp), government debt (dbt), monetary policy rate (mpr), cash reserve ratio (crr) and liquidity ratio (lqr) are bound by a long-run relationship. the long-run relationship among the variables was confirmed as the calculated f-ratio (tnr, rev, exp, dbt, mpr, crr and lqr) = 9.1373 which happens to be greater than the is upper bound critical value of 4.05 at the 1% level of significance. the implication of this cointegrating relationship is that stock market turnover ratio (measure of stock market liquidity) followed changes in fiscal and monetary policy components over a long period. hence, it was concluded that fiscal and monetary policy collectively explained variations in tnr. this affirms the findings of prior empirical works like chibi et al. (2019); nwaogwugwu (2018); tawfiq and tahtamouni (2018)); isola et al. (2018); chatziantoniou et al. (2013) that interaction between fiscal and monetary policy variables explains stock market behaviour. 8.3. long-run estimation of the ardl model after ascertaining the cointegration relationship, the study proceeded with the estimation of long-run and short-run dynamics using the autoregressive distributed lag (ardl) and error correction mechanism (ecm). the results of the ardl long-run coefficients were displayed in table 3 as shown below: table-3. long-run estimated coefficients. variable coefficient std. error t-statistic prob. tnr(-1) -0.866820 0.177348 -4.887683 0.0009 rev(-1) 0.182759 0.109592 1.667630 0.1297 exp(-1) -0.088269 0.382022 -0.231057 0.8224 dbt(-1) -0.351970 0.106571 -3.302687 0.0092 mpr(-1) 1.623542 0.762389 2.229546 0.0421 crr(-1) -0.561272 0.219833 -2.553174 0.0310 lqr(-1) 0.007696 0.113877 0.067581 0.9476 note: selected model ardl(1, 3, 3, 3, 3, 1, 1). the long-run estimated coefficients revealed that one period lag of tnr, dbt, mpr and crr were the most significant variables that affected current year’s tnr. the coefficient (-0.866820) and the probability value (0.0009) of tnr(-1) indicated that the observed value of stock market turnover of the previous year had significant effect on current year’s turnover ratio. though, the coefficient of rev(-1) was positive (0.182759), the p-value (0.1297) showed that government collected revenue had no significant effect on tnr. the estimated coefficient (0.088269) of exp(-1) is indicative of the fact that government expenditures exerted negative effect on tnr, but the associated p-value (0.8224) suggested that the effect of exp on tnr was not significant in the long-run. also, government borrowing which was measured by debt overhang (total debt to gdp ratio), that is, dbt(-1) emerged with negative (-0.351970) and significant (0.0092) which implied that increase in government borrowing could significantly deter tnr in the long-run. the long-run coefficients also revealed that mpr(-1) had a positive (1.623542) and significant (0.0421) long-run effect on tnr which implied that increase in monetary policy rate caused significant surge in tnr. the result was also indicative of a positive (-0.561272) and significant (0.0310) of crr(-1), which indicates that tnr declined significantly in the long-run due to increase in cash reserve ratio. on the other hand, lqr(-1) emerged with a positive (0.007696) coefficient but wasn’t significant (0.9476), thus showing that prescribed increase in liquidity ratio of banks caused tnr of the stock market to accelerate but at a slow pace. these findings implied that fiscal policy instruments (government revenue and expenditures) did not directly affect stock market liquidity (measured by turnover ratio) in the long-ru but indirectly through government borrowings due to fiscal deficit. this finding was in consonance with the richardian neutrality hypothesis that economy, 2020, 7(1): 25-35 33 © 2020 by the authors; licensee asian online journal publishing group fiscal policy has no individual ability to influence the behaviour of stock markets and other components of the financial sector in an economy without monetary policy playing a complementary role. on the other hand, the study observed that monetary policy rate and cash reserve ratio were monetary policy tools that significantly explained stock market liquidity in the long-run. thus, this is in tandem with interest rate and credit channels of monetary policy transmission that deliberate changes to interest rate by monetary authorities is a means through which stock market as well as other financial activities are controlled. 8.4. short-run estimation of the ardl model the error correction mechanism (ecm) gave information on the speed of adjustments and short-run coefficients of the ardl model while the differenced coefficients of the independent variables indicated the shortrun dynamics. directly, the ecm estimation provides information on the speed at which the stock market liquidity (measured by turnover ratio) returns to equilibrium after a shock to the independent variables (components of fiscal and monetary policies). the results were presented in table 4: table-4. error correction mechanism results. variable coefficient std. error t-statistic prob. d(rev) 0.447793 0.055425 8.079221 0.0000 d(rev(-1)) -0.317043 0.068979 -4.596203 0.0013 d(rev(-2)) 0.136133 0.058195 2.339257 0.0441 d(exp) 0.684444 0.162833 4.203346 0.0023 d(exp(-1)) -0.108068 0.186918 -0.578156 0.5773 d(exp(-2)) -1.013950 0.160921 -6.300928 0.0001 d(dbt) -0.233940 0.040295 -5.805708 0.0003 d(dbt(-1)) 0.312268 0.049118 6.357518 0.0001 d(dbt(-2)) 0.279972 0.040877 6.849186 0.0001 d(mpr) 0.173522 0.148382 1.169430 0.2723 d(mpr(-1)) -0.797467 0.147932 -5.390774 0.0004 d(mpr(-2)) -0.261833 0.099839 -2.622554 0.0277 d(crr) -0.907645 0.140365 -6.466304 0.0001 d(lqr) -0.063470 0.034927 -1.817217 0.1026 ect(-1) -0.866820 0.083955 -10.32487 0.0000 r-squared 0.920010 adjusted r-squared 0.845352 durbin-watson stat 2.253422 in table 4, the short-run dynamic coefficients revealed that rev and exp had positive effect on stock market turnover while dbt had a negative effect which buttressed the undesirable effects public debt burden could have on the nigerian financial system (sunday, agbaeze, & onyele, 2018). also, while mpr emerged with a positive coefficient, lqr and crr had negative coefficients which entails that alterations to banks’ liquidity and reserves bears diminishing effects on stock market turnover ratio in the short-run as it limits commercial banks’ ability to increase in loans to private sector which in turn affects stock market activities (orekoya, 2017). the short-run dynamics denoted by the differenced (d) coefficients of the explanatory variables indicated that all the components of fiscal policy considered for this study has significant effect on stock market turnover ratio. however, it was observed that government collected revenue, public expenditures and government debt had immediate significant effect on stock market turnover ratio. this was observed by the p-values (0.0000, 0.0023 and 0.0003) associated with d(rev), d(exp) and d(dbt), respectively which were less than the 0.05 critical value. this implies that increase in revenue collection, especially through taxation, higher public expenditures as well as increased debt burden arising from deficit financing received rapid change to stock market turnover. on the other hand, it was observed that while the monetary policy rate and liquidity ratio did not have immediate effect on stock market turnover ratio as indicated by their respective p-values (0.2723 and 0.1026) as linked with d(mpr) and d(lqr), cash reserve ratio had an immediate effect on stock market turnover ratio as indicated by the p-value (0.0001) of d(crr), but tnr was strongly predicted by the first and second lag of mpr, that is mpr(-1) and mpr(-2) . this shows that both fiscal and monetary policy were important in determining short-run turnover ratio of the nigerian stock market than monetary policy. the significance of mpr and crr validates the theoretical postulation of the keynesians that fiscal policy affects the stock market as policy makers utilize budget deficit, taxes as well as other discretionary measures to alter the prevailing interest rate, thereby causing significant change in stock market activities. the ect indicates the speed of adjustment mechanism towards restoring equilibrium following a shock in the long-run. the observed coefficient of the error correction term (ect) was found to be negative (-0.8668) and statistically significant (0.0000). a negative and statistically significant ect indicates how rapidly stock market turnover return to equilibrium after a shock or discrepancies to macroeconomic policies in the long-run. in absolute term, the relatively high adjustment mechanism denoted by the coefficient -0.8668 (86.68%) associated with the ect implies a rapid adjustment process in the model. this shows that in the current year, approximately 86.68% of previous year’s disequilibrium or shocks adjusted back to long-run equilibrium. the ect further indicated the presence of a long-run relationship between components of macroeconomic policies and stock market liquidity in nigeria. on the other hand, the adjusted r-squared (0.845352) points to the fact that interaction of monetary policy and fiscal policy explained significant proportion of tnr. this implies that approximately 84.53% of the total variations in stock market turnover (tnr) was collectively explained by fiscal policy (government revenue, government expenditures and public debt) and monetary policy instruments (mpr, cash reserve ratio and liquidity ratio). the durbin-watson value (2.253422) which is approximately two (2) indicated the absence of serious problem of autocorrelation in the ecm. economy, 2020, 7(1): 25-35 34 © 2020 by the authors; licensee asian online journal publishing group 8.5. diagnostic tests the last issue addressed in the analysis is associated with the reliability of the ardl model. for this reason, diverse diagnostic tests were performed. the diagnostic tests were serial correlation, heteroscedasticity, ramsey’s reset test as well as jarque-bera normality test. the results reported in table 5 indicated that the ardl is free from challenges of misspecification, heteroscedasticity, higher-order autocorrelation or normality in the model. this implied that the results from the ardl estimation were robust and reliable for making inferences. also, the plot of the cusum and cusumsq showed that the model was stable as the graphs lied within the 5% significance level boundaries see figures 3 & 4. table-5. residual diagnostic tests. test stat. (prob.) conclusion bruesch-godfrey (autocorrelation) 0.088463 (0.9163) no traces of higher-order autocorrelation bruesch-pagan (heteroscedasticity) 0.518096 (0.8914) no evidence of heteroscedasticity ramsey reset (omitted variables) 0.695151 (0.5066) no omitted variables jarque-bera (normality) 1.103582 (0.5759) residuals are normally distributed -10.0 -7.5 -5.0 -2.5 0.0 2.5 5.0 7.5 10.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 cusum 5% significance figure-3. plot of cusum test for model stability at 5% level of significance. -0.4 0.0 0.4 0.8 1.2 1.6 2010 2011 2012 2013 2014 2015 2016 2017 2018 cusum of squares 5% significance figure-4. plot of cusumsq for model stability at 5% level of significance. 9. conclusion and policy implications the effect of fiscal and monetary policies interaction on stock market activities have attracted attention in existing literature. nevertheless, there is dearth of knowledge as to how interaction of such macroeconomic policies affects stock market liquidity in nigeria. consequently, this paper extended the frontiers of knowledge in this perspective by investigating how interactions between fiscal and monetary policies affect stock market liquidity in nigeria. this objective was achieved by using the ardl-bounds testing approach for the analysis of annual time series data from 1986-2018. the empirical analysis was hinged on the richardian neutrality hypothesis that fiscal policy has no individual ability to influence stock market behaviour of stock markets without the complementary role of monetary policy. based on the bounds testing, there was evidence that both macroeconomic policies (fiscal and monetary policies) interacted in the long-run and that this interaction significantly affected stock market liquidity (measured by turnover ratio) in nigeria. in addition, the long-run estimation showed that government debt which was aimed at cushioning fiscal deficit, monetary policy rate and cash reserve ratio strongly predicted stock market turnover ratio in the long-run. the short-run dynamics indicated that all the independent variables (components of fiscal and monetary policies) had significant effect on stock market liquidity in nigeria. based on these findings, the paper concludes that policies that will foster sustainable and effective macroeconomic policies towards improving stock market liquidity (as proxied by turnover ratio) be strictly implemented. this implies that economy, 2020, 7(1): 25-35 35 © 2020 by the authors; licensee asian online journal publishing group macroeconomic policies in nigeria should be well-coordinated by disciplined fiscal and complementary monetary stance. references abdul-khaliq, s. 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(2016). the effect of stock market liquidity on daily returns in the nigerian capital market. iiard international journal of banking and finance research, 2(1), 47-65. orekoya, s. (2017). stock market response to monetary and fiscal policies in nigeria. nigerian journal of securities market, 3(2), 29-43. pesaran, m. h., shin, y., & smith, r. j. (2001). bounds testing approaches to the analysis of level relationships. journal of applied econometrics, 16(3), 289-326.available at: https://doi.org/10.1002/jae.616. sunday, d., agbaeze, c., & onyele, k. (2018). response of financial development to public debt in nigeria. journal of economics and business sciences, 4(5), 156-164. tawfiq, t., & tahtamouni, a. (2018). the impact of monetary and fiscal policies on stock returns in the jordanian amman stock exchange case. research journal of finance and accounting, 9(6), 115-128. ukeje, s. (2012). how central banks achieve price stability. department of monetary policy, central bank of nigeria. 24, 1-30. retrieved from: https://www.cbn.gov.ng/out/2016/mpd/understanding%2020monetary%2020policy%2020series%2020no%2024.pdf. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. http://www.cbn.gov.ng/out/2017/ccd/monetary%20policy%20at%20a%20glance.pdf http://www.investopedia.com/terms/d/debtgdpratio.asp http://www.cbn.gov.ng/out/2016/mpd/understanding%2020monetary%2020policy%2020series%2020no%2024.pdf 36 © 2020 by the authors; licensee asian online journal publishing group economy vol. 7, no. 1, 36-41, 2020 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2020.71.36.41 © 2019 by the authors; licensee asian online journal publishing group socioeconomic status measurement: an analysis of incorporation of mixed variables into principal component approach md. nayem dewan1 noor muhammad khan2 pk. md. motiur rahman3 ( corresponding author) 1institute of statistical research and training, university of dhaka, dhaka, bangladesh. 2lecturer, department of statistics, mawlana bhashani science and technology university, tangail, bangladesh. 3institute of statistical research and training, university of dhaka, dhaka, bangladesh. abstract socioeconomic status of a household in bangladesh changes overtime for many reasons. the measurement of this change is a very important tool in many aspects. this paper aims to examine the dynamic nature of wealth status in bangladesh. in particular, we want to capture the overall wealth transition in rural area of bangladesh from year 2004 to 2015. to calculate this transition, we construct wealth index for each of the year 2004, 2009, and 2015 using the ‘poverty analysis survey data’. this survey has conducted on the same households in each three years. nonlinear principal component analysis (pca) with optimal scaling using gifi method as our pca tool is used here for wealth index construction. this method is designed to use with a data set that contains both numerical and categorical variables jointly. then the transition of wealth is calculated using these three-wealth index. based on the transition result, we classified each of the households into four different social groups such as non-poor, ascending poor, descending nonpoor, and chronically poor. keywords: wealth index, socioeconomic status, poverty analysis survey, principal component analysis, panel data, mixed variable etc. jel classification: b55, c23, c33, c38, g51, n35. citation | md. nayem dewan; noor muhammad khan; pk. md. motiur rahman (2020). socioeconomic status measurement: an analysis of incorporation of mixed variables into principal component approach. economy, 7(1): 36-41. history: received: 13 february 2020 revised: 16 march 2020 accepted: 20 april 2020 published: 4 may 2020 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group acknowledgement: all authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ...................................................................................................................................................................................... 37 2. background of the study................................................................................................................................................................ 37 3. sampling design, data and variables ......................................................................................................................................... 37 4. methodology ..................................................................................................................................................................................... 38 5. estimated results and analysis .................................................................................................................................................... 38 6. discussion and conclusion ............................................................................................................................................................. 40 references .............................................................................................................................................................................................. 40 appendix ................................................................................................................................................................................................ 41 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2020.71.36.41&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ http://asianonlinejournals.com/index.php/economy/article/view/1581 https://orcid.org/0000-0003-2553-8184 https://orcid.org/0000-0003-4713-7277 https://orcid.org/0000-0001-7869-7889 http://asianonlinejournals.com/index.php/economy/article/view/1581 https://orcid.org/0000-0003-2553-8184 https://orcid.org/0000-0003-4713-7277 https://orcid.org/0000-0001-7869-7889 http://asianonlinejournals.com/index.php/economy/article/view/1581 https://orcid.org/0000-0003-2553-8184 https://orcid.org/0000-0003-4713-7277 https://orcid.org/0000-0001-7869-7889 http://asianonlinejournals.com/index.php/economy/article/view/1581 https://orcid.org/0000-0003-2553-8184 https://orcid.org/0000-0003-4713-7277 https://orcid.org/0000-0001-7869-7889 http://asianonlinejournals.com/index.php/economy/article/view/1581 https://orcid.org/0000-0003-2553-8184 https://orcid.org/0000-0003-4713-7277 https://orcid.org/0000-0001-7869-7889 economy, 2020, 7(1): 36-41 37 © 2020 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this paper aims to examine the dynamic nature of wealth status in bangladesh. 1. introduction as we know, wealth condition of a household is not statistic but dynamic. the dynamics of wealth indicates the changes in household socioeconomic condition over time. there are many reasons for which household may frequently move from one socioeconomic position to another. among these seasonality, climate change, public policy, political change, economic crisis, natural disaster, political violence, fiscal discipline, greater employment opportunity etc. are important. so considering the changes in household’s wealth status over a period of time is critically important for effective poverty alleviation policies. to calculate socioeconomic position, wealth index construction is a very popular tool. wealth index is constructed using proxy variables of household’s wealth instead of income or expenditure of a household. sanitation facilities, construction materials, toilet facility of a household, durable assets, amount of household land, cooking facilities, electricity etc. are used as proxy variable for wealth index construction. in our study, we also used such kind of household variables. a brief description about our data set is given in section 3. principal component analysis (pca) is the most popularly used tool for wealth index construction. filmer. and pritchett (2001) used a modified version of pca to construct wealth index. due to some limitations of their method, later, many researchers used some other updated versions of pca. but, none of these methods are dedicated to multivariate analysis of mixed (mixture of numerical and categorical variables) data. in this paper, we used a modified version of pca that can consider mixed data in pca, since our data set contains both numeric and categorical variables. section 2 contains the background of the study. description about data and sampling process is well described in section 3. a brief description about the methodology is given in section 4. section 5 contains the estimated results and analyses and section 6 concludes. 2. background of the study the literature on wealth transition is now quite sizable. contributors from different field have contributed in this context and contributing till now. the concept of this wealth or poverty dynamics started to get attention in early 1980s. some of these are attwood et al. (1979); duncan et al. (1993); baulch and hoddinott (2000) etc. poverty dynamics as well as development policy implication is provided by barrett (2005). by using the panel data, baulch and hoddinott (2000) conducted a study on poverty dynamics in several developing country. moreover, baulch. and davis (2008) conducted a study to identify poverty dynamics and life trajectories in rural bangladesh. similar kind of study was conducted in kenya by kristjanson, mango, krishna, radeny, and johnson (2010). addison, hulme, and kanbur (2009) provided an effective overview about poverty dynamics. more recently, the changes in the poverty situation in bangladesh is described by hossain and bayes (2009). they considered the scenario between 1988-1989 and 2008. in the context of transition of wealth measurement, rahman, matsui, and ikemoto (2013) described the poverty dynamics in rural bangladesh between year 2004 to 2009. their study was based on the data from 32 villages in 8 poverty prone districts of bangladesh. in order to examine the poverty dynamics, they classified the household into four different social groups based on the household’s economic condition. they include: 1) non-poor: where household wealth condition remains above the poverty line for 5 years. this group of households can provide adequate quality food and facility like health care, clothing and other necessities for all family members. 2) ascending poor: where household wealth condition was below the poverty line 5 years ago but is now above poverty. this group of households is second to the non-poor in terms of food security and other facility. specially, children and family members have low level of education. 3) descending non-poor: where household wealth condition was above the poverty line 5 years ago but has since fallen below. this group of households is third to the non-poor in terms of food security. they cannot provide adequate food to all family members. this group also faces difficulty to provide other facilities like health care, education, clothing etc. to all family members. 4) chronically poor: where household wealth condition has been below the poverty line and reside poor for a long period of time. this group of households cannot provide food security to all family members. moreover, they also cannot bear expenses of other facility like education, health care, clothing etc. even most of them is landless. 3. sampling design, data and variables 3.1. sampling design for empirical study on wealth transition, we have used household data from a large survey. detail descriptions of the survey is given by rahman et al. (2013). survey was conducted at random in 32 villages spread over rural areas of 8 poverty prone districts of bangladesh. details of the location are given in appendix. data set contains information on a total of 1,282 households and was collected thrice. first survey was carried out during 15 december 2004 to 15 january 2005, second survey was carried out during 28 january to 28 february 2010 and third survey was in january 2016. data set collection involved conducting both quantitative and qualitative surveys with the same households at three points in time. so we can define this data set as a panel data with 5 years interval. this panel data allows us to realize the ways in which households describe the transition that occurred with them among 2004, 2009, and 2015. there are about 23.53 million rural households in bangladesh. the selected households for the study covered about 0.81 percent of the total rural households in the country. the sample households were selected at random which helps to create a representative sample size for a long term monitoring. 3.2. variables description for our study, we used 38 household variables from the data set. 1,115 households were participated in all the three survey since some households were missing after first survey and second survey. data set contains both numeric and categorical variables. a brief summary of the variables described in the table 1. economy, 2020, 7(1): 36-41 38 © 2020 by the authors; licensee asian online journal publishing group table-1. description of variables. household variable variable type structure of main dwelling room 1=thatched cottage 2 = kaacha, 3 = made of cl sheet, 4= semi paka, 5 = paka has access to electricity 0 = no, 1 = yes amount of homestead land (decimal) numeric amount of cultivable land (decimal) numeric amount of fallow land (decimal) numeric amount of garden (decimal) numeric no. of cows numeric no. of goat/pig numeric no. of hen/cock numeric no. of duck numeric main source of drinking water 1 = pond/ river/ boiled water 2 = ring well, 3 = tube-well no. of fruit tree (big) numeric no. of fruit tree (small) numeric no. of bamboo bush numeric rickshaw 0 = no, 1 = yes tractor 0 = no, 1 = yes power tiller 0 = no, 1 = yes tube-well 0 = no, 1 = yes shallow tube-well 0 = no, 1 = yes shallow machine 0 = no, 1 = yes fishing net 0 = no, 1 = yes sewing machine 0 = no, 1 = yes loom machine 0 = no, 1 = yes plough 0 = no, 1 = yes spade 0 = no, 1 = yes no. of wrist watch numeric radio/cassette player 0 = no, 1 = yes television 0 = no, 1 = yes bicycle 0 = no, 1 = yes motorcycle 0 = no, 1 = yes no. of electric fan numeric no. of cot/bed numeric almirah 0 = no, 1 = yes bench 0 = no, 1 = yes wardrobe 0 = no, 1 = yes meatsafe 0 = no, 1 = yes no. of mobile phone numeric no. of chair/table numeric 4. methodology in this section, we discussed about the methodology that is used to construct wealth index in our study. for our study, we used an updated version of pca which is called nonlinear pca with optimal scaling. detail descriptions of the method is given by de leeuw and mair (2009); de leeuw. (2011); gifi (1990); linting, meulman, groenen, and van der koojj (2007); meulman, van der kooij, and heiser (2004). an r package is developed by de leeuw and mair (2009) called ‘homals’. a brief summary of the method is given below. the aim of nonlinear pca is same as the aim of linear pca that is dimension reduction. but nonlinear pca can handle the nonlinear relationships between variables. moreover, different measurement levels of variables such as nominal, ordinal, numeric can be considered by this method. persons with the same category score also obtain the same quantified value by nominal analysis level. the order of the original categories also considered for ordinal analysis level. during the performance of nonlinear pca, each category of categorical variables assigned numeric values through a process called optimal quantification. optimal quantification replaces category level in such a way that as much as possible of the variation in the quantified variables is accounted for. for optimal quantification, a loss function is developed, which is minimized as much as possible by an iterative least square algorithm. these newly quantified variables occupy variance as like as continuous numeric variables. this is how nonlinear pca meets the goal of linear pca by considering both the nonlinear relationships between variables and different analysis levels of variables. detail mathematics can be found in the above mentioned references. for wealth transition calculation, at first, we calculate the wealth index for each of the year 2004, 2009, and 2015 by using the nonlinear pca method. then we divided these households into two different socioeconomic groups such as poor and non-poor in terms of their wealth score, where first 50 percent considered as poor and second 50 percent considered as non-poor. this cut point is taken arbitrarily. then based on the different socioeconomic groups of a household, we classify each of the household into different social class. classification criteria is given by rahman et al. (2013). this is how we can see the transition of a household wealth condition throughout the year 2004 to 2015. 5. estimated results and analysis at first, we calculate the score for each household. based on the household score we divided each of the household into poor and non-poor categories. the estimated scenarios of poor and non-poor categories in 2004, economy, 2020, 7(1): 36-41 39 © 2020 by the authors; licensee asian online journal publishing group 2009, and 2015 are given in table 2. table-2. poor and non-poor scenario from 2004-2015. year poor non-poor 2004 954 (85.561%) 161 14.44% 2009 106 (9.51%) 1009 (90.49%) 2015 193 (17.31%) 922 (82.69%) from the result of table 2 we can see that there was a dynamic change in the household condition between year 2004 to 2009. we got almost opposite result in 2009 from 2004. on the other hand, the change was quite stable from 2009 to 2015. 5.1. transition from 2004 to 2009 here we calculate the directionality of changes in the wealth condition based on the wealth index result for each of the year. table 3 describes the results for the period 2004 2009. results are given below: table-3. wealth transition: year 2004-2009. 2004 2009 no. of household percentage economic class non-poor non-poor 84 7.53 non-poor non-poor poor 77 6.91 descending non-poor poor non-poor 925 82.96 ascending poor poor poor 29 2.6 chronically poor from table 3 we can see that a dynamic change appeared in 2009 from 2004. specially, the rate of ascending poor which is about 82.96 percent in 2009. this indicates a clear improvement in wealth condition in 2009 than 2004. moreover, only 2.6 percent household remain poor who were categorized as poor in 2004 and classified as chronically poor in 2009. in addition, 7.53 percent of household remain non-poor in 2009 from 2004 and is classified as non-poor. besides, about 6.91 percent household became poor who were categorized as non-poor in 2004 and so classified as descending non-poor in 2009. 5.2. transition from 2009 to 2015 table-4. wealth transition: year 2009-2015. 2009 2015 no. of household percentage economic class non-poor non-poor 891 79.91 non-poor non-poor poor 118 10.58 descending non-poor poor non-poor 31 2.78 ascending poor poor poor 75 6.73 chronically poor from table 4, we can see that the change from 2009 to 2015 is not so dynamic as like 2004 to 2009. in 2015, about 79.91 percent of total household categorized as non-poor that is 79.91 percent household who were non-poor in 2009 remain non-poor in 2015, which indicates a quite stable situation. moreover, about 6.73 percent of household remain poor who were poor in 2009 and categorized as chronically poor. in addition, about 2.78 percent of household became non-poor in 2015 who were poor in 2009 and classified as ascending poor. besides, about 10.58 percent household became poor in 2015 who were categorized as non-poor in 2009 and so classified as descending non-poor in 2015. 5.3. transition from 2004 to 2015 in this part, we tried to find out the direction of wealth of a household from 2004 to 2015. that is, what was the condition of a household in 2009 and 2015, which was categorized as poor or non-poor in 2004. so, here we consider the survey data of 2004, 2009, and 2015. analysis results are given in the table 5. table-5. wealth transition: year 2004-2015. 2004 2009 2015 no. of household percentage non-poor non-poor non-poor 51 4.57 poor non-poor non-poor 840 75.33 non-poor poor poor 56 5.02 poor poor poor 19 1.70 non-poor non-poor poor 33 2.96 non-poor poor non-poor 21 1.88 poor non-poor poor 85 7.62 poor poor non-poor 10 0.9 here we can see that the number of household’s who were non-poor in 2004 and remain non-poor in 2009 and in 2015 is about 4.57 percent. number of households who were categorized as poor in 2004 became non-poor in 2009 and remain non-poor in 2015 is about 75.33 percent. moreover, about 5.02 percent of household remain poor in 2009 and in 2015 who were categorized as non-poor in 2004. about 1.7 percent household remain poor from 2004 to 2015. in addition, 2.96 percent of household became poor in 2015 who were categorized as non-poor in 2004 and in 2009. about 1.88 percent of household who were non-poor in 2004 turned into poor in 2009 and economy, 2020, 7(1): 36-41 40 © 2020 by the authors; licensee asian online journal publishing group became non-poor in 2015 again. about 7.62 percent of household who were poor in 2004 became non-poor in 2009 and again turned into poor in 2015. about 0.90 percent of household who were categorized as poor in 2004 and in 2009 became non-poor in 2015. 5.4. mean wealth score transition to construct wealth index, each person in the population is given a score which represents how wealthy they are based on the characteristics of their household. this score is known as wealth score. a comparison of mean wealth score of each different class for the year between year 2009 and 2015 is presented in figure 1. mean wealth score for all four household groups increases from 2009 to 2015. this increment is small for the chronically poor group compared to other groups. figure-1. mean wealth score transition: 2004-2015. 6. discussion and conclusion this paper was inspired by the current works on poverty dynamics or the changes in the directionality of wealth of a household. application of nonlinear pca approach using optimal scaling method to construct wealth index which is different from traditional standard pca approach is introduced. a large panel data set is considered to analyses the transition of wealth in rural bangladesh from year 2004 to 2015. the foregoing analysis gives the following tentative conclusions. dynamic change from the year 2004 to 2009 was observed whereas the change was quite stable from the year 2009 to 2015. we have seen that in rural bangladesh poor became non-poor on a large number from the year 2004 to 2015. in this part, our main focus was to obtain a comprehensive picture of the change in poverty groups over a period of 10 years (2004-2015). moreover, the wealth score for different socioeconomic class also shows an increasing pattern. overall, we can say that a significant change in wealth status is observed. this indicates a good sign for government and policy makers to achieve the vision and development goal. such an understanding would also help the responsible authorities to develop appropriate policies and programs for poverty alleviation. for further improvement on socioeconomic condition of rural people and poverty alleviation, development plan specially for the poor should be strengthen. references addison, t., hulme, d., & kanbur, r. (2009). poverty dynamics: interdisciplinary perspectives. oxford: oxford university press. attwood, d. w., apte, m. l., baviskar, b., beals, a. r., eames, e., ferreira, j., . . . kudryavtsev, m. (1979). why some of the poor get richer: economic change and mobility in rural western india. current anthropology, 20(3), 495-516.available at: https://doi.org/10.1086/202321. barrett, c. b. (2005). rural poverty dynamics: development policy implications. agricultural economics, 32(s1), 45–60.available at: https://doi.org/10.1111/j.0169-5150.2004.00013.x. baulch, b., & hoddinott, j. (2000). economic mobility and poverty dynamics in developing countries. the journal of development studies, 36(6), 1-24.available at: https://doi.org/10.1080/00220380008422652. baulch., b., & davis, p. (2008). poverty dynamics and life trajectories in rural bangladesh. international journal of multiple research approaches, 2(2), 176–190.available at: https://doi.org/10.5172/mra.455.2.2.176. de leeuw, j., & mair, p. (2009). gifi methods for optimal scaling in r: the package homals. journal of statistical software, 31(4), 120.available at: https://doi.org/10.18637/jss.v031.i04. de leeuw., j. (2011). nonlinear principal component analysis and related techniques (pp. 2–23). ucla: department of statistics. duncan, g. j., gustafsson, b., hauser, r., schmauss, g., messinger, h., muffels, r., . . . ray, j.-c. (1993). poverty dynamics in eight countries. journal of population economics, 6(3), 215-234. filmer., d., & pritchett, l. h. (2001). estimating wealth effects without expenditure data, or tears: an application to educational enrollments in states of india. demography, 38(1), 115–132. gifi, a. (1990). nonlinear multivariate analysis (pp. 559). west sussex, england: john willey and sons ltd. . hossain, m., & bayes, a. (2009). rural economy and livelihoods: insights from bangladesh: ah development publishing house. kristjanson, p., mango, n., krishna, a., radeny, m., & johnson, n. (2010). understanding poverty dynamics in kenya. journal of international development, 22(7), 978-996. linting, m., meulman, j. j., groenen, p. j., & van der koojj, a. j. (2007). nonlinear principal components analysis: introduction and application. psychological methods, 12(3), 336-358. meulman, j. j., van der kooij, a. j., & heiser, w. j. (2004). principal components analysis with nonlinear optimal scaling transformations for ordinal and nominal data. in the sage handbook of quantitative methodology for the social sciences (pp. 50-71). sage publications, inc. rahman, p. m. m., matsui, n., & ikemoto, y. (2013). dynamics of poverty in rural bangladesh. london: springer. economy, 2020, 7(1): 36-41 41 © 2020 by the authors; licensee asian online journal publishing group appendix table-1. location of the selected villages to calculate wealth transition. serial no. division district upazila union village 01 sylhet sunamgonj biswambharpur dhanpur halabadi puraton gaon 02 sylhet sunamgonj deri karimpur bangagaon 03 sylhet sunamgonj doara bazar narshingpur lastobergaon 04 sylhet sunamgonj sadar gaura rong kamartuk 05 rangpur panchagarh atwari dhamur dhamur 06 rangpur panchagarh boda kajoldighi kaligonj agun tola 07 rangpur panchagarh debiganj shalbhanga shikarpur 08 rangpur panchagarh sadar magura ajadpur 09 rangpur kurigram bhurungamari bhurungamari dkhkhin para baraitara 10 rangpur kurigram phullbari phullbari kabir mamud 11 rangpur kurigram nageswari hasnabad beparir hat 12 rangpur kurigram rowmari rowmari dakhkhin notun para 13 khulna satkhira ashashuni ashashuni shitolpur 14 khulna satkhira kolaroa jogi khali paik para 15 khulna satkhira sadar bolle mukundo pur 16 khulna satkhira shyamnagar munshigonj moukhali 17 dhaka madaripur kalkini baligram pashchim barigram 18 dhaka madaripur sadar dhurail khalashi kandi 19 dhaka madaripur shibchar char janajat jalal sharkar kandi 20 dhaka madaripur rajoir bodor pasha pathan kandi 21 chittagong khagrachari dighinala merung uttor rashik nogor 22 chittagong khagrachari sadar golabari pashchim golabari 23 chittagong khagrachari matiranga guimara guimara 24 chittagong khagrachari panchari puch gang modhu mongol para 25 mymensingh sherpur jhinaigati jhinagati jhinaigati 26 mymensingh sherpur nalita bari 12 koloshpar gaglajani 27 mymensingh sherpur sadar bhatashala shapmari 28 mymensingh sherpur sribardi bhelua chokbandi 29 barisal borguna amtoli amtoli mohish danga 30 barisal borguna amtoli kukua purba kukua 31 barisal borguna sadar dhalua kodom tola 32 barisal borguna betagi kajirabad kumrakhali source: poverty analysis survey data 2004, 2009 and 2015. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. 40 © 2018 by the authors; licensee asian online journal publishing group economy vol. 5, no. 1, 40-53, 2018 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2018.51.40.53 © 2018 by the authors; licensee asian online journal publishing group determinants of africa bric countries bilateral trade flows cosmas s. mbogela1 1mzumbe university business school, box 6 mzumbe, tanzania abstract this paper uses gravity models to take advantage of the possibility to explicitly test the changes in trade patterns over time and examine how these changes differ across different regions in question. using gravity models, the paper examines the determinants of trade flows of african countries with the emerging trading partners to africa, namely brazil, russia, india and china (the bric). these countries are part of the five largest emerging economies that accounts for about 20 per cent of the world output and 27 per cent of the global trade flows. the study models some new variables in gravity models such as credit to private sectors, arable land as well as mobile cellular subscriptions. the paper highlights some important truths, african countries where most of this bilateral trade with bric is concentrated includes those countries which are rich in natural resources, and in most cases they are the same with higher gdp per capita among the african countries. the coefficients variable arable land takes a positive sign with high statistical significance for the bric africa trade flow; and it indicate that the size arable land tend to statistically explain 65 per cent of the variations on exports for the bilateral trade flows. the coefficients for the mobile cellular variable indicate a positive effect on the trade from bric to africa. mobile phones usage has a great potential to enhance the bilateral trade volumes of the african countries as well considering the limited infrastructural setup in the continent. keywords: gravity model, bilateral trade, trade flows, panel data, fixed effects model, random effect model, bric countries jel classification: f1, f3, f4, f6. citation | cosmas s. mbogela (2018). determinants of africa bric countries bilateral trade flows. economy, 5(1): 40-53. history: received: 18 september 2018 revised: 22 october 2018 accepted: 28 november 2018 published: 24 december 2018 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. competing interests: the author declares that there are no conflicts of interests regarding the publication of this paper. transparency: the author confirms that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ...................................................................................................................................................................................... 41 2. trends in african trade and gravity equation variables ...................................................................................................... 41 3. african trade: exports and imports composition ................................................................................................................... 42 4. model specification: the gravity model ................................................................................................................................... 44 5. description to variables, sample and data sources ................................................................................................................ 45 6. dealing with zero-valued and missing trade flows .............................................................................................................. 45 7. empirical model ............................................................................................................................................................................... 47 8. estimation techniques ................................................................................................................................................................... 48 9. gravity model estimation results............................................................................................................................................... 49 10. conclusion ....................................................................................................................................................................................... 51 references .............................................................................................................................................................................................. 52 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2018.51.40.53&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ http://www.asianonlinejournals.com/index.php/economy/article/view/1602 https://orcid.org/0000-0003-3124-0122 http://www.asianonlinejournals.com/index.php/economy/article/view/1602 https://orcid.org/0000-0003-3124-0122 http://www.asianonlinejournals.com/index.php/economy/article/view/1602 https://orcid.org/0000-0003-3124-0122 economy, 2018, 5(1): 40-53 41 © 2018 by the authors; licensee asian online journal publishing group 1. introduction studies on the analysis of bilateral trade flows between a pair of countries have considered either developing countries alone or a pair of developing and developed country (zannou, 2010; baldwin and taglioni, 2011; de castro, 2012). for most of the studies developing countries have been considered as a dummy variable with an argument that, including developing and developed countries in the same sample for regression analysis results into biased results hence a heterogeneity problem (fontagné and freudenberg, 2002). it is also argued that the economic difference between these economies being so huge make income likely to be a substitute for differences in degree of development instead of the ability of income growth to stimulate trade (tansey and touray, 2010). nevertheless, the literature also asserts that differences in economic size among countries will encourage more trade (islam et al., 2014) this contention is worthy examining by having a sample that contain economies that differs in size. this paper examines the determinants of trade flows of african countries with the emerging trading partners to africa, namely brazil, russia, india and china (the bric ). these countries are part of the five largest emerging economies (the other being south africa) that accounts for about 20 per cent of the world output and 27 per cent of the global trade flows (de grauwe et al., 2012). their shares in the world merchandise exports in 2011 were 11 percent (china), 3 per cent (russia), 2 per cent (india) and 1 per cent (brazil). while for some decades now the oecd accounted for the largest share of african trade, as it can be seen from the table above the trend is now changing, the share of non-oecd countries in africa’s trade has increased from 26.4 per cent in 2000 to 39.4 per cent in 2009. china (taken as a single country) may soon take a lead considering the rate of growth with which it trades with african countries. for instance, china’s share in the africa’s trade has risen from less than 1 per cent (1980’s) to 13.5 per cent (africa’s imports) and 11 per cent (africa’s exports) in 2009; besides china accounts for more than any individual european country in africa’s trade (de grauwe et al., 2012). in 2011, as africa’s largest trading partner, china’s trade deals totalled $160 billion. table-1. african trade by trading partner (figures as a percentage of total african merchandise trade) 1992 2000 2005 2009 oecd 81.8 73.6 68.5 60.6 intra africa 3.4 9.8 9.5 9.2 brazil 1.0 1.6 2.3 2.5 china and hong kong 1.7 4.2 7.6 13.5 india 1.3 2.1 2.1 4.9 russia … 0.5 0.7 1.0 total 89.2 91.8 90.7 91.7 non oecd total 18.2 26.4 31.5 39.4 source: oecd report, 2011 though bilateral trade has been widely examined, no study has done a research concerning african countries trade flows with the largest emerging economies where this study takes on and considers four of the brics economies (see table 1). some new variables are also included such as credit to private sectors operation in the economy, arable land as a percentage of total land mass as well as mobile cellular subscriptions. furthermore, the study is different from many other gravity model studies in terms of the empirical analysis that is applied. an advantage of using gravity model in a panel dataset is that it is possible to explicitly test the changes in trade patterns over time and examine how these changes differ across different regions in question. this is more thoroughly done than just clumsily examining trade patterns changes in a particular one year as can be expected in cross section studies. the examination is conducted by use of the renowned gravity model technique, which has proved to be powerful in explaining different scenarios in international trade issues, particularly bilateral trade. it employs an instrumental variable (iv) estimation technique developed by hausman and taylor (1981) in order to take care of the endogeneity and biasness resulting from omission of variables. the rest of the paper will proceed as follows; following will be the review of salient literature on the dynamics of bilateral trade in the african countries, thereafter the general model is specified together with a description of data for the study. section three provides the estimation technique, followed by empirical results and discussion. finally, a conclusion and policy implications is presented. 2. trends in african trade and gravity equation variables according to world bank (2013) from 1960–2011 africa’s exports grew at a mean rate of 2.6 percent per annum. the mean annual growth rate of imports was faster than that of the exports, at 4.1 percent. while for subsaharan africa alone the export mean growth rate was almost similar to imports rate that is, 1.8 for exports and 2.1 for imports. likewise, the total trade as a percentage of gdp for africa as a whole had a mean value of 55.7 percent with a mean growth rate of 0.24 per cent per annum. it is therefore obvious that for over the past five decades exports grew at a lower rate than the imports did. besides, the growth of total trade as a percentage of gdp has been very small (less than 0.5 p.a) over the past 52 years. contrary to the bric countries which for the same period experienced the growth of their exports at a mean rate of 9.05 per cent while imports grew at a rate of 5.7 per cent. as for the oecd countries, exports grew at a mean rate of 7.4 per cent, while imports at a mean rate of 5.6 per cent. taking sub sahara african alone (excluding south africa and nigeria), the data shows an even a worse picture. for the same period (from1960 to 2011), the exports grew at a mean annual rate of 0.1 percent, while imports at 2.2 per cent. the mean value for the total trade as a ratio of gdp for the whole period was 55.9 per cent and had been declining at a mean rate of 0.01 annually. the volume of trade as a ratio of gdp has been declining despite the fact that africa’s gdp rate of annual growth has been 3.8 per cent on average for the whole period from 1960 to 2011 (wb, 2013). this confirms the claim by coe and hoffmaister (1999) that despite the fact that africa’s gdp economy, 2018, 5(1): 40-53 42 © 2018 by the authors; licensee asian online journal publishing group has been growing more slowly than other regions since 1970’s, it has risen more rapidly than trade. compared to asia and latin america countries during the same period; to these regions trade has increased more rapidly than their respective gdp. thus what is observed in africa is contrary to the predictions of the gravity model, which predicts that the trade volumes between countries increase as their respective gdp increases. specifically, the standard gravity model predicts the trade intensity between countries by using their respective economic size and the distance between them. however, coulibaly and fontagné (2006) argue that the existence of untapped trade potentials in the sub sahara african countries trade proves that the limited intra-sub saharan african trade is not justified by the economic size of the exporting and the importing economies. on the contrary, they argue that geography, the fact that africa has a large percentage of landlocked countries coupled with poverty which creates trading costs. generally landlocked countries are disadvantaged in terms of trade, however comparatively african countries that are landlocked are more disadvantaged than the developed landlocked countries. this is because they trade less than their counterparts. on average, the export ratio for ssa land locked countries is less than 30 percent while the developed countries’ landlocked country is 50 percent. however, the total trade as a ratio of gdp data reveals that for the period from 1990 to 2012 average trade ratio mean value for the non-landlocked african countries is 71.68 per cent while for landlocked african countries was 65.81 per cent while that of developed countries was 139. 91percent (wb, 2013). table-2. mean values of trade volume as a ratio of gdp for the period from 1990 to 2012 developing landlocked countries african countries developed landlocked countries oecd % % % botswana 89.9 mali 59.2 czech republic 113.8 burkina faso 34.7 niger 44.3 hungary 115.9 burundi 33.8 rwanda 35.2 luxemburg 256.2 central africa republic 36.2 swaziland 143.8 slovak republic 132.6 chad 65.5 uganda 36.9 switzerland 80.88 ethiopia 32.6 zambia 69.3 lesotho 166.3 zimbabwe 75.9 malawi 63.6 average mean for all landlocked countries 65.81 139.91 average mean for non-landlocked countries 71.68 73.27 source: author’s calculations on the wb (2013) data. the table above provides a more detailed mean values; swaziland and lesotho are outliers probably because they are countries surrounded by south africa which has been the strongest economy in africa for so long. before nigeria took the top position (bbc news business, 2014). it can therefore be argued that the geographical and infrastructural characteristics poses a sizable obstructions on bilateral trade in the ssa countries (coulibaly and fontagné, 2006) a 10 percent increase in the paved roads that joins a pair of two trading countries is believed to induce a 17 to 30 per cent in trade between the two countries. this only means that transport costs are higher for african land locked countries than it is with the developed land locked countries. a more related to geography is the distance variable; the distance variable is one of the trade impeding features in the gravity model studies. the standard gravity model predicts that bilateral trade between any two countries is negatively related to the distance between the two trading countries. while it has been argued that the distance variable works in favour of economies that are in the same continent or region (tansey and touray, 2010) there has also been a considerable discussions about the death of distance due to technological advancement (kolko, 2000; cairncross, 2001; capling and nossal, 2001). there are arguments that the global increase in trade can be attributable to a decrease in the distance between countries which is reflected by a fall in transportation costs in terms of ocean freight rates, air freight rates and overland transport costs. there are studies that have made an attempt to link trade growths to changes in transport costs (as measured by imf c.i.f. /f.o.b. ratios) among other factors (rose, 1991; krugman, 1995; baier and bergstrand, 1997). the technological advancement in communications, the post second world war (ww ii) development of jet aircraft engines and the use of containerisation in the ocean shipping has led to lower shipping costs, as well as other transportation costs that has been linked to an increase in international trade (hummels, 2007). 3. african trade: exports and imports composition merchandise exports in africa are dominated by primary commodities (mainly minerals and fuels products) and these are mainly exported outside the continent. nevertheless, there are good stories in the intra-african trade, the fact that the goods that dominate the intra african trade are manufacturing goods. data reveals that the share of manufactured goods in intra-african trade is higher than its share of manufacturing goods in the african trade with countries outside the continent. this is true for the past two decades irrespective of the fact that this sector is not yet fully exploited relative to other sectors in the continent (unctad, 2013). the main manufactured goods being traded between partner countries includes cotton fabrics, machinery parts, gold in semi manufactured forms, plywood, aluminium alloy plate, tea in packages, portland cements, cigarettes containing tobacco, medicaments, vegetables fresh and chilled, cashew nuts fresh and dried etc. the figure 1, below compares the volume of trade by sectors and it reveals that the intra african trade is mainly dominated by manufacturing sector for the whole of the two decades. trade in minerals fuels, lubricants and related materials is second to manufacturing sector, leaving behind the agricultural sector (i.e. food and live animals, animal and vegetable oils, fats and waxes), which is the backbone for many of the african countries’ population income wise as well as for provision of employment. economy, 2018, 5(1): 40-53 43 © 2018 by the authors; licensee asian online journal publishing group figure-1. intra african total trade (merchandise and service) composition (1995-2012) source: author’s manipulation on the unctad (2013) data a different picture is seen on the part of african trade with the rest of the world (figure 2). a large percentage of external exports and especially from year 2000 has been mainly in mineral fuels, lubricants and related materials. a large part of africa’s natural resources feeds asian and european countries’ industries. primary commodities (excluding fuels) are second to minerals and fuel sector, and provides a hint on the same idea of african external trade being dominated by primary commodities. however, the intra-regional trade ratio in africa is remarkably low compared to industrialised countries although it doubled from 6 per cent (in 1990) to 12 per cent (in 2011). reasons could be because most countries in the african continent have their production and export structures such that the focus is on primary commodities like fuel, minerals and agricultural products. and since most countries have similar structures (shinyekwa and lawrence, 2013) they cannot satisfy their mutual import needs therefore leaving them with an option of satisfying the external market. figure-2. african trade (merchandise and service) to the rest of the world (1995-2012) source: author’s manipulation on the unctad (2013) data consequently, the direction of the african’s trade with the rest of the world follows the same traditional links (chiefly to europe). therefore, the reason why the intra-regional trade ratios remain persistently low is that more than 80 per cent of the continents exports are destined for external markets. likewise for imports; large part of imports comes from markets outside the continent (unctad, 2013). besides, as pointed out earlier, inadequate and unreliable infrastructure cannot be neglected as another major reason for lower intra-regional trade. over the past decade, the share of africa’s traditional export markets has been maintained whereas the continent’s share of exports of emerging economies (brics) import markets has increased significantly. after the recent financial crisis, the growth in exports to the brics is to a large extent explained by the rising in commodity prices. in 2009, the value of african exports fell by 31 per cent and grew by 25 per cent in 2010, and the volume of imports fell by 11 per cent and consequently mended by 9 per cent in the respective years. which means price effects described virtually two thirds of the growth in trade values (unctad, 2013). economy, 2018, 5(1): 40-53 44 © 2018 by the authors; licensee asian online journal publishing group figure-3. africa merchandise trade with the bric countries (product groups, exports in millions of dollars, annual, for 2012) source: author’s manipulation on the unctad (2013) data this trend of africa diversifying its exports market towards emerging partners has seen china’s export and import figures gradually progressing from one of the least among the top ten trading partners to africa to the largest ones over the last decade, becoming the second after usa in 2010. in 2010 alone, 12.5 per cent and 4 percent of africa exports went to china and india respectively, which represented 5 per cent and 8 per cent of these countries’ imports respectively. as depicted in figure 15 and 16 above, african exports to these emerging countries is characterised by concentration of minerals and fuels. there is much concentration trend of the products dominating the exports from africa to each of the bric countries (unctad, 2013). it can be argued that the driving force behind bric –african trade boom is natural resources available in the african countries. this is because exports to brazil, china and india represent a significant part of mineral oils being exported from african countries to the bric. for this matter therefore there is a concentration of this booming trade to certain african countries with major sources of natural resources. according to world bank data, the top in the list of trading partners includes angola, sudan, nigeria, republic of congo, libya and algeria. all these countries have mineral fuels as the main product for their exports (drummond and liu, 2013). for instance, considering china alone, its engagement with africa portrays an increasing trend with african share in the chinese mineral fuels import market increasing from less than 5 per cent in 1995 to 25 per cent in 2011 (unctad, 2013). the other countries in the list include south africa, benin, morocco and egypt. the latter have a diversified economy so they export agricultural products and manufactured products. russia is a leading importer of these products among the bric, followed by china and india. 4. model specification: the gravity model this paper uses gravity model to estimate the determinants of bilateral trade flows of africa. the application of the model to analyse international trade flows traces back to tinbergen (1962). since then the gravity model has gained great interest of the researchers due to its powerfulness in explaining different scenarios in international trade issues; such as testing the effect of a common currency, or membership in regional integrations agreements on bilateral trade (guttmann and richards, 2006). it is a model that gives clear and robust economic empirical findings on international trade issues (haveman and hummels, 2004). in the context of international trade flows, the theory asserts that the volume of trade flows between two trading partners is defined by the supply conditions at the country of origin, demand conditions at the country of destination and stimulating or restraining factors that are related to the trade flows between the two trading partners (serlenga and shin, 2004). according to baier and bergstrand (1997) and zannou (2010) in the earlier days of its usage, the gravity model was lacking a formal theoretical foundation, only to be provided by the empirical investigations by anderson (1979); krugman (1979); krugman and elhanan (1985); deardorff (2011); evenett and keller (2002); feenstra et al. (2001). they represent the gravity model to be a reduced form that is derived theoretically from a general equilibrium model of international trade in final goods. two countries gdps are taken to be the production and absorption capacities of the two exporting and importing countries respectively; whereas the geographical distance represents the transportation costs, more distance meaning greater costs (baier and bergstrand, 2001). the starting point for any specification of the gravity model must be a consideration of the flow of goods (xij) between two countries i and j; whereas, the flow of goods between the two, would depend on the characteristics of the country of origin (ai) and those of the destination country (bj) as well as the measure of resistances and motivational factors to bilateral trade that exists between the two countries (rij). hence, the multiplicative form of the gravity equation; xij= g*ai*bj*rij (i) to put it in the typical terms of the gravity model tradition, xij represent the monetary value of exports from country i to j; the g denotes some variables that do not depend on either of the two countries, also known as gravitational constant (e.g. globalisation level). ai stands for factors that are specific to an exporting country (e.g. exporter’s gdp); bj comprises of all the importer specific factors that make up the total importer’s demand (e.g. importer’s gdp).rij signifies the ease with which the exporter country can access the importer’s market j, in some other studies (drysdale and garnaut, 1982) rij stands for resistances to trade between i and j. the rij is more defined in deardorff (2011) who presents it as a measure of distance between the two countries, the combined effect of the two factors (size and distance) is known as the gravity term and it is normally expressed as the product of the output of the two trading partners divided by the distance between them (musila and sigué, 2010) the result of which is the model below: tij=g*[(yit*yjt)/dij] (ii) economy, 2018, 5(1): 40-53 45 © 2018 by the authors; licensee asian online journal publishing group where; tij represents the value of exports from country i to country j; yi and yj are their respective national incomes; and dij represents a measure of distance between them; and g is a gravitational constant. the national incomes shows the economic size of the exporting country and hence determines the quantity of goods that it can produce and export, while the economic size of the importing country determines the capacity of its market to purchase the imported goods. on the other hand, the distance variable represents the transportation costs that will determine the volume of goods that will be traded. the distance variable is considered as a resistance/motivating factor as it can either promote or hinder trade flows between countries (sichei et al., 2011). this reflects that transport costs in international trade flows increases with distance. gradually, new explanatory variables were added to the model in order to capture more country specific characteristics. the literature reckons the augmentation of such variables as population (linnemann, 1966a) income per capita and contiguity (sanso et al., 1993; frankel et al., 1995; eichengreen and irwin, 1998; frankel and wei, 1998). moreover, variables that captures geographic features, economic development and policy institutions, were included in the model as explanatory variables resulting in an augmented gravity model which is in use in most of the most current literature like that of guttmann and richards (2006); zannou (2010) and vicard (2011). the augmented gravity model came to be presented as; tijt= β0 yit β1 yjt β2 pit β3 pjt β4 dij β5 mij β6 ηijt (iii) where; β0 is the constant of proportionality; yit (yjt) is the gdp of the country i and (j); pit(pjt) are populations of country i and (j); dij represents a measure of distance between the two countries; mij represents any dummy variables that can be included in the model; ηijt is the error term and βs are the parameters of the model. from the original standard gravity model in a multiplicative form, the standard procedure for estimating the model is by making the application of natural logarithms of all variables so as to obtain a log linear equation that can easily be estimated by the ordinary least squares (ols) regressions as well as other estimation methods (tripathi and leitão, 2013). in estimating a gravity model, the inclusion of all the surveyed variables can be done; but the issue is whether all countries and most especially the less developed countries have their data included in the dataset of the samples previously used (baltagi et al., 2003). hence, though the number of variables may vary depending on the nature of estimations required, the log linear form of the model can be presented follows; logtijt= β0 +β1logyit+ β2log yjt+ β3logpit+ β4logpjt+ β5logdij + β6mij + ηijt (iv) the classical gravity models were basically used in a cross section studies so as to estimate trade effects or trade relationships for a particular time period (baltagi et al., 2003). one of the first studies that applied gravity model in the panel data studies to account for country pair effects instead of exporter and importer effects was the study by hummels and levinsohn (1995). and it is now the most adopted approach by majority of the current studies on the determinants of trade volumes. the advantage for this is that the fixed country-pair effects controls for the impact of any time-invariant factors such as bilateral distance, common language, historical relations, membership to regional trading groups and contiguity. besides, the use of country–pair effects removes any possibility for biasness resulting from error of omission due to the omission of any such variable (baltagi et al., 2003). the panel data approach allows for more variation in the data and hence assuring more efficiency in data handling, and reduction in the degree of multicollinearity in the variables (baltagi and kao, 2000). this paper use panel data for the sample of countries that are examined. 5. description to variables, sample and data sources the data for this paper were obtained from different databases and compiled to fit the analysis as indicated in the table below. the main databases included the world bank development indicators, centre d’etudes prospectivesetd’informations internationales (cepii) gravity dataset, wto database and the imf direction of trade statistics database. the sample period is 32 years (from 1980 to 2012 all inclusive). the reason for this sample period is because most of african countries have at least complete dataset from 1980’s, so to avoid a large number of gaps in the dataset 1980 to 2012 was appropriate. the paper considers a bilateral trade flows between african countries and the brics countries (41 african countries and 4 bric countries). 6. dealing with zero-valued and missing trade flows the study uses logarithmic transformation in most of the variables so as to enable for the estimation of the log linear equation (coe and hoffmaister, 1999). however the data that is used is a bilateral trade flow data in most cases has either missing values or many zero trade flow observations. and for the case of african trade flows some observations are even missing. the zero data values normally would imply absence of any trade at all (bikker, 1987) however this would be the case for a carefully prepared datasets. otherwise, they could be caused by nonreporting of the trade flows between pair of countries. it could also reflect errors or omission during the preparation of the datasets (martin and pham, 2015). even if there are zero values still the study would want to examine the trade flows because if two countries have zero flows it imply that they are small or they are distant countries or both, thus the gravity model predictions would be either very low bilateral flows or non-existent (frankel et al., 1997; coe and hoffmaister, 1999). the logarithmic transformation cannot be possible with zero observations because the log of zero is undefined (or minus infinity). thus doing such transformation prior to dealing with the available zero observations would result into biased and inconsistent estimation results. likewise if the zero flows are disregarded by omitting them in the dataset, the information to explain why there is very low trade cannot be obtained. same kind of problems occurs in case there are missing values in the dataset, hence these calls for a solution. economy, 2018, 5(1): 40-53 46 © 2018 by the authors; licensee asian online journal publishing group table-3. description of variables, data sources and expected relationship variable description source expected sign exports1 measures the total exports from one trading partner to another in the country pair. the exports variable accounts for both flows from country a to b as well as country b to a. imf direction of trade statistics this is the dependent variable. gdp per capita measures of the level of economic development of an economy. the gdp per capita data are in constant 2005 us dollars. wb (2013) the sign for coefficients is expected to be positive as in zannou (2010) geographical distance measure of the geographical distance between the capital cities of pair of countries. cepii gravitydataset the level of trade between a pair of countries is a negative function of the distance between trading pair countries (rose and van wincoop, 2001) population size measure of the total population of a country wb (2013) studies finds a different relationship depending on if a country is an importing and exporting country (kimino et al., 2007; zannou, 2010). the expected sign is positive. landlocked measures the number of countries without access to the sea/ocean in each country pair (i.e. 0 if not one country in a pair is landlocked, 1 if one country in a pair is landlocked or 2 if both are) cepii gravity dataset the expected sign is negative. common language official measure of whether countries in a pair share official common language. the variable takes the value of 1 for countries using common language and 0 for countries that do not. cepii gravity dataset similarity in countries encourages bilateral trade and therefore similarity in language has a positive effect on trade (balassa, 1966; frankel and rose, 2002) membership to wto a measure of whether countries in a pair are member to wto (i.e. 0 if not one country in a pair is a member, 1 if one country in a pair is a member or 2 if both are). wto database, 2013 it is expected that the coefficients will be positive. mobile cellular subscription: measures the subscriptions to public mobile telephone services using cellular technology that provides access to the public switched telephone network. it represents a percentage of the total subscriptions to public telephone network. wb (2013) mobile cellular subscription is considered as a factor that positively influences the trade flows between african countries and outside the continent, hence positive coefficients. this is based on the fact that not only it simplifies communication, but also enables the users to use mobile banking facility (for settling transaction bills).thus reducing transaction costs in bilateral trade. arable land as a percentage of total land a measure of the total size of arable land as a proportion of the total land in each country in a pair. wb (2013) arable land is more closely related to a country’s productive capacity than the total land (baxter and kouparitsas, 2006). the expected sign is positive coefficients reflecting a positive impact to the bilateral trade flows. domestic credit to private sector measures all the financial resources provided to the private sector, such as through loans, purchases of non-equity securities, and trade credits and other accounts receivable, that establish a claim for repayment (wb, 2013). wb (2013) the role played by private sector is paramount in the trade flows between economies. the expected sign for the coefficients of this variable is positive. bilateral exchange rate refers to the exchange rate determined by national authorities from which a bilateral exchange rate (cross rate) is computed by the researcher. wb (2013) generally changes in exchange rate index has a significant negative impact on the volume of exports because for risk averse market participants, exchange rate uncertainty causes them to reduce their activities, change prices, or shift sources of demand and supply in order to minimize their exposure to the effects of exchange rate volatility (chowdhury, 1993; de vita and abbott, 2004). source: compilation by the author (2015) 1it is often the case that data on exports between pair of countries have inconsistencies between exports to a partner and the partner's recorded imports from a particular country, i.e. the exports from country a to b do not always equal the imports of country b from a. this is due to the different ways countries report their trade, i.e. differences in classification concepts and detail, time of recording, valuation, and coverage, as well as processing errors. economy, 2018, 5(1): 40-53 47 © 2018 by the authors; licensee asian online journal publishing group there are many solutions to this problem as suggested by the literature (confer, e.g. linders and de groot (2006); foroutan and pritchett (1993)). the most resorted solution is to ensure that the sample is selected such that is does not contain observations with zero or missing values. however sometimes this is difficult especially when the aspiration is to have as broader sample size as possible. this approach has been adopted by such authors as frankel et al. (1997) and bikker (1987). another solution/approach would be to arbitrarily substitute small number values for all observations with zero and missing values. this would enable the logarithmic transformation process be correctly done. example of literature following this includes (linnemann, 1966b; wang and winters, 1992; raballand, 2003). this approach has also been challenged for being an ad hoc process and does not guarantee the underlying expected value. this study has adopted approaches one and two together so that they can complement each other, first the sample selection is based on the countries with less gaps, but the sample period also took into consideration the period when most of the countries, especially african countries has number values in their observations leaving aside those years with missing values. in this way there were very few gaps which were taken care of by the second approach. otherwise some other literature resorted to some other approaches such as the use of the original multiplicative gravity equation, hence nonlinear estimation technique (see for example coe and hoffmaister (1999)). in this way, there was no need for log transformation process where observation with zero values would be problematic. some other studies adopting linear estimation techniques have used tobit estimation technique (linders and de groot, 2006). 7. empirical model an examination of bilateral trade between african countries and the brics formed two ways trade flows, which makes two sets of estimation results. to be consistent with what is being measured; same model with same set of variables is used so as to obtain coherent test results. below two models are presented, one is for the variables at level, and the second includes product variables (i.e. a product of variable data for importing country and exporting country). the study also includes a dummy variable for time fixed effects, thus a two way fixed effects (observing variations of time and panels). estimation model using variables at level: exports, population, gdp per capita, bilateral exchange rate, domestic credit to private sector and distance variables are in natural logarithm. the rest of the variables are either presented as ratios or they are dummies, hence there was no necessity of converting them into natural logs. mobile cellular subscriptions represents a percentage of the total subscriptions to public mobile telephone network services, arable land is a percentage of total land mass of a particular country. dummy variables include the rest of the variables, i.e. whether they are members of the world trade organisation or not (0 if none of the pair countries is, 1 if one country in a pair is a member, 2 if both are members), landlocked measures whether countries belong to a landlocked countries (0 if none is, 1 if one in the pair is, and 2 if both are), language indicates whether both countries have common official language or not. the model is presented as follows; logexpijt= β0 +β1log(popnit) + β2log (popnjt)+ β3log(gdpppit) + β4log (gdpppjt)+β5log(exchijt) + β6log(distij)+ β7log(crdprit)+ β8log(crdprjt)+ β9mobilit + β10mobiljt + β11arbli+ β12arblj+ β13wtoij + β14landlij +β15langij +∂d+ηijt (v) where; β = represents the coefficients of the variables logexpijt= natural logarithm for exports from country i to j logpopnit= natural logarithm for population of importing country logpopnjt= natural logarithm for population of exporting country loggdpppit= natural logarithm for gdp per capita of importing country loggdpppjt = natural logarithm for gdp per capita of exporting country logexchijt = natural logarithm for bilateral exchange rate logdistij =distance between exporting (i) and importing (j) country logcrprit =credit to private sector for importing country logcrprjt= credit to private sector for exporting country mobit =mobile cellular subscriptions for importing country mobjt =mobile cellular subscription for exporting country arbli =arable land for importing country arblj =arable land for exporting country wtoij = wto membership landlij =landlocked (1 if one of the country in a pair is land locked, 2 if both are land locked) langij=common official language (1 if both countries use same official language) ∂d = is a vector of year dummies for the year 1982 through 2012 (the year dummy for the year 1981 is dropped) ηijt = is the error term estimation model including product variables: this model uses the same variables as above, only that it includes some variables representing a product of two variables for importing and exporting country. the aim is to examine how simultaneously the two variables can influence the bilateral trade flows between the two parties. the variables in a product form include mobile cellular subscription, arable land, and credit to private sectors, population and gdp per capita. logexpijt=β0+β1log(popnijt)+β2log(gdpijt)+β3log(exchijt)+β4log(distij)+β5log(crdprijt)+β6log(mobilijt)+β7log(ar blij)+ β8wtoij+β9landlij +β10langij+∂d+ηijt (vi) where; logpopnijt= natural log for a product of population of importing and exporting country economy, 2018, 5(1): 40-53 48 © 2018 by the authors; licensee asian online journal publishing group loggdpppijt= natural log for a product of gdp per capita of importing and exporting country logcrprijt = natural log for a product of credit to private sector for importing and exporting country logmobijt = anatural log for product of mobile cellular subscriptions for importing and exporting country logarblij = natural log for a product of credit to arable land private sector for importing and exporting country the rest of the variables are defined as above (model 5). since the panel data analysis is used in this study to examine the determinants of bilateral trade flows, whereas the sample contains several countries and a number of periods, there is a need also to test whether time fixed effects have a role on bilateral trade flows as well. therefore a full set of (t-1) time dummies, one for each period but the first, is introduced. if these dummies are not included it may lead to omitted variable bias in the results. these dummies, are shift variables that take the value of one for all states in the reference years and zero in all the others. moreover, after estimation regressions are obtained, a joint test is conducted to see if these dummies are jointly equal to zero or not. this is not included in any of the models above because it is a post estimation process by using a ‘test varlist’ command. if the year dummies are zero then time fixed effects have no influence on the bilateral trade flows. thus it will be testing the null hypothesis: all years’ coefficients are jointly equal to zero. failing to reject the null hypothesis will mean that no time fixed effects are needed. 8. estimation techniques the study uses a panel based approach following the criticisms over using cross section estimation, which is misspecification, because it cannot deal with bilateral heterogeneity present in the bilateral trade flows. with panel data approach heterogeneity issues are modelled by including country-pair individual effects (serlenga and shin, 2004). the essence of using panel data is to control for these individual specific effects that are possibly unobservable but may be correlated with other explanatory variables in the econometric model (hausman and taylor, 1981). there are a number of panel estimation techniques; the traditional and commonly used estimation technique for the gravity model studies has been the ordinary least squares (ols) technique. however the use of ols has been challenged because its implementation assumptions are not in line with the underlying theoretical models. it ignores the fact that there can be a correlation between explanatory variables and individual effects which are unobservable, hence resulting to coefficient estimates that are severely biased (serlenga and shin, 2004). it also fails to account for endogeneity and biasness resulting from omission of variables. the presence of these correlations excludes both ols and gls from being used as estimation methods in the estimation of parameters of this study as may yield biased and inconsistent estimates (hausman and taylor, 1981). in such a situation, traditionally the option has been to go for an instrumental variable (iv) estimation technique. thus in order to overcome this, the within estimator from analysis of covariance or fixed effects estimation technique has been used (cornwell and rupert, 1988). the estimator is designed particularly for analysing the impact of variables that vary over time, as it assumes that the time invariant variables are unique to the individual country hence not correlated with other individual country characteristics. therefore, under this method all the individual effects in the sample are eliminated by transforming the data into deviations from individual means. as a result of this procedure, the within-groups estimator also suffers from two imperative defects; one, during data transformation process, all the time invariant variables are eliminated hence their coefficients are not estimated, two, the within group estimator ignores variation across the individuals or countries included in the sample hence it is not fully efficient. comparatively, the first defect seem to be more serious especially when the primary interest in the application of the estimator is attached to the unknown coefficient of time invariant variables such as the influence of country’s historical past events, membership to regional trading groups or countries using the same official language in the gravity modelling. leaving these variables un-estimated renders the study meaningless. the time invariant variables are well estimated by the gls random effects model (partial pooling model). this is because under this technique the assumption is that variations across countries are assumed random and uncorrelated with the independent variable used in the model. therefore while under the fixed effect model , the time invariant variables are absorbed by the intercept, this technique include time invariant variables as explanatory variables in the model because for this model the error term is assumed to be uncorrelated with explanatory variables. thus for a perfect estimation, inclusion of all individual country characteristics is required which is normally not possible hence leading to the omitted variable bias in the specified model. in their ground-breaking paper of 1981, jery hausman and william taylor developed an alternative method that has been used with panel data to treat the problem of correlation between explanatory variables and the concealed individual specific effect. it is an iv estimator with neither of the two defects mentioned above as it employs several dimensions of panel data to overcome the correlation without any variables from outside the model (egger, 2002). the ht makes use of time varying variables in two ways – to estimate their own coefficients as well as serving as instruments for endogenous time invariant variables, hence giving room for identification and efficient estimation of both time varying and time invariant coefficients. it is therefore better than the within groups estimation technique as it is more efficient and it also produces coefficient estimates for time invariant variables. the possibility of the existence of a potential correlation between the unobservable individual specific effect and a subset of the exogenous variables cannot be denied (serlenga and shin, 2004; rault et al., 2009). since the presence unobservable individual effects and time invariant variables is unquestionable even in the estimation of the bilateral trade flows in the african countries, this paper uses the hausman taylor estimator. consider the following equation; economy, 2018, 5(1): 40-53 49 © 2018 by the authors; licensee asian online journal publishing group yit =xitβ +ziγ +αi +ηit (i =1…, n; t =1, …, t) (vii) where, β and γ are k and g vector coefficients associated with time varying (for this case gdppp, popn,exch, crdpr and mobil) and time invariant observable variables (for this case dist and arbl) respectively. the disturbance ηit is assumed uncorrelated with the columns of (x, z, α). the individual specific effects αi (for this case landl, contig, lang and wto) are assumed to be time invariant random variable and in this study is potentially correlated with columns of x and z. the ht estimation model does not assume a specification of the unobservable individual specific effects αi and it is less sensitive to whether they are known or unknown by the researcher (hausman and taylor, 1981). in this way handles the risk of falling into biased results due to omission of variables. it rather works under an assumption that some variables among x and z are uncorrelated with individual specific effects αi. and that the xit which are uncorrelated with αi serves two functions because of their variation across both individuals and time; first, using deviations from individual means, they produce unbiased estimates of the coefficients, and secondly using the individual means, they produce valid instruments for the time invariant variables (zi) that are correlated with the individual specific effects αi (hausman and taylor, 1981). therefore it helps to avoid the difficulty of extracting instrument variables external to the specified model by using some variables within the model as instruments. however for comparison purposes as well as for checking the robustness of the results, ht estimation techniques will be used together with some other panel data estimation techniques including the random effect generalized least square regression and the fixed effect (within) estimation techniques. 9. gravity model estimation results the estimation is done for model 5 and 6 and, for each model regressions are conducted twofold; the bilateral trade flows from african countries to the brics and, from the brics to african countries. moreover, for each part estimation is done in two steps, in the first step variables are considered at level, while in the second step the model includes some variables as a product of the values of the two trading partners. both models are estimated using the ht, estimation technique as well other two panel data estimators. results are presented in table 4 to 5. from the results in table 4 three major factors that influence the bilateral trade between africa and the bric countries include the use of common official language, the gdp per capita and population. the variables are statistically significant and economically reasonable. results in table 5 reveals that, arable land and bilateral exchangerate are also important in explaining the bilateral trade flows between trading partners. and in both equations the time dummies are jointly highly significant. table-4. empirical results, africa -bric bilateral trade flows (variables at level) from africa to the bric from the bric to africa modelling technique ht re fe ht re fe lnpopulationi 0.88 (0.56) 1.46*** (0.14) 1.59*** (0.63) 3.59*** (0.27) 2.55*** (0.12) 3.86*** (0.38) lnpopulationj 3.32*** 0.83 2.27*** (0.32) 1.42 (0.95) 1.90*** (0.21) 1.19*** (0.06) 1.81*** (0.26) lndistanceij -3.89 (6.19) 1.04 (0.78) 4.77** (2.21) -0.32 (0.29) lngdp per capitai 1.96*** (0.23) 1.57*** (0.17) 2.07*** (0.24) 0.71*** (0.07) 1.14*** (0.05) 0.73*** (0.07) lngdp per capitaj 1.28*** (0.19) 1.39*** (0.14) 1.46*** (0.19) 0.87*** (0.07) 0.76*** (0.06) 0.73*** (0.08) lncredit to private sectori -0.12 (0.11) -0.41* (0.22) -0.24 (0.23) -0.28*** (0.06) 0.01 (0.03) 0.01 (0.04) lncredit to private sectorj -0.39* (0.21) -0.02 (0.11) -0.03 (0.11) -0.01 (0.03) -0.29*** (0.07) -0.19*** (0.07) lnbilateral exchange rateij -0.02 (0.03) -0.02 (0.03) -0.02 (0.04) -0.04*** (0.00) -0.03*** (0.00) -0.05*** (0.01) mobile cellulari 0.01* (0.00) -0.00 (0.00) -0.01 (0.00) 0.01*** (0.00 0.01*** (0.00) 0.01*** (0.00) mobile cellularj 0.01 (0.00) 0.01*** (0.00) 0.01*** (0.00) 0.01*** (0.00 0.01*** (0.00) 0.01*** (0.00) arable land i 0.03 (0.01) 0.00 (0.01) -0.12*** (0.01) 0.01 (0.01) arable land j -0.25*** (0.04) 0.01 (0.01) -0.01 (0.00) -0.03*** (0.01) landlocked -0.41 (2.77) -0.63 (0.52) -1.26* (0.76) -1.57*** (0.22) common language official 7.05* (3.80) 0.39 (0.71) 2.67*** (1.10) 1.33*** (0.33) wto membership 0.68 (2.85) -0.03 (0.55) -0.54 (0.93) -0.19 (0.26) year dummy 83.46*** (0.00) 85.84*** (0.00) 3.63*** (0.00) 41.14*** (0.01) 46.19*** (0.00) 1.63** (0.05) r-square 0.45 0.34 0.66 0.46 no. of observations 2,321 2,321 2,321 3,778 3,778 3,778 no of country pairs 148 148 148 164 164 164 note: the dependent variable for these regression results exports from country i to j. ***, **, * denotes significance level at 1%, 5% and 10% respectively. standard errors are in parentheses. i denotes exporting country, while j denotes importing county. under the hausman taylor modelling technique all the time varying variables are used as instruments for endogenous time invariant variables. economy, 2018, 5(1): 40-53 50 © 2018 by the authors; licensee asian online journal publishing group the variable common official language has higher coefficients than the rest of the variables more so in table 4. the coefficients are positive and statistically significant implying that the bilateral trade between african countries and the bric is explained by use of common official language. however in actual sense there is no african country that uses chinese or any of the russian language as an official language. but the fact that english is adopted by many countries as a medium of business language it has become possible for trade with china as well. gdp per capita variables has positive and statistically significant coefficients in most cases at one per cent level. except for the fixed effects estimations on the variables at level in table 4, the coefficients are not significant in both cases. this is applicable for both the exporting and the importing country which indicates that the level of economic development tends to positively influence the exports and imports in the bilateral trade between africa and the bric countries. as explained earlier in this study, the bric-africa trade is characterised by the exports of primary commodities from african countries and importation of food and consumables from bric countries, but mainly from china. this is a vivid complementarily, whereas african exports feeds the growing industries in the brics african countries also imports manufactured goods from these countries, particularly from china. the imported manufactured goods are not only for household consumption but also for feeding the growing manufacturing sector in the african countries (broadman, 2006). it is also worth noting that african countries where most of this bilateral trade with bric is concentrated includes those countries which are rich in natural resources, and in most cases they are the same with higher gdp per capita among the african countries. thus, an automatic connection with the role of the level of economic development with the bilateral trade. these results are similar to the claim by markusen that the intra-country distribution of income measured by gdp per capita matters for inter-country trade (markusen, 2013). besides deardorff (2011) confirms that economies with higher per capita income are expected to have high capital labour ratios which results into producing more of capital intensive goods and will tend to trade more because they produce more and consume larger proportions of capital-intensive goods. recent literature concludes that there is robust empirical evidence that economies with lower per capita income will tend to have smaller volumes of bilateral trade even after controlling for aggregate income (tarasov, 2012). likewise he asserts that not only trade volume will be lower but also less number of trading partners can be expected for such economies. in their seminal paper examining the north – south trade, coe and hoffmaister (1999) assert that income has a positive impact of bilateral trade such that a 1 percent increase in income of the trading partners, will lead to an increase in the bilateral trade between the two groups by 2 per cent. these results are somehow similar to what this paper presents in table 4 as well as table 5. table-5. empirical results, africa-bric bilateral trade flows (include product variables) from africa to the bric from the bric to africa modelling technique: ht re fe ht re fe ln (mobilecellulari xj) -0.01 (0.02) 0.02 (0.01) 0.03 (0.02) 0.05*** (0.00) 0.07*** (0.01) -0.01 (0.01) ln (arable landi x j) 0.11 (0.22) 0.24* (0.14) 0.65*** (0.14) 0.05*** (0.01) ln(credit to privat.i xj) -0.05 (0.10) 0.02 (0.10) 0.04 (0.01) -0.05 (0.08) 0.14 (0.13) 0.20 (0.14) lnexchange rate -0.34*** (0.07) -0.30*** (0.07) -0.36*** (0.07) -0.07*** (0.01) -0.07*** (0.02) -0.04 (0.02) ln (populationix j) 0.08*** (0.01) 0.09*** (0.01) 0.11*** (0.03) 0.09*** (0.00) 0.08*** (0.00) 0.18*** (0.02) ln(gdpppi x j) 0.29*** (0.02) 0.22*** (0.02) 0.31*** (0.03) 0.19*** (0.01) 0.12*** (0.01) 0.19*** (0.02) lndistance 11.47*** (4.74) 2.12*** (0.69) 1.12 (2.28) -0.42 (0.39) landlocked -0.82 (0.90) -0.99* (0.56) -1.09*** (0.45) -1.31*** (0.29) common official language 3.59*** (1.36) 1.63*** (0.72) -0.26 (0.69) 0.43 (0.41) wto membership 0.39 (1.01) -0.49 (0.58) -0.07 (0.61) -0.36 (0.37) years 95.74*** (0.00) 117.85*** (0.00) 5.43*** (0.00) 36.18*** (0.00) 33.19** (0.02) 1.94*** (0.01) r-square 0.41 0.23 0.62 0.54 no. of observations 1,818 1,818 1,818 2,454 1,654 1,654 no. of country pairs 148 148 148 164 128 128 note: the dependent variable for these regression results exports from country i to j. ***, **, * denotes significance level at 1%, 5% and 10% respectively. standard errors are in parentheses. i denotes exporting country, while j denotes importing county. under the hausman -taylor modelling technique all the time varying variables are used as instruments for endogenous time invariant variables. population variable has positive and significant coefficients especially in the bilateral trade from bric countries to africa. this imply that an increase in population tend to result into a proportionate increase in trade between trading partners. for the trade flow from africa to bric, the coefficient does not support that the increase in population leads to an increase in exports but more in imports. however the literature assert that there has been an increase in the food exports from africa to asian countries particularly china and india, and this has been as a result of an increasing populations and income levels in these countries (broadman, 2006). this fact is confirmed by the results in table 5 when population is used as a product variable, the coefficient turn to be positive and significant. moreover, the flow of manufactured goods from bric countries to african countries are for the search of market, and data shows that nigeria, which is the most populous country in the continent records higher imports from china (wb, 2014). the african exports concentration is also based on the same pattern, for the period economy, 2018, 5(1): 40-53 51 © 2018 by the authors; licensee asian online journal publishing group between 2000 to 2004 more than 80 percent of value added exports from africa originated from nigeria (refined petroleum), south africa (refined petroleum products, pharmaceuticals, electronics, machinery and transportation equipment’s) and swaziland (pharmaceuticals) (broadman, 2006). bilateral exchange rate has negative coefficients though not significant in all estimation techniques for the variables at level. the effects of bilateral exchange rate on bilateral trade arises where there are uncertainties on the appreciation and depreciation in value of any of the trading partner’s currency. this exchange rate volatility has a tendency of affecting the profitability of foreign exchange trades. the coefficients for the variable are negative and significant especially with results in table 5. the results signify that in times when the bilateral exchange rate index drops, the exporter currency depreciates with respect to the trading partner’s currency, which improves the exports competitiveness (rault et al., 2009; iqbal and islam, 2014). generally these results provide coefficients that confirm that bilateral exchange rate changes adversely affect the bilateral trade flows between trading partners. de vita and abbott (2004) confirms the negative effect that exchange rate uncertainty has on export volumes, in his study exchange rate uncertainty is found to have negative and significant influence on the uk exports to the eu countries. the argument is, despite the fact that with short run fluctuations hedging can be used to insure the risk, it becomes more challenging to cover against long-term exchange rate fluctuations. these results are also supported by iqbal and islam (2014) who asserts that the bilateral real exchange rates are inversely related to the bilateral trade flow between bangladesh and the european union. besides, the negative coefficients conforms to the results by chowdhury (1993) whose error-correction results indicate that exchange rate volatility has a significant negative impact on the volume of exports in each of the g-7 countries. moreover, rault et al. (2009) modelling trade flows between ceec and oecd countries get the same results implying that when exchange rate index slumps the exporter currency depreciates relative to the currency of the importer, hence improving export competitiveness. the coefficients for the distance variable also do not appear to have consistent sign and significance in all the estimation techniques. however, the traditional gravity model studies and many recent empirical studies find that the level of trade between a pair of countries is a negative function of the distance between trading pair countries (rose and van wincoop, 2001; tripathi and leitão, 2013). hence the inconsistence in these results could possibly be insinuating the aspect of the death of distance due to technological advancement in the transportation and communication sectors as discussed earlier in this paper. a country in a trading pair being a member to wto or not has also been examined, in the estimation results under the hausman taylor, coefficients are positive but not significant in both cases. however looking of the rest of the estimation techniques, they give mixed results. this could be in line with what is discussed in the literature, while rose (2004) suggest that membership to wto does not have any positive effects on trade, subramanian and wei have provided evidence that though little but there is an impact of wto membership on bilateral trade. they find that bilateral trade is greater when both partners had liberalized their trade policy than when only one partner did and the other did not. besides, as it is in theory, the wto membership impact would depend on what the country does with its membership, with whom it negotiates, and which products the negotiation covers. this disagreement might explain the mixed regression results in this study (subramanian and wei, 2007). the variable arable land does not give out the expected results. when the variable is estimated at level it almost gives negative coefficients, but the coefficients becomes positive when tested as a product variable. the coefficients takes a positive sign with high statistical significance for the trade flow from bric to africa; and it indicate that the size arable land tend to statistically explain 65 per cent of the variations on exports for the bilateral trade flow from the bric to african countries. the coefficients for the variable land locked are negative but not significant in all the estimation techniques, however it implies that the variable has a good explanatory power on the bilateral trade between the africa and the bric countries. the coefficient for the variable credit to private sector does not indicate the expected results. the coefficients are negative and in most cases not significant, hence reflecting that the variable does not explain the bilateral trade flows between african countries and the bric countries. this could be resulting from the nature of the african private sector and enterprises which are characterised with low level of innovation capabilities and competitiveness (unctad, 2013). they thus do not have significant contribution to the competitiveness of the products to the market external to africa. looking at the results in table 4 and 5, the coefficients for the mobile cellular variable seem to indicate that the variable affect the trade from bric to africa positively. the coefficients are positive and significant. however the magnitude of the effects on trade is so minimal around 0.1 to 0.7 per cent for any 10 percent increase in mobile cellular subscriptions. all the same this shows that the mobile phone usages do have an impact in enhancing the linkage between trading partners. 10. conclusion the paper examines the determinants for the bilateral trade flows of bilateral trade flow between africa and bric using the gravity model on some economic, demographic, cultural and political ties data of the african countries and their trading partners. it has included some new variables in the gravity model considering their pivotal role particularly in the africa trading activities. considering the role of private sector in the bilateral trade, credit to private sector was also included in modelling african bilateral trade flows. besides the fact that the continent account for a significant portion of the world arable land (27%), arable land was also included to consider the role of productivity on bilateral trade. in the recent decade, mobile phones has become widely used particularly in the african countries, measured by a number of subscriptions for each country, mobile phone usage has also been included to examine its role in the augmentation of bilateral trade flows. all of these variables have indicated that they account for the bilateral trade in the african countries to a considerable extent, especially credit to private sector. mobile phones usage also has a great potential to enhance the bilateral trade volumes of the african countries as well considering the limited infrastructural setup in the continent. but the sustainability and efficiency of this to happen will largely depend on the institutional climate and regulatory system in these economies to support these initiatives. economy, 2018, 5(1): 40-53 52 © 2018 by the authors; licensee asian online journal publishing group the paper highlights some important facts that developing land locked countries trade less than their counter part developed land locked countries. efficiency transportation and telecommunication systems in these countries makes landlocked-ness and distance to be less of a stumbling block to bilateral trade than it is for developing landlocked countries in africa. moreover, it highlights some important implications on the up surging trade links of africa with emerging economies (bric). data shows that the commodity composition of this bilateral trade is much concentrated on the primary products, and most especially on minerals and fuel products. raising doubt on whether the growing bilateral trade with these countries is for the interest of either trading partners or it is for their benefit in order to feed their growing industrializing economies and leaving africa a looser. even looking at the main african countries that are leading for exportations in the bric countries, it is mainly the countries with large deposits of fuel and minerals like angola, algeria, south africa and nigeria to mention few, that has more trade volumes. policy makers in the african countries should beware of the investment contracts and negotiations with these emerging countries so that the continent does not end loosing. the bilateral trade flow between african countries and the bric countries is determined mainly by the gdp per capita, common official language and population. the empirical results show that even the size of arable land matters for this trade relationship. still landlocked and distance poses a sizable negative influence on the volume of bilateral trade flow even between the african countries and the brics. furthermore, it is anticipated that future research work examines the statistical determinants of african regional blocks and the recs bilateral trade with the bric and the oecd. this is vital considering the regional diversity of africa as far as trade and economic size is concerned. references anderson, j.e., 1979. a theoretical foundation for the gravity equation. the american economic review, 69(1): 106-116. baier, s.l. and j.h. bergstrand, 1997. international trade, regional free trade agreements, and economic development. review of development economics, 1(2): 153-170. available at: https://doi.org/10.1111/1467-9361.00011. baier, s.l. and j.h. bergstrand, 2001. the growth of world trade: tariffs, transport costs, and income similarity. journal of international economics, 53(1): 1-27. available at: https://doi.org/10.1016/s0022-1996(00)00060-x. balassa, b., 1966. tariff reductions and trade in manufacturers among the industrial countries. the american economic review, 56(3): 466473. baldwin, r. and d. taglioni, 2011. gravity chains: estimating bilateral trade flows when parts and components trade is important (no. w16672). national bureau of economic research. baltagi, b.h., p. egger and m. pfaffermayr, 2003. a generalized design for bilateral trade flow models. economics letters, 80(3): 391-397. available at: https://doi.org/10.1016/s0165-1765(03)00115-0. baltagi, b.h. and c. kao, 2000. nonstationary panels, cointegration in panels and dynamic panels: a survey. advances in econometrics, 15: 7–51. baxter, m. and m.a. kouparitsas, 2006. what determines bilateral trade flows? 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(ed.) university of manchester. world bank, 2013. world development indicators. in: international, e. (ed.). university of manchester. zannou, a., 2010. determinants of intra-ecowas trade flows. african journal of business management, 4(5): 678-686. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. 17 economy vol. 5, no. 1, 17-39, 2018 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2018.51.17.39 manufacturer, supermarket, and grocer liability for contaminated food and beverages due to negligence, warranty, and liability laws frank j. cavico1 bahaudin g. mujtaba2 stephen muffler3 marissa samuel4 nicolas-michel polito5 (corresponding author) 1the h. wayne huizenga college of business and entrepreneurship nova southeastern university, usa 2nova southeastern university, usa 3university of miami, usa 4columbia university, usa 5fairleigh dickenson university, usa abstract foodborne illnesses linked to salmonella, norovirus, listeria, and escherichia coli (e. coli) are a serious problem people all over the world as they tend to negatively impact about ten to fifteen percent of every population. in this article, we focus on who is legally responsible for the proper handling of foods and the legal redress harmed consumers have in recovering damages. this article examines three legal doctrines that the injured consumer can use to sue parties on the food chain – the common law tort of negligence, warranty law based on statutory law – the uniform commercial code, and the common law tort of strict liability. the article provides a legal overview of the three legal doctrines wherein basic principles and elements are set forth and illustrated, while examining them in the context of recent food and beverage case law involving manufacturers, supermarkets, and grocers. based on the legal analysis, the knowledge and experience of the authors, as well as insights gained from legal and management commentary, the authors discuss the implications of food and beverage liability for employers and managers in the food chain. finally, we provide recommendations to employers and managers on how to properly handle safety standards in order to avoid liability for foodborne illnesses and accidents. keywords: food manufacturer, food contamination, food adulteration, negligence, warranty, wholesomeness, strict liability, defect. citation | frank j. cavico; bahaudin g. mujtaba; stephen muffler; marissa samuel; nicolas-michel polito (2018). manufacturer, supermarket, and grocer liability for contaminated food and beverages due to negligence, warranty, and liability laws. economy, 5(1): 17-39. history: received: 23 may 2018 revised: 10 july 2018 accepted: 4 september 2018 published: 21 september 2018 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group contribution/acknowledgement: all authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ...................................................................................................................................................................................... 18 2. definitions ......................................................................................................................................................................................... 18 3. limitations ........................................................................................................................................................................................ 18 4. legal overview ................................................................................................................................................................................. 19 5. implications for management ....................................................................................................................................................... 32 6. recommendations for management ............................................................................................................................................ 34 7. summary ............................................................................................................................................................................................ 37 references .............................................................................................................................................................................................. 37 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2018.51.17.39&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ http://www.asianonlinejournals.com/index.php/economy/article/view/1475 https://orcid.org/0000-0003-1615-3100 http://www.asianonlinejournals.com/index.php/economy/article/view/1475 https://orcid.org/0000-0003-1615-3100 http://www.asianonlinejournals.com/index.php/economy/article/view/1475 https://orcid.org/0000-0003-1615-3100 economy, 2018, 5(1): 17-39 18 1. introduction foodborne illnesses are a serious problem in the united states. cogan (2016) using data from the centers of disease control and prevention, reports that one in six people in the u.s., approximately 48 million, suffer from foodborne illnesses annually, which are principally caused by salmonella, norovirus, listeria, and escherichia coli (e. coli). moreover, annually, 128,000 people require hospitalization and 3000 die from foodborne illnesses (cogan, 2016). what legal redress do these harmed consumers have? that question is the essence of this article. the issue of the legal liability for contaminated food is even more pronounced today because many supermarkets and grocers are now engaging in much more take-out food business; and, moreover, the food meals and items involved are a lot more sophisticated and complex than past more basic offerings. the wall street journal (haddon and nassauer, 2016; newman, 2016) pointed out three recent contamination examples: whole foods market, inc. was ordered by the food and drug administration (fda) to commercially close one of its commercial kitchens that produced fresh meals for stores due to concerns about safety lapses in a boston-area facility which resulted in a listeria outbreak; also in 2016, an e. coli outbreak that sickened 19 people that was linked to rotisserie chicken salad that was made at costco wholesale corp.; and deli foods from the boise co-op, a natural foods grocer in idaho, were tied to a salmonella outbreak in 2015 that made almost 300 people sick. the wall street journal (haddon and nassauer, 2016; newman, 2016) further reported that the u.s. centers for disease control and prevention indicated that food contamination outbreaks doubled from 2014 to 2015, where in that latter year 23 outbreaks occurred, 572 people were sickened, and 42 people were hospitalized. salmonella was the most frequent outbreak linked to stores, followed by the norovirus (haddon and nassauer, 2016; newman, 2016). nevertheless, freshly prepared meals are plainly now “big business.” the wall street journal (haddon and nassauer, 2016; newman, 2016) reported that in 2005 freshly-prepared foods generated $15 billion in sales, but that amount nearly doubled to approximately $28 billion in 2015. fortune (kell, 2016) recently profiled one of these new companies called blue apron, which bills itself as a “meal-kit-delivery startup” company, selling meal kits (recipes and ingredients) using an “eclectic mix” of “precise” oils, spices, proteins and farm-fresh foods as well as other ingredients (kell, 2016). one meal example is a summer green salad with green beans and carrots, grilled barramundi on top of an heirloom-tomato salad with smashed crispy fingerling potatoes. the company is just four years old and is valued at $2 billion with 4000 employees, selling 8 million meal kits a month, which cost $9.99 per person or $8.74 each for a family plan, excluding delivery costs (kell, 2016). furthermore, as reported in the wall street journal (haddon and nassauer, 2016). amazon.com, has developed an e-commerce fresh food business, called amazon fresh, which is aggressively competing with traditional grocers and other online food merchants. in 2014, the wall street journal (haddon and nassauer, 2016) reported that amazon and other online food merchants achieved $6.3 billion in sales, which amount was up 20% from 2013. when it comes to information related to the safety of food items and ingredients, regardless of how or where purchased, the consumer is in a decidedly disadvantageous position. cogan (2016) explains: consumers are burdened by significant informational asymmetries with respect to the food they eat. possessing less information than farmers, processors, transporters, retailers and others who grow, handle, prepare, and sell food, consumers cannot fully discern risky food from safe food. was the food dropped on the floor? was it exposed to contaminants and pathogens? consumers almost never know. furthermore, the nature of foodborne illness creates its own information problems. the period of time between infection by a pathogen and the onset of symptoms is variable. some foodborne illnesses take a few hours to develop, while others can take a week or more. this not only makes it harder for victims of foodborne illness to link their sickness to a particular food, but the passage of time increases the likelihood that evidence of the contaminated food (i.e., the leftovers) will be unavailable for testing – thereby severing the empirical connection between the illness and its food source (pp. 1501-1502). yet despite the aforementioned informational and practical problems, the consumer harmed by unsafe food or beverage products does have certain legal avenues to pursue to achieve redress. as such, in this article we examine the common law tort of negligence, warranty law based on statutory law – the uniform commercial code, and the common law tort of strict liability. 2. definitions food contamination or contaminated food is the presence in food of harmful, unpalatable, or otherwise foreign substances, for example, microorganisms, diluents, dirt, dust, chemicals, toxic substances, microbes, and/or organisms, before, during, or after processing or storage, which can cause consumer illness (encyclopedia of medical concepts, 2016; wikipedia, 2016). adulterated food, generally speaking, is food that is not pure, safe, or wholesome because it contains poisonous or deleterious substances or contains foreign matter, filth or food that is otherwise contaminated, and thus the food is injurious to health (wikipedia, 2016). note that the federal government in the food, drug, and cosmetic act and the federal meat inspection and the poultry products inspection act has other detailed and technical standards of what makes food “adulterated,” including impermissible and permissible pathogens (that is, microorganisms such as bacteria) in certain types of food (u.s. legal – legal definitions, 2016; wikipedia, 2016) but such a scientific micro-biological examination is beyond the scope of this article. finally, foodborne illness, also known as foodborne disease or food poisoning, is any illness resulting from contaminated food (wikipedia, 2016). it should be noted that states also have food adulteration statutes (cousineau, 2010). 3. limitations this article has certain limitations. first, the article examines the liability of food manufacturers, supermarkets, and grocers. the authors cover the liability of restaurants in a separate academic effort, though some references to restaurants are made in this work. second, the article primarily deals with the three conventional legal doctrines as designated in the title and briefly addressed in the introduction, all of which are based on state law. negligence and strict liability are, as noted, torts, based on the common law of the states; and warranty law is based on the economy, 2018, 5(1): 17-39 19 uniform commercial code, which is a form of state statutory law. accordingly, the areas of the law examined herein are highly dependent on the law of several states, which of course can vary; and, moreover, there actually may be contradictions in interpretation on the appellate level in the states, which ultimately the supreme court of the state will have to resolve. so, for a particular lawsuit reference must be made to the law of the state having jurisdiction or if a federal “diversity” case (that is, the parties are from different states and the case is heard in federal court) to the law of the state where the injury or harm occurred (cavico and mujtaba, 2014). there is also a vast array of detailed federal law dealing with food safety, most prominently regulatory law emanating from the federal food and drug administration, especially since the agency was further empowered to regulate by the food safety modernization act of 2011 which aims to prevent food contamination. a failure to comply with government statutory or regulatory standards does impact negligence liability, as will be seen and explained. secondly, the article only deals with food and beverages that are contaminated in the traditional sense of being unwholesome or having foreign objects therein. accordingly, the article does not extensively examine the growing area of the law dealing with the legal liability when food or beverages lack “warnings” as to calorie counts, fats, cholesterol, and sugar, among other perceived harmful substances. similarly, the authors do not extensively cover the area of law dealing with the alleged “defectiveness” of food or beverages because they were not designed better to be more healthful. the authors will mention these areas, but save the health “warnings” (or lack thereof) and “design defects” aspect of food and beverage law for other future academic efforts. finally, this article does not deal with the liability of the cruise lines since that examination would be in the highly specialized areas of admiralty law and international treaties. 4. legal overview one academic study of 320 litigation and arbitration cases filed against food distributors, manufacturers and retail outlets revealed some interesting statistics. the evaluation of this study found as follows: the 320 defendants in the dataset were comprised of 44 distributers, 45 manufacturers, and 231 retail outlets or restaurants…the average resolution for cases involving distributers was $343,999 with a minimum of $0 and a maximum of $4.75 million. of the 44 cases against distributors, 29 cases (or 66% of the total) went to trial and reached a jury verdict, 12 (27%) were settled, and 3 (7%) went to arbitration. the average resolution for cases involving manufacturers was $284,394 with a minimum of $ 0 and a maximum of $ 3 million. of the 45 cases against manufacturers, 16 (or 36% of the total) went to trial and reached a jury verdict, 21 (48%) were settled, and 7 cases (16%) were resolved through arbitration. interestingly, 88% of cases against manufacturers resulted in monetary damages awarded to the plaintiff, as opposed to 59% of cases against distributers and 61% of cases against restaurants (marks, 2013). however, these statistics show a low occurrence of litigation relative to food borne illnesses, which fact suggests that they are reflective of how difficult it is to prove under any theory of recovery (cogan, 2016). nevertheless, an injured party can sue for any or all of the legal theories to be examined herein as well as any others supported by the facts and the law. the legal theories will be separate parts or “counts” of a lawsuit. as such, if one or more is dismissed by the court or ruled against by a jury the plaintiff may be able to sustain his or her case on another “count.” for example, in goodman v. wenco foods inc (1992) the supreme court of north carolina dismissed the negligence claim but allowed the merchantability claim based on the uniform commercial code to go to the jury. similarly, in the new jersey supreme court case of hollinger v. shoppers paradise of new jersey inc (1975) involving a consumer who contracted trichinosis from eating pork chops, the court ruled that though there was no evidence of negligence in the handling of the meat, the case nonetheless could proceed on the theories of the implied warranty of merchantability and strict liability in tort as the latter two theories do not require proof of negligence by the defendant. a. the tort of negligence 1. generally negligence is a form of conduct, but conduct that can give rise to liability under the common law based on the tort, or civil wrong, of negligence. the traditional elements or components of the tort of negligence are as follows: 1) the existence of a duty, imposed by law, requiring persons to conform to a certain standard of conduct, to wit, the “reasonable person” standard; 2) a failure on a person‟s part to conform to the aforementioned standard, that is, a breach of the duty; 3) causation, that is, a reasonably close nexus or connection between the conduct and the resulting harm, consisting in causation-in-fact as well as “legal” cause, which latter cause is also referred to as “proximate cause”; and 4) an actual loss, harm, or damage resulting from the conduct (keeton et al., 1984; clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). the burden of proof and persuasion are on the plaintiff bringing the lawsuit to demonstrate that the elements of the tort are present (gant v. lucy ho‟s bamboo garden, 1984). although the tort of negligence in the united states is based on state law, the fundamental elements of the tort, originally stemming from the old common law of england, as well as the elements of the tort as applied in the context herein, are generally consistent among the several states. a general review of various state jurisdictions reveals that the courts are fairly divided as to what may constitute initial evidence of negligence in food cases: georgia, iowa, louisiana, new york, and new jersey have found that illness or injury following ingestion establishes a prima facie case, while alabama, colorado, illinois, massachusetts, mississippi, north carolina, tennessee, and washington have not (spahn, 2011). in the next section of the article these elements are explicated both generally and in the context of food and beverage liability. 2. elements a. duty the first requirement to a negligence cause of action is the duty element. the duty, imposed by the law, is one of due care. the duty to conform one‟s conduct to the conduct of a “reasonable person” is the essence of negligence law. as explained by keeton et al. (1984): economy, 2018, 5(1): 17-39 20 the whole theory of negligence presupposes some uniform standard of behavior….the standard of conduct which the community demands must be an external and objective one, rather than the individual judgment, good or bad, of the particular actor; and it must be, so far as possible, the same for all persons since the law can have no favorites….the courts have dealt with this very difficult problem by creating a fictitious person….sometimes he is described as a reasonable person, or a person of ordinary prudence, or a person of reasonable prudence (pp. 173-74). a jury typically is the lay body of citizens which determines if the duty to act as a reasonably prudent person was violated or breached. as further explained by keeton et al. (1984): “the conduct of the reasonable person will vary with the situation with which he is confronted. the jury must therefore be instructed to take the circumstances into account; negligence is a failure to do what a reasonable person would do „under the same or similar circumstances.” this general duty of care attaches to both preand post-sales of products. under california law, for example, there is a duty owed by supermarkets to warn potential customers of a food product recall as well as a duty to warn those customers that have already purchased the food product (hensley-maclean v. safeway inc, 2014). b. breach of duty once a legal duty has been established by the court (that is, the judge, who decides issues of law) then, typically, unless waived, a jury (which decides issues of fact) must be empaneled to determine the factual issue of whether the defendant has breached or contravened the duty. a breach of duty occurs when a defendant fails to exercise due care and thus fails to act as a reasonable person (keeton et al., 1984; clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). the burden of persuasion in demonstrating a breach to the jury is on the plaintiff bringing the lawsuit; and the standard of proof that the jury will use is the one characteristic for a civil case, such as negligence, the “preponderance of the evidence,” standard (colloquially referred to as “50% plus 1” of the evidence) (keeton et al., 1984). however, conversely, it needs to be pointed out that evidence of a lack of due care will defeat a negligence claim. to illustrate, cnn.com reported on a situation where a man found the remnants of a frog or toad in his can of diet pepsi after he had consumed some of the beverage and became sick. he called the food and drug administration (fda) as well as poison control. the fda investigated the local pepsi bottling plant, but “…did not find any adverse conditions or association to this problem,” and thus the agency had “not determined when or how the contamination occurred,” and was “simply unable to determine when or how the specimen entered the package” (grinberg, 2009). moreover, evidence of the presence of due care, for example, that a defendant producer or seller met or exceeded government standards, may defeat a negligence claim since there would be no breach of the duty of care. for example, in goodman v. wenco foods inc (1992) evidence that the defendant hamburger seller‟s ground beef processing standards exceeded u.s.d.a. requirements was sufficient for the court to dismiss a negligence claim. one interesting case distinguishes the levels of duty of care between a mere grocer, who sells pre-packaged self-contained food products, and the manufacture of such items in a deleterious food negligence claim. in simmons v. brookshire grocery company d/b/a brookshire‟s food and pharmacy (2016) a customer of the grocer purchased fruit cups and became ill after eating them. he sued under various theories, including negligence, seeking damages relative to the consumption of deleterious food. the court presumed the facts most favorable to the plaintiff as follows when considering the defendant‟s summary judgment motion: simmons alleged that on friday, february 15, 2013, he went to the brookshire's on north market street in shreveport and bought four packages of del monte "peaches in peach" fruit cups. each package consisted of four clear-plastic cups with clear-plastic peel-off lids, stacked top-to-top, and held together in a cardboard wrapper that covered most of the product but allowed a view of a portion of each plastic cup. he ate one of the cups around 10:00 p.m. that night, went to bed, and started feeling sick around 3:30 a.m. he got up and ate another cup, "to settle my stomach," but noticed it tasted slightly different from the first: he thought it was just a peach hull. around 7:00 a.m. he opened the remaining cups and then, for the first time, noticed a small patch of mold around the rim of the cup. he took pictures of the cups, returned them to brookshire's and got a refund. however, later that day he started having cramps and nausea, then vomiting, and then constipation. on monday, february 18, he went to david raines community health center, and testified that he received medicine for food poisoning (simmons v. brookshire grocery company d/b/a brookshire‟s food and pharmacy, 2016). the court distinguished the duty to inspect pre-packaged food items differently between grocery store owner versus a food manufacturer. the court explained that this particular grocery store did not take part in the preparation, processing or manufacturing of the product, or subjected the product to improper care. in affirming the summary judgment in favor of the grocer, the appeals court explained its holding as follows: we find that simmons has failed to offer evidence to create a genuine issue under the applicable law. there is absolutely no evidence that brookshire's took part in the preparation, processing or manufacturing of the del monte fruit cup consumed by simmons. further, there is nothing but speculation that brookshire's mishandled, disturbed or subjected the fruit cup to improper care; simmons himself testified that the cardboard wrapper and the plastic cups were intact, and no store employee was deposed to show any mishandling. in short, brookshire's has shown lack of support for the essential elements of a claim under le blanc and ard, supra, [seminal case precedent relied upon by the appeals court] and simmons has not supplied the evidence that would create a genuine issue. finally, simmons argues that if brookshire's employees had "inspected their products more closely," they would have seen the mold on the product through the clear packaging. although le blanc and ard impose liability on a grocer only for mishandling, disturbing or subjecting the product to improper care, there is no liability for failure to conduct a "close" inspection. the fruit cups are packaged top-to-top, with the cardboard wrapper covering much of the sides. simmons's photographs show a small area of mold near the rim, at the top of one plastic cup. any inspection sufficient to discover this would be incredibly intense, economy, 2018, 5(1): 17-39 21 requiring the removal of wrappers and close examination under the peel-off lids. the law does not require this degree of invasive, or destructive, inspection (simmons v. brookshire grocery company d/b/a brookshire‟s food and pharmacy, 2016). in certain states, a grocery store‟s duty of care owed to their patrons may also sometimes obligate grocery store managers to personal liability if they fail to fulfill this duty. in the case of hutchen v. wal-mart stores east i lp. & juden (2008) a customer of wal-mart alleged that spinach he purchased from the store was infected with e. coli bacteria and sued the store and its manager for negligence. the plaintiff‟s complaint alleged the following against both defendants collectively: 1. defendants failed to have in place proper and appropriate processing procedure for the detection of contaminated food, and in particular contaminated spinach though they knew or should have known of the risk of such contamination; 2. defendants continued to market contaminated spinach though they knew or should have known of the contamination of the product in other states and stores; 3. defendants continued to market contaminated spinach though they knew or should have known of a recall of the product in other states and stores; 4. defendants failed to remove contaminated spinach from the shelves in a timely fashion or warn of possible contamination; 5. defendants sold contaminated spinach to the plaintiff. in examining the legitimacy of the claim against the store manager, the court explained that since the plaintiff‟s petition “alleged, inter alia, that store manager juden was negligent because she "knew or should have known" that contaminated spinach had been found in other states and stores and had been recalled in other states and stores, but she failed to remove contaminated spinach from the dexter wal-mart shelves and failed to warn customers of possible contamination, such knowledge creates a duty as a matter of missouri law” (hutchen v. wal-mart stores east i lp. & juden, 2008). however, a grocery store has no duty to customers if it never had control over the food product whatsoever before or at the time of sale. the court in the case of campbell v. supervalu inc (2008) examined a customer‟s claim that they purchased ground beef that was tainted with e. coli and which was served in hamburger helper to their child making him ill. thirteen years later, the lawsuit was filed to recover damages for the child‟s complications of acute renal failure, onset of insulin dependent diabetes mellitus, congestive heart failure, and chronic renal failure alleged to have occurred because of the e. coli. the court granted the grocer‟s summary judgment not only on the basis of the statute of limitations running, but also because the defendant company did not own the grocery store at the time of the sale of the product and thus did not owe the plaintiff a duty of care. specifically, the court explained: therefore, from a legal perspective, on september 22, 1993, supervalu had no legal duty to the campbells as a matter of law…... „whether a defendant owes a duty of care to a plaintiff is a question of law for the court to decide‟ bowman v. tippmann enters. (868 n.e.2d 1172, 1174) relationship between the parties, the reasonable foreseeability of harm, and public policy concerns‟ (campbell v. supervalu inc, 2008). once a jury determines that the defendant acted in an unreasonable manner, and consequently the duty of care has been breached, the next issue for the jury to determine is the causation element to a negligence lawsuit. c. causation – factual and proximate causation is an essential element to a lawsuit for negligence; and there are two types of causation. one is called “factual causation” (or at times “actual” or “cause-in-fact”) and the other is called “legal causation” or (perhaps better because less confusing) “proximate causation.” factual causation is simply a question of scientific fact, that is, as a matter of science, and regardless of how long, attenuated, or convoluted the causation chain, did careless act “a” cause ultimate harm “z”? if the answer is “yes,” then factual causation is present (keeton et al., 1984; clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). causation can be established by direct evidence, circumstantial evidence, expert testimony, lay testimony, or some combination thereof (southern states coop v. doggett, 1982; mccarley v. west quality food service, 1998). the standard of proof for factual causation is the usual civil “preponderance of the evidence” standard; that is, the evidence presented by the injured plaintiff must show that it was more likely than not that the allegedly harmful food caused the plaintiff‟s injury (jackson v. winn dixie stores inc, 1983). of course, the foregoing comments are a bit simplistic statements since in the “real world” factual causation can be quite complicated as when there is more than one cause or multiple causes of harm or where there are possible intervening, supervening, and/or superseding causes. for example, in the case of rouse v. george a. hormel &co (1976) the court ruled that the injured plaintiffs failed to prove that the consumption of the defendant packer‟s luncheon meat, which allegedly contained a sliver of glass, was the cause-in-fact of their illness principally because their illness occurred several hours after they ate the food. similarly, in the case of brown v. general foods corp (1978) the medical evidence presented by the plaintiff was not sufficient to prove by a preponderance of the evidence that the plaintiff‟s severe tenderness to the big toe area of the right foot was caused by the ingestion of penicillin fungus which allegedly was growing on a moldy banana peel at the bottom of a box of grape nuts cereal. to compare, in the case of miller v. atlantic bottling corp (1972) the fact that the showing of harmful symptoms followed shortly after the consumption of the contaminated food was sufficient for the court to allow the case to go to the jury on the issue of a causal connection. even if factual causation is determined to be present by the jury, the second causation element – legal or proximate causation – must also be present. proximate causation is a very interesting and unusual legal doctrine indeed in that it protects careless defendants. the application of the doctrine is within the province of the jury. even if a defendant acted carelessly and unreasonably and caused harm the defendant is not liable for all the harmful consequences of his or her careless action or omission; rather, pursuant to the proximate causation doctrine a defendant is only liable for the reasonably foreseeable adverse consequences of his or her wrongful act; and as such the careless defendant is not liable for any unforeseeable, unusual, or remote harmful consequences. thus, if a causation chain is very long and attenuated the jury is allowed, in essence, to “cut off” the causation economy, 2018, 5(1): 17-39 22 chain, and thus exonerate the defendant from those consequences which the jury has deemed unforeseeable (keeton et al., 1984; clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). the rationale for the doctrine “is that there be some reasonable connection between the act or omission of the defendant and the damage which the plaintiff has suffered” (keeton et al., 1984). once again, the typical civil “preponderance of the evidence” standard is used to determine if there is a causal connection or relationship between the careless act and the ultimate harm (way v. tampa coca cola bottling co, 1972). usually, expert testimony in the form of a medical expert will be necessary to establish the causal connection between the illness or injury and the consumption of certain food or beverage, unless the causal connection would be clearly apparent to a jury composed of lay persons based on the circumstances of the case. one court further elaborates that the plaintiff must prove causation to a degree of “reasonable and probable” and the mere existence of a package meat recall will not solely support this burden (thacker vs. kroger company & conagra inc, 2005). in thacker, the grocery giant kroger sold prepackaged meat to the plaintiff which was produced by an independent meat processing company. the appeals court summarized the materials facts as follows: sometime in early july, kristi thacker purchased ground beef for her family from kroger's store. all four members of the family ate it during the first two weeks of august. on august 12 and 13, savana the youngest member of the family complained of stomach cramps, and, by august 17, she was vomiting. on august 19, savana was taken to see her primary physician and then rushed to a hospital where she was diagnosed with hemolytic uremic syndrome (hus), a disease commonly associated with e. coli. savana was the only family member that became sick. the thackers' beef was never tested to confirm the presence of e. coli (thacker vs. kroger company & conagra inc, 2005). the thackers sued kroger and their meat supplier for negligence after buying processed, packaged meat which they made into hamburgers for their family members to consume, who become ill after eating the same. the united states district court for the western district of missouri granted summary judgment in favor of the defendants, ruling that the plaintiffs failed to establish that the injuries were caused by the beef produced by the meat producer, conagra, and sold by kroger. the appellate court affirmed the trial court‟s ruling and explained how the plaintiff‟s lack of causation defeated their negligence claim during the summary judgment phase by explaining: the thackers rely mostly on the fact that the beef they ate was subject to the conagra/kroger recall. additionally, the thackers interpret ms. thacker's testimony to say she bought clear-wrapped ground beef as well as the five-pound chubs. even assuming ms. thacker did purchase clear-wrapped beef, it is undisputed that fresh ground beef has a maximum 18-day shelf life from the date of production. any meat produced on may 31 the only production day that the usda detected e. coli in meat that was actually distributed would have been removed from the shelves by june 18, long before ms. thacker purchased the beef consumed. thus, viewed most favorably to the thackers, the clear-wrapped beef, while subject to the recall, was not part of the contaminated meat discovered by the usda on may 31. this fact does not establish the causation necessary to avoid summary judgment….finally, to the extent there is more than one possible cause of savana's hus, the thackers fail to show by substantial evidence the probable cause (thacker vs. kroger company & conagra inc, 2005). further, the plaintiff‟s own medical expert, a medical doctor, could not affirmatively state with any medical certainty the cause of the food that injured the plaintiffs and his testimony was characterized by the appeals court as speculative. in granting summary judgment in favor of the grocery store and meat processing supplier, the appeals court pointed out missouri‟s long standing principle, to wit: “where there are multiple possible causes, the plaintiff must exclude other causes by presenting substantial evidence that a particular cause for which defendant is liable is responsible for plaintiff's injuries" (thacker vs. kroger company & conagra inc, 2005). 1. damages the final element in a cause of action for negligence is the presence of damages. an actual loss or harm to the person or interests of the person is required. nominal, that is, token, damages are insufficient as are damages for the threat of any future harm. actual damages can include harm to the person, medical costs and expenses, lost wages, damage to his or her property – real or personal, or economic harm. moreover, since negligence is a tort as per the common law damages can include emotional distress and “pain and suffering” at the discretion of the jury. finally, if the negligence is deemed by the jury to be “gross,” that is, flagrant, or reckless, then the jury can impose at its discretion punitive damages as punishment and as a deterrent (keeton et al., 1984; clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). one problem for an injured consumer who wants to sue for emotional distress damages based on negligent conduct is the traditional “impact” rule of negligence law which maintains that one has to be physically impacted, at least touched, in order to sustain an emotional damage recovery for the negligent conduct (cavico and mujtaba, 2014; cheeseman, 2016). this rule could be a problem in a food or beverage negligence case in some states when the consumer does not ingest a portion of the contaminated food or is not harmed by the object in the food. for example, in doyle v. pillsbury co. in 1985 the plaintiff consumer alleged that she opened a can of peas, saw an insect floating in the can, was frightened, fell backwards over her chair, and suffered emotional distress; however, the florida supreme court denied recovery because the plaintiff did not consume the adulterated food and thus she was not “impacted.” ingestion of the food, therefore, was required by the court. similarly, if a customer sees hair in his or her food but does not eat the food, the customer may be “grossed out” and thus loudly complain to the staff and management, but the customer likely will not be able to sue for emotional distress because of the lack of an impact. however, if the consumer does ingest the food or beverage, for example, tasting a flat soda and then seeing an apparent used condom in it, the consumer, who became nauseated and went to a health facility to be vaccinated, and then was tested twice for hiv-aids, could sue for the emotional harm caused, according to the florida supreme court (hagan v. coca-cola bottling co, 2001). note, though, that some courts have attempted to liberalize the older “impact” rule in food cases by saying that the consumer has to either ingest the food (i.e., the economy, 2018, 5(1): 17-39 23 “impact”) or suffer objective physical systems in response to the foreign substance (way v. tampa coca cola bottling co, 1972). 2. the doctrine of res ipsa loquitur when an injured plaintiff lacks direct evidence that the defendant breached the duty of care, the plaintiff may be able to use the doctrine of res ipsa loquitur (“the thing speaks for itself”) to create an inference or presumption of negligence. this presumption is a rebuttable one, it must be emphasized. the injured plaintiff will have to show that the defendant had control of the situation that caused the harm to the plaintiff. the plaintiff also will still have to show that it was more likely than not that the defendant caused the plaintiff‟s injury (keeton et al., 1984; clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). moreover, the plaintiff will still have to demonstrate the causation and damages elements of a negligence lawsuit. a favorable granting of a res ipsa loquitur request will allow the injured consumer to proceed with circumstantial evidence, primarily the fact of the injury itself and the unusualness of its occurrence (keeton et al., 1984; clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). courts typically will require a three-part test to determine if res ipsa loquitur is applicable to a case, to wit: 1) the injury or harm was caused by an agency or instrumentality under the exclusive control of the defendant; 2) the injury or harm must be of a type that ordinarily does not occur unless someone was negligent; and 3) the injury or harm must not have been due to any voluntary act or contributing fault of the injured plaintiff (keeton et al., 1984; benton, 2012; clarkson et al., 2012; cavico and mujtaba, 2014; lipp and hafer, 2014). for example, in ford v. miller meat company (1994) the injured plaintiff brought a lawsuit against a supermarket and meat supplier for negligence utilizing res ipsa loquitur when she broke a tooth when she bit into a bone fragment in ground beef she had purchased. similarly, in schafer v. jlc food systems inc (2005) the injured plaintiff utilized res ipsa loquitur to recover for a throat injury caused by a defective pumpkin muffin. as benton (2012) points out, the “exclusive control” element could present a huge challenge to the injured consumer in foodborne illness cases since based on a particular state‟s law the plaintiff may have to exclude all other reasonable possibilities of his or her illness. that is, evidence is required for a jury to make an inference that the contamination or other unsafe aspect of the food or beverage product came from a particular defendant‟s lack of due care (benton, 2012; lipp and hafer, 2014). for example, in burnett v. essex insurance company (2000)the plaintiffs who suffered abdominal problems allegedly from bacteria in food did not prevail because their physician could not eliminate other possible causes of illness, such as the local drinking water or that one of the plaintiffs was susceptible to gastric disorders. 3. negligence per se a duty of due care may also be specifically created by a statute or government regulation. as such, the violation of a statute with such a duty which contravention causes injury to a party is called “negligence per se.” the injured plaintiff would have to prove that such a statute existed, it was promulgated to protect against the type of harm suffered, and the injured plaintiff was within a class of people to be protected by the statute (keeton et al., 1984; clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). for example, in the case of coward v. borden foods (1976) the fact that there was proof of a violation of the food and drug act could constitute negligence per se if the violation factually and proximately caused the injury to the plaintiff. one court has held that a negligence per se cause of action against food manufacturers must be based upon the alleged violation of a statute and cannot be premised upon the violation of a regulation (cohen v. fairbank reconstruction corporation d/b/a fairbank farms, 2012). while both have the effect of law, statutes are bills passed by state legislatures or the federal congress and signed by the state governor or the president of the united states, while a regulation is promulgated by an administrative agency with at least a public notice and comment procedure. there are, obviously, many statutes and regulations regarding food and beverage safety. to cite one recent enactment, in 2011, president obama signed the food safety and modernization act (fsma), which congressional statute seeks to improve the nation‟s food safety by empowering the food and drug administration (fda) to further and more effectively regulate food and beverages by promulgating, overseeing, and enforcing food safety regulations (benton, 2012). one important provision of the fsma grants the fda the authority to recall food products if the agency determines that there is a “reasonable probability” that an article of food or beverage is adulterated or mislabeled and the use or exposure will cause adverse health consequences to humans or animals benton (2012). the fmsa dos not provide a private cause of action for damages based on an fda food recall. however, benton (2012) points out that critics of the statute are concerned that “„reasonable probability‟ is not a stringent enough standard and that when combined with a mandatory recall will be seen as proof that food is dangerous, encouraging the filing of successful lawsuits.” that is, the fact of the food recall may be argued as evidence that the standard of care was breached for a negligence lawsuit, the food is not merchantable for a warranty lawsuit, and/or the food is “defective” for a products liability lawsuit. however, in the case of velazquez v. abbott labs (2012) the plaintiff‟s parents alleged that their infant suffered acute gastroenteritis as a result of ingesting defendant manufacturer's powdered milk. the defendant was entitled to summary judgment on strict liability and negligence claims because defendant's recall notice and the fda's notices about the recall were inadmissible to show that the milk ingested by the infant contained beetles, there was insufficient evidence to establish that there was a defect in the powdered milk and that the powdered milk caused the infant's illness, and the plaintiffs did not show that defendant breached any standard of care (velazquez v. abbott labs, 2012). 4. defenses contributory negligence and comparative negligence are defenses to a negligence lawsuit which are based on the law of each state (keeton et al., 1984; clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). the former holds that a plaintiff who is even partially responsible for his or her own injury cannot recover anything from a defendant; and in the latter a jury is allowed to apportion the fault to each party and then to deduct that percentage of fault from the plaintiff‟s recovery (keeton et al., 1984; cavico and mujtaba, 2014; cheeseman, 2016). economy, 2018, 5(1): 17-39 24 food and beverage examples would be when the plaintiff caused his or her own illness through his or her own negligent conduct by the careless storage or preparation of a food or beverage product. one illustration of an assertion of comparative negligence is the florida court of appeals case of coulterv v. american bakeries company (1988) where the consumer, who had an abscessed tooth, dissolved a donut in milk, and while drinking the milk through a straw, had a piece of wire which was in the donut lodged in her throat; but the court ruled that she was not comparatively negligent under the circumstances for not chewing the donut. another example of a defense would be assumption of the risk, where the plaintiff knowingly and voluntarily assumes a known risk or danger that a reasonable person would not. assumption of the risk is a complete defense to a negligence lawsuit (keeton et al., 1984; clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). so, for example, if one continues to eat food with known foreign fragments in it and is injured thereby it can be said that one assumed the risk of injury. segal (2006) even posits that assumption of the risk could be used in eating improperly, to wit: “eating in excess or consuming food that is high in fat can obviously cause health problems for consumers, especially children who are part of the fast-food revolution.” b. warranty law and the uniform commercial code 1. article 2 of the uniform commercial code warranty law is based on the uniform commercial code (ucc) which is a statutory law adopted by all the states in a (more-or-less) uniform manner. a warranty is a guaranty that a seller makes about its goods when making a sale. generally, the warranty means that the goods will operate in a certain way or conform to a certain standard. by making the warranty the seller agrees to compensate the buyer for any loss or damages suffered if the goods are not as warranted. warranties can be express, that is, by affirmative words, action, or conduct of the seller, or implied, that is, implied by the law (the ucc). there are warranties of title and warranties of title (clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). for the purposes of this article the authors examine the three ucc implied warranties of quality – the implied warranty of merchantability, the implied warranty of wholesomeness, and the implied warranty of fitness for a particular purpose. first however, the sale of a good requirement, which is an indispensable feature of the ucc, must be explicated. 2. the sale of a good requirement warranty law, as noted, is based on the ucc, which is premised on the sale of a “good.” there thus must be the sale of a good for ucc warranty law to be applied. goods are tangible, physical, personal property. food and beverages certainly are goods. employment relationships and the provision of services of course may be based on contracts but they are not “goods” and thus no implied warranties would arise. there may be breach of contract lawsuits as well as negligence lawsuits in employment and service situations, but not ucc breach of warranty lawsuits (clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). 3. implied warranties generally as noted, the law by virtue of the ucc implies certain warranties just because a sale of goods is made. it is important to point out that these warranties are imposed by the law regardless of the seller‟s intentions and regardless of the fact that the seller has not made any representations, statements, or promises regarding the goods. unless the warranties are disclaimed by the seller they arise by operation of the ucc in every sale of a good (cavico and mujtaba, 2014; cheeseman, 2016). however, as to the warranty liability of cruise line companies, it should be noted that this area of the law is governed primarily by admiralty law; and as such one federal district court stated that it was unwilling to imply a ucc warranty of merchantability against a cruise line being sued by a passenger who contracted food poisoning requiring surgery since the admiralty courts would have primary jurisdiction (bird v. celebrity cruise lines, 2005). if genuine issues of fact are in dispute in either breach of implied warranties of merchantability or fitness for a particular purpose claims, a plaintiff‟s allegations will proceed to trial against both a producer of a food product and the supermarket seller. for example, in l.w. v. tyson foods inc. & wal-mart stores east l.p (2011) both the plaintiff and defendants produced evidence disputing where the contaminated meat products were bought and the causation of the resulting food poisoning of the child who consumed the meat. in that case, l.w., a minor child, consumed a hamburger at his grandmother‟s house. she prepared the hamburger allegedly from tyson's ground beef she bought at the wal-mart. the child shortly thereafter, became ill with diarrhea, nausea, vomiting, fever, and stomach cramps and eventually hospitalized and diagnosed with campylobacter food poisoning. subsequently, the parents filed the action on the child‟s behalf alleging breach of the implied warranties of merchantability and fitness for a particular purposes against both the manufacturer of the meat, tyson foods, and the supermarket retailer which sold the meat, wal-mart. the defendants disputed the facts that the food product was purchased at wal-mart and that the meat was contaminated. the plaintiff contended that they bought the meat from wal-mart and furthermore, another relative became ill also after eating the same meat. given these disputed facts, the court held that the jury was best to resolve these disputes. 4. the implied warranty of merchantability the uniform commercial code in section 2-314 maintains that a warranty that goods sold by merchant must be “merchantable” will be imposed in a contract for the sale of the goods. in order to be of “merchantable” quality the ucc specifies several criteria, to wit: the goods must be fit for the ordinary purposes for which the goods are used; the goods must meet normal commercial standards; the goods must do their ordinary job safely; the goods must be of the middle range of quality; and the goods must be adequately packaged and labeled (clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). it is very important to note that only “merchants” are deemed to make the implied warranty merchantability. the merchant must also be a merchant with respect to the goods sold; as such, sales by merchants out of their field or by private individuals are not governed by the ucc merchantability warranty (clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). for the purposes herein, manufacturers, wholesalers, distributors of food and beverages, retailers such as supermarkets and grocers, economy, 2018, 5(1): 17-39 25 as well as restaurants, can be deemed to be merchants. courts look for guidance in determining the “merchantability” of food and beverages from applicable government regulatory standards, court precedents, characteristics of the same or similar goods produced by others, and usages in the trade (eller, 1993). the burden of proof and persuasion is on the injured consumer to prove that the food was not merchantable (deveraux v. mcgarry‟s inc, 1970). there are times when the implied warranty of merchantability may validly state a claim against a food manufacturer but not the grocery retailer of the same product. a good example of this is in the case of porrazzo v. bubble bee foods llc & the stop and shop supermarket company llc (2011) where the plaintiff sued both the manufacturer of the canned tuna fish and the supermarket that sold the same product. the plaintiff‟s amended complaint alleged the following fact pattern: plaintiff lee porrazzo consumed approximately ten six-ounce cans of tuna fish per week from approximately january 2006 to october 2008. the tuna fish was canned by defendant bumble bee foods, llc ("bumble bee"). plaintiff purchased this tuna fish, which was frequently on sale, from defendant stop & shop supermarket company ("stop & shop"). during this time bumble bee promoted its tuna fish as an "excellent and safe source of high quality protein, vitamins, minerals and omega-3 fatty acids, as well as being low in saturated fats and carbohydrates[,] and touted its product as being 'heart healthy.'" the bumble bee tuna fish did not provide any warning that it contained mercury, "an odorless, colorless, tasteless, poisonous, heavy metal." at some point between january 2006 and october 2008, plaintiff began to experience, two to three times per week, "episodes of chest pains, heart palpitations, sweatiness, dizziness, and lightheadedness," which led him to believe that he had a heart condition. plaintiff sought medical attention and underwent numerous tests to understand the cause of his symptoms, but none of these tests provided an answer. on april 14, 2006, plaintiff went to the white plains hospital emergency room because he believed (incorrectly) that he was having a heart attack. on or about october 1, 2008, plaintiff's primary care practitioner ordered a heavy metals blood test, which showed that there was an elevated level of mercury in plaintiff's blood. specifically, plaintiff's blood mercury level was 23 mcg/l as opposed to the less than 10 mcg/l, which is normal. on the same date, the new york state department of health contacted plaintiff by telephone, advised him that he had a dangerous level of mercury in his blood, asked him questions, filled out a questionnaire, and instructed him to stop eating tuna fish. plaintiff stopped eating tuna fish, and a blood test on november 4, 2008, revealed that his mercury levels had returned to normal. plaintiff no longer suffered the heart attack-like symptoms previously described, but he alleges that he "remains worried today about what effects the mercury has had on his health" (porrazzo v. bubble bee foods llc & the stop and shop supermarket company llc, 2011). both bubble bee and the supermarket moved to dismiss the amended complaint for failure to state a cause of action under the theory of breach of warranty of merchantability. the court ultimately held that this plaintiff‟s implied warranty claim against bubble bee, the tuna manufacturer, could survive a motion to dismiss, by explaining: the relevant question here, therefore, is whether the presence of mercury in defendants' canned tuna, without any accompanying warnings, renders it not reasonably fit for the ordinary purpose for which it was intended. in other words, plaintiff's claim for breach of implied warranty turns upon whether: 1) the customary, usual, and reasonably foreseeable use of tuna fish includes the type of consumption plaintiff engaged in--namely, eating approximately one to two cans of tuna fish daily for more than two years; and 2) plaintiff reasonably expected mercury--which, when consumed in those quantities, could be poisonous-to be present in the fish…..at this stage plaintiff has plausibly alleged as much. (the court on summary judgment or a jury could, of course, conclude otherwise.) furthermore, plaintiff's ability to recover under his breach of implied warranty claim is not affected by the feasibility of making the product safer, and thus whether mercury is naturally present in tuna and/or can be removed through the use of ordinary care is irrelevant. because plaintiff plausibly alleges that he was, indeed, "injured by conditions which he could not have reasonably anticipated to be present in the product purchased," [citing case precedent] defendants' motion to dismiss plaintiff's claim for breach of the implied warranty of merchantability as to bumble bee is denied (porrazzo v. bubble bee foods llc & the stop and shop supermarket company llc, 2011). however, as to the supermarket retailer defendant, which sold the same alleged defective tuna fish to the plaintiff, the breach of implied warrant of merchantability claim could not survive a motion to dismiss. the court explained the application of that theory of recovery against a grocer as follows: with respect to plaintiff's claim for breach of implied warranty of merchantability against stop & shop (count ii), however, such claim must fail. for claims for breach of warranty and negligence, a retailer „cannot be held liable for injuries sustained from the contents of a sealed product even though a test might have disclosed a potential danger‟ because „(t)here is no obligation upon it to make such a test‟ (citing case precedent). because stop & shop is a retail seller that cannot be held liable under breach of warranty for a defect it could not discover through ordinary inspection, defendants' motion to dismiss count ii, as to a breach of implied warranty, is granted (porrazzo v. bubble bee foods llc & the stop and shop supermarket company llc, 2011). 5. the implied warranty of wholesomeness regarding food and beverage products, the ucc‟s implied warranty of wholesomeness maintains that food and beverages must be “fit for human consumption.” the warranty is imposed by law by virtue of the ucc. if food or beverages are unwholesome, that is, poisonous, noxious, contaminated, adulterated, or otherwise unfit for human consumption, the products are of course not “merchantable.” the warranty applies to retailer supermarkets and grocers whether the items are selected by the grocer for the customer or selected by the customer from the shelf or when the products come prepackaged in sealed containers. the warranty is also implied against restaurants regardless of whether the food is sold for consumption on-or-off the premises (clarkson et al., 2012; cavico and economy, 2018, 5(1): 17-39 26 mujtaba, 2014; cheeseman, 2016). the warranty also applies fast-food restaurants, coffee shops, bars, vending machines, and other sellers of food and beverages (cheeseman, 2016). a problem, however, arises with the wholesomeness warranty when there is an object in the food or beverage, which problem area is covered in the next sub-section to this article. 6. the foreign/natural test v. the reasonable expectations test the legal and practical problem regarding food and beverages and wholesomeness arises when there is an object in the product that injures the consumer. the courts have used two tests to determine liability for objects in food and/or beverages – the older “foreign/natural” test and the newer “reasonable expectations” of the consumer test (clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). the foreign/natural test harkens back to a california supreme court decision in 1936, wherein the court said in a case involving a chicken bone fragment in a chicken pie that liability would only be imposed under products liability law if food was impure or noxious or if there was a foreign substance in the food, such as glass, metal, or a creature; but since a chicken bone is “natural” to chicken food there would be no liability for any harm caused (mix v. ingersoll candy co, 1936). however, under the “reasonable expectations” test, first, if the object in the food or beverage is “foreign” there is legal liability as there was under the foreign/natural test. however, in a major change to this area of wholesomeness warranty law, if the object is “natural,” recovery by the injured plaintiff would be permitted if he or she could demonstrate that the object or substance in the food or beverage was one that a reasonable consumer would not expect or anticipate (goodman v. wenco foods inc, 1992; clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). eller (1993) explains the rationale for the “reasonable expectations” test, to wit: “…if a consumer does not reasonably expect the substance to be present in the food, he cannot take precautions to avoid being injured by it; the food is thus unfit for consumption because it cannot be eaten without risk of injury.” the north carolina supreme court in the 1992 decision of goodman v. wenco foods inc (1992) which involved a consumer suffering severe dental injuries by biting into a hamburger sold by a fast-food establishment due to a “natural” meat bone fragment in the food, overruled the appeals court which applied the foreign/natural test to deny recovery; rather, the state supreme court adopted the “reasonable expectations” test, thereby allowing the case to go to a jury. also, in jackson v. nestle-beich, 1992), the supreme court of illinois, in a case involving a pecan shell in chocolate-covered pecan candy, rejected the “foreign-natural” test and thus changed that state‟s law to the “reasonable expectations” test. to compare, in the state supreme court 1964 decision by the massachusetts supreme court in webster v. blue ship tea room, inc., the court held that a reasonable consumer should expect fish bones in a bowl of new england fish chowder, and thus there was no breach of the merchantability warranty. similarly, a florida appeals court ruled that it was reasonable to expect an occasional piece of clam shell in a bowl of clam chowder and thus the manufacturer of the chowder and the supermarket which sold it were not liable (koperwas v. publix supermarkets inc, 1988). other examples of both tests are provided by cheeseman (2016) to wit: under the foreign substance test, “…the implied warranty would be breached if a person were injured by eating a nail in a cherry pie. this is because a nail is a foreign object in cherry pie. the implied warranty would not be breached if a person were injured by eating a cherry pit in the pie. this is because the cherry pit is not a foreign object in the cherry pie….under the (consumer expectation test), the implied warranty would be breached if a person would be injured by a chicken bone while eating a chicken salad sandwich. this is because the consumer would expect that the food preparer would have removed all bones from the chicken. under this test the implied warranty would not be breached if a person were injured by a chicken bone while eating fried chicken. this is because a consumer would expect to find bones in fried chicken (p. 361). as to which test is applied in a particular jurisdiction one would need to make reference to pertinent state law. however, bassett et al. (2009) in examining texas law, conclude that “…the trend appears to be that if a case were in a gray area, the courts would tend to choose the reasonable expectation test, which involves determining what is reasonably expected by the consumer in the food served. however, as it has been in the past, if the foreign object is clearly „foreign,‟ formal adoption of any one doctrine would not be necessary, because liability would attach due to the product being unfit for human consumption.” finally, it must be pointed out that the ultimate decision-maker as to the reasonableness of the consumer‟s expectations typically would be a jury. both the manufacture and supermarket defendants‟ in porrazzo v. bubble bee foods llc & the stop and shop supermarket company llc (2011) attempted to escape liability from alleged mercury within canned tuna by using the reasonable expectation and obviousness of danger of the presence of this substance in tuna. the judge rejected that premise at the motion to dismiss phase of the case by explaining: in order to succeed on either a failure to warn claim, or a breach of implied warranty claim, a plaintiff must also establish that the danger inherent in the injurious product was not open and obvious and thus something which a reasonable consumer would ordinarily anticipate finding therein. this is not a case where i can say as a matter of law at this stage that the dangers of mercury poisoning from consumption of canned tuna fish are open and obvious, and that an ordinary consumer would necessarily be aware that canned tuna fish contains high levels of methylmercury, the consumption of which could lead to mercury poisoning. this is particularly so because mercury is "an odorless, colorless, tasteless," metal, and thus nothing about the appearance of the fish itself would reveal either that it contains mercury or that such mercury may be dangerous if consumed on a daily basis. there may be many consumers who are unaware that canned tuna fish--which they believe is a low-fat, heart-healthy, source of protein--in fact contains mercury which can, in high quantities, be harmful to their health. thus, although the facts as developed may permit the conclusion, by the court on summary judgment or by the jury at trial, that consumers do reasonably expect mercury in their tuna and understand that it can be harmful, the allegations of the amended complaint do not support such a conclusion, and it is not obvious to the court as a matter of judicial experience and common sense (porrazzo v. bubble bee foods llc & the stop and shop supermarket company llc, 2011). economy, 2018, 5(1): 17-39 27 both defendants also argued that the plaintiff acted unreasonably when consuming so much tuna and thus requested the amended complaint to be dismissed. the court also rejected this line of reasoning and allowed the case to proceed forward by explaining: defendants contend that plaintiff's consumption of its canned tuna fish was unreasonable as a matter of law and that plaintiff's claims therefore cannot survive. (see defs.' mem. at 22 ("[a] diet consisting of nearly 1,500 cans or over 500 lbs of tuna in thirty-three months is undisputedly outside the 'intended use' of the product").) defendants' contention is unavailing. plaintiff's daily consumption of one to two cans of tuna fish cannot, as a matter of law at this stage, be said to be unreasonable.9 indeed, plaintiff was arguably exactly the type of consumer that defendants desired--a consumer who purchased and consumed their product regularly. moreover, even if plaintiff's consumption of such quantities of tuna was unreasonable, defendants still would be liable for failure to warn if plaintiff's conduct was foreseeable (porrazzo v. bubble bee foods llc & the stop and shop supermarket company llc, 2011). 7. the implied warranty of fitness for a particular purpose the implied warranty of fitness for a particular purpose arises when a seller is aware of a particular use of goods by a buyer and the buyer relies on the seller‟s knowledge and judgment to select suitable goods. one need not be a merchant to have this warranty arise; rather the seller must know of the buyer‟s special requirements and that the buyer is relying on the seller to fulfill these requirements (clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). however, if the sale is made according to buyer‟s specifications, for example, perhaps, specialized food items ordered by the buyer to the buyer‟s specifications, the warranty does not arise because the buyer cannot claim reliance on the seller‟s selection of the goods (clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). in a 2017 missouri “fitness” case, the defendant vaughan foods, inc., sold romaine lettuce to schnuck markets, inc. vaughan was aware that the lettuce would be sold to the public for human consumption; it would be placed in schnuck salad bars in numerous locations. the plaintiff (an insurance company representing schnuck) claimed that romaine lettuce that had been provided by vaughan to schnuck around 2011 or 2012 had been contaminated with ecoli and thus caused illness to many people who ate at schnuck salad bars. the plaintiff brought suit against vaughan as well as c&e farms, inc., which had supplied vaughan with romaine lettuce from its farms. the suit included various claims, including breach of implied warranty of fitness for a particular purpose (chartis specialty ins. co. v. vaughan foods inc, 2017). vaughan filed a motion to dismiss, asserting that the claim for breach of implied warranty for a particular purpose was invalid because the lettuce had been used for its normal and ordinary purpose, human consumption for salads, rather than for any particular purpose. in contrast, the plaintiff argued that the lettuce had been used for the particular purpose of being sold in a raw, unprepared state in schnuck salad bars (chartis specialty ins. co. v. vaughan foods inc, 2017). the court explained, a claim for breach of implied warranty of fitness for a particular purpose exists: “[w]here the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods there is unless excluded or modified under section 400.2-316 an implied warranty that the goods shall be fit for such purpose.” (quotations added) (id., pp. 4, 5 (quoting mo. rev. stat. § 400.2-315)). the court went on to clarify that a “particular purpose” is different from the ordinary purpose for which the goods are used in that a particular purpose envisages a specific use by the buyer which is peculiar to the nature of his/her business (mo. rev. stat. § 400.2-315, at comment 2). thus, “when deciding whether a product has been used for a unique purpose, the crucial question is not whether anyone else uses the goods in the same way, but whether the buyer's use is sufficiently different from the customary use of the goods to make it not an ordinary use of the goods” (chartis specialty ins. co. v. vaughan foods inc, 2017). with regard to this case, the court noted that lettuce is ordinarily sold in its raw form and consumed in salads (and that nothing in the plaintiff‟s arguments had stated otherwise). moreover, while “plaintiff attempts to convert the use of lettuce to something unique by virtue of its sale in schnucks‟ salad bars, the court finds that the location does not alter the ordinary use of the lettuce, which is sold in its raw state and consumed in salads” (chartis specialty ins. co. v. vaughan foods inc, 2017). accordingly, the court dismissed the claim of breach of implied warranty for a particular purpose. 8. the privity and notice requirements the concept of privity is a difficult area of warranty law, especially for the injured consumer. originally, pursuant to the ucc privity meant the requirement that an actual contractual relationship existed between the seller and buyer of the goods. consequently, only the actual buyer could sue for breach of warranty and he or she could sue only the immediate seller of the goods. today the privity doctrine has been modified or abolished in many states (clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). an examination of privity is beyond the scope of this article; nonetheless, the authors warn that depending on state law privity may emerge as an impediment to ucc warranty recovery. notice is another technical requirement of the ucc, and yet another problem for the injured consumer, as the ucc holds that in order to recover for breach of warranty the buyer must give the seller notice of the breach within a reasonable time after the breach has been discovered (clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). like privity, the states have made modifications to this strict notice requirement; and again, any detailed examination is beyond the purposes of this article; nevertheless, the authors also extend the same warning to be aware of any privity and notice requirements still in existence in a particular state‟s law. 9. disclaimers another major problem for consumers with warranty law is that the ucc permits sellers of goods to exclude implied warranties from the sales transaction. by means of a disclaimer the seller can lawfully exclude economy, 2018, 5(1): 17-39 28 warranties from the sales transaction. of course, the consumer can still sue for negligence and, as will be seen, for strict liability. for a disclaimer to be operative the ucc says that it must be “conspicuous,” that is, a reasonable person should be aware of it, thereby obviating any “fine-print” disclaimers. also, for a seller to disclaim merchantability the exact word “merchantability” must be used; and to disclaim fitness the disclaimer must be in writing. finally, “catch-all” disclaimers, such as buyer takes the goods “as-is,” in their “present condition,” or “as they stand” will exclude all implied warranties, presuming these disclaimers are conspicuous (clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). 10. damages if the injured consumer can show a sale, a warranty, the goods do not conform to the warranty, and the plaintiff consumer was injured he or she can sue for breach of warranty and recover the following damages: any loss of value in the goods, consequential damages (that is, other damages reasonably foreseeable from the breach of warranty), personal injury damages, including pain and suffering, property damages, and any other incidental damages (such as storage or inspection fees) (clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). c. strict liability in tort 1. definition and core principles in addition to negligence law and warranty law products liability law encompasses a relatively new, significant, frequently asserted, and very pro-consumer doctrine – strict liability in tort for defective products. strict liability comes from the restatement (second) of torts, section 402a. a “restatement” is a compendium of law developed by legal scholars offered to the courts for adoption. restatements are regarded as authoritative legal authority; but they are not case law precedents. so, as a case precedent, the strict liability doctrine was first enunciated by the california supreme court in the famous 1963 case of greenman v. yuba power products. it is thus a state common law doctrine which has been adopted by all the states in the united states (clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). pursuant to strict liability one who sells a product in a defective condition unreasonably dangerous to the consumer or user is liable if 1) the seller is engaged in the business of selling such a product; and 2) the product is expected to and does reach the consumer or user without substantial change in the condition which it is sold (keeton et al., 1984; clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). strict liability is thus “strict,” that is, fault is imputed to the seller even though the seller has exercised all possible care in the preparation and sale of the product. as such, an absence of negligence will not preclude liability (clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). moreover, strict liability applies even though the consumer or user has not purchased the product from, or entered into any contract with, the seller (clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). as emphasized, strict liability as fashioned by the california supreme court is a very pro-consumer doctrine that has many advantages to the injured user or consumer, to wit: 1) there is no need to prove that a defect in the product that caused harm was caused by the negligence of the seller; 2) there is no need to prove that any warranty existed; 3) the injured party need only prove that the goods were dangerously defective when the goods left the seller‟s hands and the defect caused the injury; 4) any privity and notice requirements under warranty law are eliminated; 5) similarly disclaimers are not effective; and, finally, not only the manufacturer, but also wholesalers, distributors, retailers, and any vendors of food are liable (bassett et al., 2009; clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). moreover, the parties “below” the manufacturer on the marking chain are liable even if the product came to them in sealed package or container from the manufacturer (cavico and mujtaba, 2014; cheeseman, 2016). moreover, section 4012a of the restatement (second) of torts (1979) in comment i maintains that a seller of a good is strictly liable for any condition not contemplated by the ultimate consumer that renders the product unreasonably dangerous to the consumer, thereby creating, in essence, a “reasonable expectations” test in strict liability law which of course can be applied to food (getz, 1994; cousineau, 2010). finally, there is a restatement (third) of torts: products liability (1997) which provides some food liability examples in the context of strict liability, as will be seen. the objectives of strict liability are to promote safety, to make sure the injured party is compensated for his or her injuries, and to motivate the sellers of products to obtain insurance (clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). in the context herein the parties on the food chain would be advised to purchase food safety liability insurance (cogan, 2016). yet, despite the pro-consumer bias to the doctrine, strict liability is not an absolute liability type of law. for there to be liability the product must be defective and unreasonably dangerous. however, most courts will assume the “unreasonably dangerous” aspect of the doctrine if the product is defective (clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). accordingly, finding the “defect” in the product is the key to liability. a product can be defective in three ways: 1) it is flawed; 2) it lacks an adequate warning; or 3) the product is defectively designed. 2. nature of a “defect” a. flawed products the failure of a manufacturer to adhere to its own manufacturing standards will result in a product being deemed “flawed” and thus defective (keeton et al., 1984; clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). as emphasized, this is not a negligence action; no evidence is required as to how and why the standards were not complied with; rather, the injured party “simply” compares the product (or what is left of it) to the manufacturer‟s own standards for that product; and if the latter were not followed the product is flawed (keeton et al., 1984; clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). of course, expert testimony will likely be required for that comparison. accordingly, in a food or beverage case involving an adulterated or contaminated product or an object in a product the injured consumer would have to show that the manufacturer violated its own rules, regulations, standards, and/or procedures in making, storing, preparing, or serving the product. for example, in the case of wachtel v. rosol (1970) an egg salad sandwich was deemed defective and unreasonably dangerous because it contained salmonella. economy, 2018, 5(1): 17-39 29 in sec nat'l bank v. abbott labs (2013) the plaintiff claimed that the infant formula manufactured by abbott had deviated from the formula‟s intended design due to the presence of e. sakazakii (a bacteria). in support of its claim, the defendant cited another court‟s decision in which abbott was the defendant under similar facts burks v. abbot laboratories (639 f. supp. 2d 1006, 1016). in that case, the court found that because the infant formula is a non-sterile product and is expected to be contaminated, the plaintiff failed to show that abbott's product deviated from its intended design. however, the court here disagreed, explaining that “this court does not think that the presence of harmful bacteria in baby formula is "expected" by the average, reasonable consumer” (sec nat'l bank v. abbott labs, 2013). in its analysis, the court explained that the other court‟s decision appeared to depend on the fact that the fda had reported in 2003 that e. sakazakii was present in 23% of this type of formula according to tests, making such presence somehow common knowledge or acceptable. likewise, in this case, the defendant had argued that, the general rule that a "manufacturing defect . . . 'exists only where an item is substandard when compared to other identical units off the assembly line.'" docket no. 56, 3 (quoting wright v. brooke group, ltd. (652 n.w.2d 159, 178-79); (sec nat'l bank v. abbott labs, 2013). to this assertion, the court responded: though defendant does not draw this citation to its logical conclusion, the implication is clear: their product is intended to contain e. sakazakii, as well as other potentially harmful bacteria. first, if 75% of a product does not contain bacteria and 25% of a product does, elementary statistics dictates that the 75% without the bacteria constitutes the norm while the 25% with the bacteria constitutes a deviation therefrom. second, a common defect, such as the persistent contamination of a food product with bacteria, if generally unknown and proven harmful, should increase a manufacturer's total liability, rather than eliminate it sec nat'l bank v. abbott labs (2013). further, the court reasoned, since the defendant admitted that it has testing procedures to test for the presence of e. sakazakii and that it discards batches of the formula found to contain the bacteria, the presence of e. sakazakii is not part of the intended design, and its presence thus constitutes a deviation (sec nat'l bank v. abbott labs, 2013). finally, the court asserted that the other court ignored the primary test for determining whether a product has deviated from its intended design: “a determination of whether the average, reasonable consumer, rather than government regulators or industry insiders, would expect a product to have the alleged defect” (sec nat'l bank v. abbott labs, 2013) restatement (third) of torts: products liability, § 2, comment g). the court explained, while expressly rejecting consumer expectations as a test for whether a product has a design defect, the restatement (third) of torts: products liability, notes the importance of consumer expectations in relation to manufacturing defects and, more specifically, food product defects; it provides: on occasion, it is difficult to determine whether a given food component is an inherent aspect of a product or constitutes an adulteration of the product. whether, for example, a fish bone in commercially distributed fish chowder constitutes a manufacturing defect within the meaning of §2(a) is best determined by focusing on reasonable consumer expectations (sec nat'l bank v. abbott labs, 2013); restatement (third) of torts: products liability, § 2, comments g and h). the plaintiff had alleged that neither the mother of the infant nor the ordinary consumer would reasonably expect the formula to contain e. sakazakii, and the court agreed. despite that fact that the defendant had made no secret that the formula was not sterilized, “the average consumer would not, from that, infer that its baby formula contains life-threatening bacteria” (sec nat'l bank v. abbott labs, 2013). as such, the court found that there were sufficient facts to establish a “defect” claim (sec nat'l bank v. abbott labs, 2013). the nature of the defect was central to the court‟s evaluation of a strict liability claim against the manufacturer, distributor and retailer of a candy product in gentry v. the hershey company liberty distribution and petco animal supplies inc (2010). the facts, as disturbing as they are, were summarized by the court as follows: on november 28, 2007, plaintiff pulled a york peppermint pattie out of the candy stand at the cookeville petco store. at the time, she did not notice anything unusual about the product or its packaging and she proceeded to walk around the store. plaintiff first noticed a problem with the york peppermint pattie after opening the package and biting into the candy. when she bit into the pattie, she noticed something "crunchy" in her mouth which was not the expected texture of a york peppermint pattie. when plaintiff looked at the pattie, she observed at least one wormlike creature and black dots which she assumed to be feces. upon discovering the infestation, plaintiff showed the candy to the store manager on duty. plaintiff then visited her doctor, complaining of nausea and vomiting, and was treated for food poisoning. plaintiff claims that discovering the larvae in the candy was traumatic and she has undergone a steady and intensive regimen of psychological counseling, which continues to date. petco employees routinely check expiration dates of the candies for sale to ensure that they have not expired, and are supposed to see if any of the candy has torn or open packaging. the york peppermint pattie at issue in this case did not have an expired expiration date, and it is unclear whether there were any tears or holes in the packaging before plaintiff opened the wrapping. after the subject incident, the general manager at petco's cookeville store, kelly darty ("ms. darty"), was called at home. upon her arrival at work the following morning, ms. darty opened approximately ten remaining york peppermint pattie packages in the display and observed larvae or webbing inside approximately four of those packages. she then called liberty distribution to complain about the infestation and was allegedly told to discard the product and a replacement order would be shipped to the store…..the infestation in this case has been described as that of an indian meal moth or an almond moth. both types of moths are considered infesting moths in grains, including dog food, bird seeds, and other types of pet foods (gentry v. the hershey company liberty distribution and petco animal supplies inc, 2010). economy, 2018, 5(1): 17-39 30 the manufacturer and distributor‟s summary judgment was granted because the nature of the defect did not exist while in the care, custody, and control of these defendants. the court explained: “there is no evidence that the york peppermint pattie at issue in this case was in a defective or unreasonably dangerous condition when it was in the hands of either hershey or liberty distribution. quite the contrary, all experts in this case agree that any infestation of the york peppermint pattie occurred while the product was in the exclusive possession and control of petco” (gentry v. the hershey company liberty distribution and petco animal supplies inc, 2010). as to petco, the plaintiff‟s strict liability claim failed since the applicable tennessee product liability act of 1978 permitted a strict liability action against a seller only when the seller was also the manufacturer, or when the manufacturer cannot be located and served, or when the manufacturer has been declared judicially insolvent. however, the plaintiff‟s other causes of action were, in part, actionable against petco and the case proceed forward against the pet store giant. b. failure to warn a product can be defective if it lacks a warning so that the consumer is aware of a danger in the product (keeton et al., 1984; clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). however, there is no legal obligation to warn of dangers which a reasonable and rational consumer should be aware of, for example, that alcohol even in a caffeinated beverage product is dangerous if over-consumed (cook v. millercoors llc, 2011). a failure to warn case illustration is the california supreme court decision in livingston v. marie callender‟s inc (1999) where the court ruled that a seller of food is potentially liable for the failure to warn of an ingredient in the food to which a substantial number of the population are allergic, for example, msg. of course, the famous (“infamous” perhaps) failure to warn case (legal “saga” perhaps) is not an adulterated or contaminated food or beverage case. rather, it was the mcdonald‟s failure to warn of very hot coffee case (actually very, very hot coffee); and there was at one point a decision in favor of the injured plaintiff who was granted by the jury a $200,000 compensatory damages award and a $2.7 million jury punitive award; but the decision was appealed by both sides resulting in a confidential financial settlement (segal, 2006). in sec nat'l bank v. abbott labs (2013) the plaintiff sued abbott laboratories, the manufacturer of powdered infant formula, arguing that the formula was the source of the bacteria that caused bacterial meningitis which led to the brain damage of a baby. among other claims, the plaintiff asserted a claim for negligent failure to warn. abbott sought summary judgment on this claim, arguing that regardless of the adequacy of abbott's warning, the warning did not proximately cause the baby‟s illness because the baby‟s mother's decision to feed the baby the formula was entirely independent of abbott's warning. specifically, abbott pointed out that the mother did not read the label warnings nor rely upon them when making the decision to use the formula. as such, abbot argued, the warning language did not enter the mother‟s decision-making process when deciding to feed the formula to the baby (sec nat'l bank v. abbott labs, 2013). interesting, the court explained that pursuant to a 2002 iowa supreme court case, there was no longer a distinction under iowa law between strict liability and negligence in the context of failure to warn claims. as such, the court chose to characterize the negligence claim not as negligence, but rather, as a “warning defect” claim (sec nat'l bank v. abbott labs, 2013). as with negligence, the court explained that the causation element of a warning defect claim has two components: cause in fact and legal causation. the court further dictated that although abbott made its argument for summary judgment in terms of lack of evidence of proximate cause, the nature of the challenge actually was based on factual causation. this was the case because the argument was that the mother did not read the label warnings nor rely upon them when making the decision to use the formula (sec nat'l bank v. abbott labs, 2013). the court rejected abbot‟s claim that it was entitled to summary judgment; specifically, the court stated that the “argument fails because it misconstrues the nature of "factual causation" in a warning defect case. the question is whether the product was defective because it provided inadequate warnings and whether the omission of reasonable instructions caused the harm” (sec nat'l bank v. abbott labs, 2013). furthermore, the court stated that, in the context of a failure to warn claim, factual “cause can be established by showing a warning would have altered the plaintiff's conduct so as to avoid injury.'" mercer v. pittway corp., 616 n.w.2d 602, 624 (quoting lovick v. wil-rich, 588 n.w.2d 688, 700). indeed, this rule is entirely consistent with restatement (third): products liability § 2(c), which frames the definition of a warning defect, in part, in terms of whether "the foreseeable risks of harm posed by the product could have been reduced or avoided by the provision of reasonable instructions or warnings," and restatement (third): products liability § 1, which frames the causation element in terms of whether the omission of reasonable instructions or warnings caused the harm (sec nat'l bank v. abbott labs, 2013). the court explained that abbott's contention that the mother did not read the label (or did not consider the warnings on the label) does not destroy the warning defect claim. the court reasoned that the plaintiff had created a genuine issue of material fact as to causation when the mother stated that she would not have fed the baby the formula if the label had stated it was unsuitable for an infant under 28 days, that it may contain harmful bacteria, or that liquid formula was safer (sec nat'l bank v. abbott labs, 2013). failure to warn theories sounding in strict liability or negligence do not always produce the same outcomes relative to food manufacturers and supermarket retailer defendants for the very same deleterious food item. in porrazzo v. bubble bee foods llc & the stop and shop supermarket company llc (2011) as to the plaintiff‟s “failure to warn” strict liability claim against both bubble bee foods, the manufacturer of the canned tuna containing levels of mercury, and the supermarket seller of the same tuna cans survived the defendant‟s motion to dismiss. the judge explained that the: plaintiff here has adequately set forth a strict liability failure to warn claim. as noted above, he has established both injury and proximate cause, and has sufficiently alleged that the dangers of mercury poisoning from consumption of canned tuna fish are not open and obvious. further, there is no suggestion at this stage that this particular plaintiff was, in fact, aware either that canned tuna fish contained methylmercury or that there were risks inherent in the consumption of fish which contained high economy, 2018, 5(1): 17-39 31 concentrations of this substance. see colon ex rel. molina, 199 f. supp. 2d at 85 ([hn36] "a failure-to-warn inquiry focuses on three factors: obviousness of risk from actual use of product, knowledge of the particular user, and proximate cause."). finally, the fact that methylmercury in tuna may be "naturally occurring" does not necessarily mean defendants cannot be strictly liable for failing to warn customers of same (porrazzo v. bubble bee foods llc & the stop and shop supermarket company llc, 2011). however, the negligence claim for “failure to warn” of the same potentially dangerous condition of the same canned tuna could be had against bubble bee foods as a manufacture but not the supermarket seller of the tuna. the court explained it this way: plaintiff has also adequately alleged a negligent failure to warn claim against bumble bee, because "[r]egardless of the descriptive terminology used to denominate the cause of action (viz, 'strict liability' or 'negligence'), where the theory of liability is failure to warn, negligence and strict liability are equivalent." [citing case precedent]. defendants' motion to dismiss plaintiff's claim against bumble bee for negligent failure to warn is thus likewise denied. defendants are correct, however, that plaintiff's negligent failure to warn claim cannot be sustained against stop & shop. under a negligence theory of liability, a "retailer . . . can be held liable . . . for the sale of a defective product or for failure to warn only if it fails to detect a dangerous condition that it could have discovered during the course of a normal inspection while the product was in its possession." [citing case precedent] consequently, defendants' motion to dismiss plaintiff's claim (within count ii) for negligent failure to warn against stop & shop is granted (porrazzo v. bubble bee foods llc & the stop and shop supermarket company llc, 2011). c. design defects a product is defective if it is defectively designed. note that the product is not necessarily flawed; it is doing what it is supposed to do; and the warnings are adequate. nonetheless, under strict liability law the issue is whether the design of the product is defective. in order to determine if a product is defectively designed the courts apply three tests: 1) the state-of-the-art, 2) practical feasibility, and 3) economic feasibility. regarding the first test, the courts would instruct a jury to go back in time to when the product was made (and not at the time of the lawsuit) and ask, based on the level of science, technology, and engineering then in existence, whether the product could be made safer. as to the second test the issue is whether the product could be made safer and still function as a product of that type. for example, a knife could be made very safe but it would be useless as it would not cut! lastly, could the product be made safer from an economic feasibility perspective? that is, could the product be made more safe and still be affordable, perhaps as an “economy product.” lipp and hafer (2014) provide an example of a possible design defect from the restatement (third) of torts: products liability, to wit: when the recipe for potato chips contains a dangerous chemical preservative for which there is an alternate preservative. the object of strict liability is to advance safety and not to bankrupt the manufacturer. any one of the aforementioned types of defects will be sufficient to trigger strict liability (keeton et al., 1984; clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). food and beverages are certainly counted as products for strict liability analysis. as a result of consumer activism and also as a possible concern about products liability lawsuits, many companies, for example kfc and dunkin‟ donuts, have made their products healthier and safer by eliminating trans-fats (caruso, 2006; jewell, 2007). lawsuits that allege design defects against a food manufacturer appear to be the most difficult claims for plaintiffs to prove (benton, 2012). this is because “a food product is defective in design only when there is a foreseeable risk of harm, which could have been avoided by using an alternative design. in the case of foods (excluding meat and poultry), there is only one way to grow them; i.e., farming. further, because of section 103 of the food safety modernization act (fsma), if there is an alternative design that is less dangerous to consumers, it will likely have already been in place and approved by the fda” (benton, 2012). 3. defenses the main defenses to strict liability are the aforementioned assumption of the risk doctrine, disregarding instructions, and the misuse and/or abuse of a product (clarkson et al., 2012; cavico and mujtaba, 2014; cheeseman, 2016). however, it is worth noting that if the grocery store was not owned or operated by a defendant when the alleged defective food product was sold to the customer, this would defeat a claimant‟s case sounding in strict liability. this was explained in campbell v. supervalu inc (2008) where the alleged e. coli tainted meat was sold by the prior owner of the grocery store, and thus the current owner could not be held liable. in granting the grocery store‟s summary judgment the court explained: under the rubric of strict liability, [the campbells] must prove that: (1) the product was defective and unreasonably dangerous; (2) the defective condition existed at the time the product left [supervalu's] control; and (3) the defective condition was the proximate cause of [michael's] injuries." [citing case precedent]. once again, supervalu asserts that the ground beef was never in their "control" so as to impose liability. because the campbells have not shown on this record that supervalu was either the seller of the ground beef, or that the ground beef was tainted, or for that matter that it caused michael's injury, we believe that summary judgment must be granted (campbell v. supervalu inc, 2008). 1. preemption by statute preemption is a legal doctrine that holds that when a federal law occupies a regulatory field by means of extensive and pervasive regulation congress, in effect, has “spoken” on the matter, and thus the federal law supersedes any conflicting state law (cavico and mujtaba, 2014; mortazavi, 2016). a relevant preemption case to the analysis, though not a direct precedent, is the 2009 supreme court decision in wyeth v. levine. in the case a plaintiff who had to have her arm amputated argued that the defendant manufacturer, wyeth, argued that the company was negligent and strictly liable for the defective product for not providing a warning of the risk of injecting the drug directly into her arm. the jury found for the plaintiff; and the vermont supreme court affirmed the decision. the company appealed to the u.s. supreme court, arguing that the fda‟s drug labelling regulations economy, 2018, 5(1): 17-39 32 and requirements pursuant to the food, drug, and cosmetic act preempted her state product liability claims (wyeth v. levine, 2009). the supreme court, however, refused to rule that the fda regulatory scheme for labelling drugs preempted state law because of the lack of an express congressional intent to preempt state law (wyeth v. levine, 2009). the supreme court explained: “if congress thought state-law suits posed an obstacle to its objectives, it surely would have enacted an express preemption provision at some point during the fdca‟s 70year history….its silence on the issue, coupled with its certain awareness of the prevalence of state tort litigation, is powerful evidence that congress did not intend fda oversight to be the exclusive means of ensuring drug safety and effectiveness” (wyeth v. levine, 2009). to compare, mortazavi (2016) points to a 2013 federal district court case, lateef v. pharmavite, where the plaintiff‟s breach of warranty and other state claims based on the alleged mislabeling of vitamins as vegetarian were deemed to be preempted by the federal law, specifically the national labeling and education act (nlea), because nela contained an express preemption clause to ensure the uniform labeling of food products. accordingly, benton (2012) argues that one way to improve food safety would be to allow the food safety modernization act to preempt state regulations and state laws regarding food safety, which presumably would include state common law lawsuits for negligence and strict liability as well as state statutory warranty law pursuant to the uniform commercial code. such a preemption policy, benton (2012) argues, “could promote economic interests by keeping food manufacturing costs low and thereby allowing consumers to continue purchasing affordable food products.” there is a precedent on the federal level, benton (2012) points to, and that is the preemption effect of state claims by the food, drug, and cosmetic act (fdca). benton (2012) explains that such preemption for food, …would also bring the fsma closer in line with the fdca, which preempts state claims regarding medical devices where the state law adds or takes away from the fdca. the policy behind limiting the liability of medical device manufacturers was to spur innovation, even though individuals are sometimes injured when using medical devices. such a policy promotes medical advancement and economic interests (pp. 49-50). there is another preemption precedent, moreover, though not quite as direct as the fdca one, on the state level. this preemption situation deals with negligence and harassment claims brought by employees against their employers for harms and injuries caused by fellow employees. many state courts have held that these common law and civil rights claims are preempted by state workers‟ compensation laws (cavico et al., 2016). thus far, the legal analysis provided by the authors first explained and illustrated the basic principles underlying the three main legal theories – negligence, warranty, and strict liability – used by injured consumers to bring lawsuits against manufacturers, supermarkets, and grocers for contaminated and unwholesome food and beverage products. then the authors presented and explicated recent case law decisions against the aforementioned entities based on the three legal theories. however, it needs to be pointed out the courts seem to use the terms “merchantable,” “wholesomeness,” and “fitness” interchangeably; and, moreover, as noted, a “reasonable consumer expectations” test arises in section 402a the restatement (second) of torts and thus finds its way into strict liability law as well as warranty law, all of which adds to the confusion in this area of food and beverage liability law (getz, 1994). in the next section of the article the authors discuss the implications of this legal environment and the preceding legal analysis, first generally and then in the context of the three legal theories. 5. implications for management a. generally today, supermarkets and grocers as well as traditional restaurants are now competing for consumers who want freshly-prepared meals as opposed to conventional “home-cooking” or even standard restaurant meals. the result has been an increase in the amount of these “fresh” offerings as well as their complexity. these more complicated meals require more specialized cooking and serving practices. consequently, supermarkets, grocers, and restaurants now have to deal with heightened food safety issues as the first two entities are now acting like mini-restaurants and the traditional restaurants are now doing much more take-out business and thus acting like grocers. the authors discuss the implications of their legal analysis for employers and managers in the frame of the three major legal theories adduced herein. first and foremost, one must be aware that manufacturers, supermarkets, grocers, as well as restaurants, and other entities on the food chain are not guarantors or insurers. that is, the injured must be able to utilize and support from legal, evidentiary, and proof and persuasion grounds one of the three legal theories discussed herein or other legal avenues to obtain redress. for example, pursuant to negligence law “merely” ordinary care and prudence are required. and although there are beneficial legal doctrines, such as res ipsa loquitur and negligence per se, and although strict liability is “strict,” the consumer, regardless of the legal theory being employed, still must be able to demonstrate that his or her foodborne illness was caused by the unwholesome food or beverage. the mere fact of eating certain food or consuming a certain beverage and then getting ill is insufficient; rather, causation – factual and proximate – is required. b. pursuant to negligence law and practice first to be discussed are the implications that arise from negligence law. pursuant to negligence principles a seller or provider of food has a duty to act as a reasonably prudent person knowledgeable and skilled in the culinary arts and sciences of food selection, storage, preparation, and cooking, including the detection and removal of harmful substances from the food. knowledge of government safety standards is essential since failure to comply with government standards is evidence of negligence. the wall street journal (haddon and nassauer, 2016; newman, 2016) provided two examples of cooking safety standards to illustrate the complexity of this area: first, chicken prepared for a chicken biryani dish on a hot buffet must be cooked at least 165 degrees for a minimum of 15 seconds, then “cooled” two hours to 70 degrees in order to prevent bacteria, like salmonella, for occurring; and second, rice prepared for a cold mediterranean pilaf salad must be cooked to 135 degrees, then “cooled” for two hours to 70 degrees, and chilled for an additional four hours at 41 degrees in order to prevent spores from growing economy, 2018, 5(1): 17-39 33 and thereby contaminating the food. another example involves oysters, where temperature control is critical. in order to prevent the fast-growing vibrio vulnificus bacteria from contaminating the oysters they must be cooled within two hours after being taken out of the water to bring their internal temperature down to 55 degrees (kestin, 2016). consequently, the failure of an entity on the food marketing chain to comply with industry, government, or its own standards of manufacture, storage, handling, preparation, and serving of food or beverages is evidence of negligence. causation, both factual and proximate, is a required element to a negligence claim (as well as warranty and strict liability). yet demonstrating causation likely will be a challenge for the injured consumer, especially in foodborne illness claims. cogan (2016) explains the problem, to wit: “…the victim cannot connect the foodborne illness with a particular source, he or she suspects a particular food source but no longer possesses the evidence (i.e., the food is gone and there are no leftovers), no lab tests were conducted to confirm the presence of foodborne pathogen, or the victim simply cannot remember what he or she ate.” the source problem is particularly acute when it comes to foodborne illnesses caused by oysters as it is very difficult to tell where the oysters come from and thus who is accountable. as such, there are uncertainties as to where the oysters are harvested, including perhaps closed and prohibited areas; restaurants serve oysters purchased from multiple dealers; mislabeling and relabeling by dealers occurs despite fda regulations, inspections, and fines; gulf oysters are substituted for northeast oysters because the former are cheaper; and “it‟s not uncommon for oysters to go through two or more dealers before being sold to a restaurant” (kestin, 2016). the doctrine of res ipsa loquitur was created to benefit injured plaintiffs who could not obtain direct evidence of a lack of due care to satisfy the breach of duty element of a negligence lawsuit. however, benton (2012) emphasizes that the burden of proof for an injured plaintiff is a “heavy one” in a food situation under res ipsa loquitur. benton (2012) lists several reasons, to wit: 1) proving that the food became adulterated and contaminated while under the defendant‟s control is a difficult task “…since the food industry is large and complex, and a product can pass through the hands of many different people or companies before reaching the grocery stores or restaurants.” 2) a person with preexisting illnesses, for example, a stomach disorder, would have to show by means of expert medical witness testimony that his or her particular illness resulted from the defendant‟s food or beverage product and not any other existing medical illness. 3) for a plaintiff who has eaten previous meals the burden will seem “overwhelming” because “…he must also prove that everything else he ate on the same day he consumed the manufacturer‟s product, or even the same week, did not cause his illness. accepting the assumption that an average person eats at least three times a day over a seven-day period, there could be at least twenty meals, not counting the manufacturer‟s product, which the plaintiff faces the challenge of disqualifying as the cause of his illness.” 4) another variable which compounds the problem for the plaintiff is “…whether there is any possibility another agent might have caused the contamination before the product reached the plaintiff, or whether the plaintiff caused the illness through his own negligent preparation or even storage of a product.” 5) finally, the food system in the u.s. is “complex,” meaning that “by the time a food product has reached the supermarket it has traveled countless miles and been handled by several players, from distributors to brokers. any one of these players might have acted negligently and caused the plaintiff‟s illness, rather than the manufacturer.” cogan (2016) agrees: undoubtedly, our highly complex food chain contributes to the problem. foodborne pathogens can infect food at any point in the production and distribution process. contamination can occur at a farm, during transport, at a processing plant, in a restaurant, in a supermarket, or even in our own homes. industrialized food production, long supply chains, and market pressures to reduce food production costs all increase the risk of contamination by foodborne pathogens. as food processing or shipping systems have continually grown larger and more efficient, foodborne illnesses have become a national problem (pp. 1504-1505). therefore, benton (2012) concludes as follows: “thus, while res ipsa loquitur may seem to be a viable tool for plaintiffs who would bring a claim against a food manufacturer whose product they suspect made them sick…courts apply a very stringent set of rules that make it difficult for plaintiffs to succeed.” c. pursuant to warranty law and practice the second series of implications are those derived from warranty law. the trend in the jurisdictions away from the traditional “foreign/natural” test to determine whether food/beverages are “fit for human consumption” under the ucc to the “reasonable expectations” test gives the injured consumer more leeway in bringing a lawsuit as well as affording a jury (perhaps sympathetic to the injured consumer) the power to answer the “reasonableness” of the consumer‟s expectations. a consumer would no longer be under some type of duty of care to break apart food, inspect it, seek out and hunt foreign objects, or cut, slice, or pick at food with a knife or fork that was meant to be eaten out of hand. eller (1993) criticizes the foreign/natural test as being “arbitrary and capricious” and applauds jurisdictions that have adopted the “more principled approach” of “reasonable expectations.” the key, therefore, is simply what the “reasonable” consumer would expect in his or her food or beverage. regarding the labeling component to “merchantability,” benton (2012) points out that food producers are not likely to place labels on fruits and vegetables concerning the possible presence of bacteria; but benton (2012) also emphasizes that “consumers do not buy fruits and vegetables that can lead to kidney failure and death.” d. pursuant to strict liability law and practice the third part to the discussions of legal consequences deals with the tort of strict liability. generally, a food strict liability claim would consist of the following elements: 1) the food is in some way “defective” and thus is unreasonably dangerous to the consumer; 2) the food is expected to and in fact does reach the consumer without any substantial change in its condition; 3) the food caused (factually and proximately) the consumer‟s illness or injury; 4) the defendant was the “seller” (i.e., on the food-chain); and 5) the consumer sustained damages (lipp and hafer, 2014). a product is defective if it is “flawed.” as noted, the manufacturer must adhere to its own rules and standards. as such, as benton (2012) points out: “thus, there is an incentive for food manufacturers to remain in compliance with their own established standards. such standards must be reported to the fda and updated every three years under the fsma anyway.” economy, 2018, 5(1): 17-39 34 regarding the failure to warn component to strict liability in tort if there is a lack of a warning or an adequate warning (or labels, branding, or instructions) that indicated that the food or beverage product was unsafe or dangerous tort liability of the manufacturer (or any entity on the food marketing chain) could ensue. lipp and hafer (2014) in examining colorado law, provide the example of a required warning when there is an unknown ingredient that can cause harm, for example, that the dye applied to the skin of oranges contains a well-known allergen. however, as emphasized, warnings are required only when it would be reasonable to do so; and thus there is no liability for failure to warn of widely known risks based on colorado law, for example, that some consumers may be allergic to strawberries, or that the excessive consumption of alcoholic beverages can be injurious to one‟s health and safety (lipp and hafer, 2014). the supreme court of illinois especially advises that warnings would be most appropriate in a jurisdiction that uses a “reasonable expectations” standard for liability, for example, by warning that pecan shells could be found in chocolate-covered pecan candy (jackson v. nestle-beich inc, 1992). nevertheless, benton (2012) foresees a major practical and legal problem with the utilization of this theory as a means of recovery for the injured consumer, to wit: the plaintiff would have to prove that a reasonable person in the manufacturer‟s position would have provided a warning about the product. however, food manufacturers are not likely to place a product on the market they believe will cause a food-borne illness, and products such as fruits, vegetables, and nuts do not easily lend themselves to the ready discovery of whether they are adulterated in the same way that alcohol is known to be dangerous. in addition, food manufacturers are highly unlikely to put a warning label on such products because such a label would be off-putting to consumers. consumers want to feel confident when they bit into an apple that it is completely safe. consumers cannot do this with the thought of a warning label in the back of their mind that they might become sick later. if this were the case, they would likely not buy the product (pp. 46-47). as to the design defect aspect to this tort, it appears that it is going to be challenging to demonstrate that food and beverages are defectively designed so that they are unreasonably dangerous to the consumer. yet can food and beverages be made healthier? the answer is likely “yes”? but are food and beverages defectively designed products because they could be made more healthful? the answer is likely “no” due to the requirements for design defect liability under strict liability. in particular, defining what types of food and beverages are healthy or unhealthy or stating which types could be made more healthful is an exceedingly difficult task indeed (campos, 2015). what are the alternative ingredients to food and beverages? are they safer alternatives? benton (2012) adds that “in the case of foods (excluding meat and poultry), there is only one way to grow them, i.e., farming.” moreover, campos (2015) warns that “nutrition science is beset by contradiction, uncertainty, and complexity. under the circumstances, the tendency of public health authorities to divide food into „good‟ and „bad‟ categories, and to prescribe homogeneous dietary patterns to heterogeneous populations, is an example of both intellectual hubris and overweening public policy.” 6. recommendations for management contaminated food that makes the consumer ill can make the food manufacturer and the other entities on the food chain sick as well. food businesses, their shareholders, employees, and other stakeholders know full well that the slightest outbreak of a foodborne illness can seriously damage the reputation of a food business and consequently result in severe financial harm. accordingly, based on the discussion of the implications of the preceding legal analysis, the authors‟ own knowledge and experience, as well as legal and management commentary, the authors offer the following suggestions to employers and managers to avoid liability. first, the authors would like to stress one very basic and very important recommendation – thoroughly wash your hands with warm water for at least 15-20 seconds. obviously, employees working with food must be told in strongly, clearly, and regularly to wash their hands while working with and handling food and beverage items. certain food items also must be rinsed thoroughly, for example, lettuce. another very basic recommendation is that when dealing with food to cover one‟s hair. in addition to improper hygiene by food handlers, managers must be aware of the main causes of foodborne diseases – improper storage, improper cooking and preparation, especially not heating or refrigerating food properly, cross-contamination, and otherwise inadequate handling of food and its ingredients (cogan, 2016). a critical feature in avoiding legal liability concerns the proper storage of food. when food is received from the vendor, it first needs to be immediately inspected by the person in charge of deliveries. the food items must be examined in a scrupulous manner to ensure that acceptable standards have been adhered to before being removed from the shipping vessel. the food then needs to be washed and stored into clean, imperforated, plastic containers, which are sanitized, and then labeled according to the specific items, and dated. all storage items, regardless if they are dry goods (such as flour, salt, sugar), or perishable goods, (such as milk, eggs, or cheese) should be organized using the fifo system (first-in, first-out) and stored with the older items in front of newer ones. all consumable items, regardless if they are still good, need to be discarded 12 months after delivery. foods, which are time and temperature controlled for safety, are referred to as “tcs.” these items include meat, fish, cooked foods, vegetables, fruits, dairy products, infused oils, and other items not considered dry storage, meaning they cannot be stored at ambient temperature (room-temperature). tcs items should always be stored out of the food danger zone of 41°f (5°c) – 140°f (60°c). items received should never be over 41°f (5°c) (servsafe, 2016). the person receiving tcs items should have a calibrated instant-read thermometer; and he or she should check all items for quality, quantity, and temperature. all tcs foods should be stored in a refrigerator or freezer in a certain order to prevent cross-contamination. meat/fish, dairy, and vegetables should all be stored separately. when storing a “protein” meat or fish, the refrigerator should be organized in this order, to wit: 1) ready to eat foods; 2) seafood; 3) whole cuts of beef, lamb, veal, pork; 4) ground meats and ground fish; and 5) whole and ground poultry (servsafe, 2016). the refrigeration order for the vegetables and fruits is less strict, but order also should have a descending order, to wit: 1) the ready to eat foods; 2) already cut foods for preparation; 3) vegetables/fruits which do not have an allergy association; and 4) vegetables/fruits which do have a possible allergy association. economy, 2018, 5(1): 17-39 35 today, modern restaurants and supermarkets have many foods which are storage vacuum-packed. some even cook their items “sous-vide” (french for “under vacuum”). when vacuum packing foods, the chef needs to make certain that the food is very cold 38°f (3.3°c) or under. the food item can be seared, but it must be chilled immediately and thoroughly. the chilled food needs to be sealed and and either cooked immediately or stored at 38°f (3.3°c) or below. when cooking sous-vide, the food must be cooked to the desired “doneness,” then removed from the bag and served. conversely, the food can be cooked, left in the bag, and chilled in an ice-bath, (at a minimum of 50% ice, but the more ice the better), to 34°f (1°c), then refrigerated or placed in a freezer (keller, 2008). the food must be stored in the refrigerator (chilled first if it has been cooked) at or below about 38°f (3.3°c) or frozen. food must be in the refrigerator before using any vacuum-packed items. food vacuum-packed for storage, will last considerably longer in the refrigerator than wrapped in plastic; and the food also holds up better in the freezer. the main reason is because of the removal of oxygen from the food‟s environment. lack of oxygen greatly reduces the activity of many bacteria that cause spoilage. in the freezer, the vacuum-sealing keeps the food from losing moisture to the air, preventing freezer-burn (keller, 2008). cooking and then storing food “sous vide” has the additional benefit of detracting airborne bacteria from a cutting board or a cook‟s hands, and these actions will further delay spoilage. storing food this way helps to maintain the shape of the food and it is also neater, cleaner, and more hygienic (keller, 2008). regardless of the method of storing tcs food items, or the cooking method used, the maximum time-period for food storage in the refrigerator is 7 days. “haccp” or hazard analysis critical control points, which all usda and fda inspected facilities must use, have additional rules, which should be adopted by all restaurants, supermarkets, and manufacturers. two examples are: 1) all cold items should be 41°f (5°c) or lower; 2) the temperature of a cooling cooked item should reach a minimum temperature of 70°f (21.1°c) in the first two hours with four hours to degrees of the temperature from 70°f (21.1°c) to 41°f (5°c) or under (servsafe, 2016). another problem food area that can result in legal liability is cross-contamination. cross-contamination can occur in the storage of food and also within the service of the kitchen and the restaurant staff during prepping or during service. cross-contamination can occur with an employee‟s hands, customer interaction, or contact with infected surface areas. although cross-contamination is mainly associated with items such as raw chicken, with a cooked product, often overlooked, is cross-contamination associated with food allergies. to reduce the chances of cross-contamination, recognition must be given to items which have a high chance of salmonella, such as chicken and turkey products; items that will not be cooked; and items that have allergy associations. employees who are handling these items need to use plastic gloves, wash their hands immediately after disposing the gloves, and clean and disinfect the work-stations (servsafe, 2016). professional kitchens should have hard-plastic cutting boards, which are dishwasher safe, and the employees should use different color cutting-boards to identify exactly what items are to be used on the associated colorcutting board. for example, a system which establishes the fixed-rule that raw poultry will only be cut on an orange cutting board can alleviate many cross contamination problems. having a system like this in place will help trained employees have immediate recognition if someone is not using the right-colored cutting board. a reason to have hard-plastic dishwasher-safe cutting boards as opposed to wood cutting-boards is that the wood board has no real way of being totally disinfected. when put into a dishwasher the wood board will likely warp and bacteria can develop in the nicks in the wood leading to a bacteria-infused cutting-board. in the food production-world there are eight foods categories that account for 90% of all allergies, and that by law must be disclosed on the food items nutritional fact panel. the eight foods categories are anything that contains milk, eggs, fish, crustacean shellfish, tree nuts, peanuts, wheat, and soybeans. the name of the food source of a major food allergen must appear in parentheses following the name of the ingredient; for example: "lecithin (soy)," "flour (wheat)," "whey (milk)." or they must appear immediately after or next to the “list of ingredients” in a "contains" statement, for example: "contains wheat, milk, soy” (servsafe, 2016). also, it is recommended that food allergy sufferers immediately inform their restaurant or server or supermarket sales clerk of their allergy to alleviate possible food contamination. the server or sales clerk will then inform the chef and staff of the allergy, who will then need to use separate tools, cutting boards, and other kitchen items, so every step is taken to avoid possible cross contamination. another possible way that cross-contamination can occur is if the customer happens to touch something unintentionally either with his or her hands, utensil, or bodily fluids. cross-contamination can easily happen in a buffet-style restaurant or supermarket salad bar because people can touch the food. although many of these buffetstyle food services have sneeze-guards to prevent bodily fluids and also supply special utensils, such as a pair of tongs, to prevent people from touching the item; yet, unfortunately, many people use other utensils to pick up an item. accordingly, it is recommended that utensils be replaced often, signs posted listing the specific ingredients in the item, and designate an employee to watch out for possible cross-contamination problems. it is also very important for manufactures, supermarkets, grocers, and restaurants to avoid common illnesses. freezing is a relatively modern development in food storage. freezing will preserve meat indefinitely; however, it can diminish food quality by not only physical damage but also with rancidity. freezing an item will physically make the water in the cell membranes form ice crystals and thereby be physically punctured. when the items are thawed, the punctured cell membranes leak salts, vitamins, proteins and other nutrients that will make the food not taste as good as it once was mcgee (2004). a cooked item normally holds up to freezing because the item has been already transformed during the cooking process and consequently much of the water has already been lost. freezing also causes a chemical change in animal-based food products. ice crystals remove the muscle fluids and water, thereby allowing for increased concentration of salts and trace metals that promotes oxidation and rancidity (mcgee, 2004). most meat products should only be frozen for no longer than one year; poultry six months; fish, shellfish, and ground meats for less than six months. when thawing a product, it should be wrapped in an ice-bath or left in the refrigerator until the item is completely thawed. hot water should never be used in thawing because it causes the rapid growth of dangerous bacteria (mcgee, 2004). red meat has a unique problem because of specific likes by the customer. the main risks involving food poison of uncooked red meat are the bacteria of listeriosis and escherichia coli. for instance, rare meat needs a certain economy, 2018, 5(1): 17-39 36 temperature of 125°f (51.6°c) or less; medium rare 135°f (57.2°c); medium 140°f (60°c); and well done above 150°f (65.5°c); but at temperatures above 160°f (71.1°c), the meat would lose most of its moisture and become too dry to enjoy eating. bacteria are located on the meat‟s surface and not inside the meat. as long as the surface is thoroughly cooked, the bacteria will be killed and the meat can be enjoyed at the desired temperature (mcgee, 2004). salt is the most important ingredient in the kitchen. it is used in every cuisine either directly or indirectly. salt will “make or break” a dish. too little, and the food will taste bland; and too much and the food will be inedible. salt is made up of two elements: sodium and chloride. salt has provided economic stability to many early civilizations (for example, the city of salzburg in austria); and salt has provided a means for preserving food in order for civilization to survive to this day. what destroys food is not time, but tiny microbes and bacteria that causes food to spoil and rot. salt preserves meat by depriving bacteria molds of water. salt dissolves the sodium and chloride ions outside of the microbes and water the inside of their cellular walls. these salted microbes are either killed or actually dehydrated and thus drastically slow down the spoilage process (ruhlman et al., 2005). salt, especially the nitrite no2, suppresses the oxygen intolerant clostridium botulinum which causes the extremely deadly toxin botulism, which is toxin that cannot be cooked out of foods. specifically, sausages are very prone to this deadly toxin. in fact, the word “botulism” comes from the latin word “botulus,” meaning “sausage.” nitrite inhibits important bacterial enzymes and interferes with its energy production making the sausage safe to eat. nitrates and nitrites get a “bad press” because they can react with other food components to form possible cancer causing nitrosamine. however, in the united states, nitrates and nitrites in cured meats are limited to (0.02%) 200 parts per million and are normally well below this limit for cancer concern (mcgee, 2004). salmonella, which is one of the most common food poisoning “culprits” is found in many items, the most common being poultry, and also is found in eggs, which are the most common food items in any kitchen. salmonella is very resilient to acidity and temperature. salmonella is prevalent due to the industrial scale of poultry farming in the united states, where the over-crowding and close confinement of the animals help spread the bacteria (mcgee, 2004). the only way to kill salmonella is to cook food to its proper temperature, normally known in the food world as the “magic number” of 165°f (73.8°c), in which bacteria will die in 15 seconds at that temperature. the potential pathogens that can be considerably more dangerous when dealing with anaerobic environments are salmonella, clostridium botulinum, e.coli, and listeria. the longer bacteria exist in what is referred to as the “danger zone” of temperatures between 41°f (5°c) – 140°f (60°c), the faster they multiply, and thus the more dangerous they become. bacteria grow with exceptional speed at temperatures between about 100°f (37.7°c) – 120°f (48.8°c), doubling in number every 20-30 minutes (keller, 2008). keeping food cold and chilling cooked food as quickly as possible can drastically reduce the bacteria‟s rate of growth. the maximum time food can safely remain in danger-zone temperatures (this includes cooking time if cooking below 140°f (60°c)) is four hours. however, the sooner cooked food is out of the danger zone (meaning the faster it is chilled), the better, from both a safety and a spoilage standpoint. any cooked or raw protein, which has been in the danger zone for four hours or longer, should be discarded immediately (keller, 2008). mishandling food preparation and service is, as emphasized, a major area of concern. many forms of food contamination, especially if caused by bacteria, can be prevented by the proper cooking of food, eating it promptly, or properly refrigerating the food. thus, another strong suggestion would be for supermarkets, grocers, as well as restaurants to engage in training of employees as to the current food safety standards for storage, preparation, and serving. online training is available, for example, with the international dairy-deli-bakery association which offers food safety courses for grocery store workers (haddon and nassauer, 2016; newman, 2016). the entities examined herein should attempt to identify any weaknesses or gaps that become apparent in the growing, manufacture, storage, selling, preparation, and serving of food and beverages. testing and inspections, inhouse as well as through independent and certified third parties, must be conducted to ensure compliance with health and safety regulatory standards and to maintain the safety and quality of food and beverage products. traceability emerges as another important safety factor; that is, an attempt must be made to know the origin of the food and its ingredients, as well as where the food was harvested or processed, so that if there is a problem the origin of the illness can be tracked, identified, and rectified. however, as noted herein, and again as emphasized: “tracing the source of contamination responsible for a foodborne illness outbreak can be an onerous and complex process” (bassett et al., 2009). another suggestion would be to regularly close the kitchens and other cooking facilities for a “deep cleaning,” as the cruise lines are now doing to avoid outbreaks of the norovirus. tyson foods, for example, has a food safety and laboratory services network which conducts 280,000 tests per month at 18 labs across the country, a food safety and quality insurance group to ensure regulatory compliance and to evaluate suppliers, and a sentinel site program of environmental monitoring that tracks the effective of its sanitation procedures, particularly to detect even low levels of e. coli (tyson foods food safety and quality assurance department, 2016). chipolte mexican grill, which had to deal with an e. coli outbreak in 2016, now has an extensive, and well publicized, food safety program called food safety advancements (jargon, 2016) which consists of supplier interventions, advanced technology, farmer support and training, enhanced food preparation procedures, food safety certification, and inspections. the goal of the program is to ensure that the food served is as “safe as possible” (jargon, 2016). nevertheless, the wall street journal (jargon, 2016) reported that chipolte‟s profits plunged 95% in the third quarter of 2016. as per the prior illustrations, any entity on the food chain should have and follow explicit policies and procedures regarding to producing, receiving, storing, preparing, holding, and serving food in order to avoid adverse legal and financial consequences. this type of information will help to evaluate whether a particular seller‟s food is the source of a person‟s illness. moreover, evidence of the existence of food safeguards and following those safeguards will help to negate any negligence accusations (bassett et al., 2009). if an incident does occur, the results of tests conducted by government entities – from the fda to the local health department, of the food entity‟s facilities, personnel, equipment, and procedures will be important evidence. of course, the food or beverage itself can be introduced into evidence, if possible. evidence that other consumers or patrons did or did not become ill when served the same food or beverage is important too. moreover, whenever economy, 2018, 5(1): 17-39 37 possible create a contemporaneous report about the event as soon as possible thereafter, include documentation of statements made by the party or parties and any witnesses, photographs, and maintain and preserve any items involved in the incident, if feasible. also, preserve any surveillance as well as any waivers or releases given and signed by the injured party (corkran et al., 2016). investigate the injured party‟s social media and networking sites and accounts which are publicly viewable for postings, messages, photographs, or other information that may be pertinent to the incident (corkran et al., 2016). be very careful to view only public sites so as to avoid any invasion of privacy claims. remember that a person will not have a “reasonable” expectation of privacy in content on public sites, which is necessary to sustain an invasion of privacy lawsuit (cavico and mujtaba, 2016). also, investigate if other consumers complained of foodborne illnesses at the time of the initial consumer complaint since usually for a foodborne illness numerous people will become ill; and thus if no other complaints are ascertained, then one must consider other possible causes for the illness besides food contamination or adulteration (bassett et al., 2009). similarly, if the consumer alleges a foodborne illness after eating a particular type of food or a particular meal determine who else ate the food or meal with the stricken consumer. so, if other people ate the same food or consumed the same meal and only the one stricken consumer became ill and the others did not the question is raised as to whether the food is the cause of the stricken consumer‟s illness (bassett et al., 2009). of course, if there is leftover food or containers for food that is possibly contaminated they must be properly stored to determine if they are truly contaminated to determine potential liability but also to try to determine the cause of the contamination so that other entities in the food chain as well as consumers can be warned and proactive measures can be taken (bassett et al., 2009). another suggestion would be to put clear, simple, and prominent “warning” information on food and beverage products wherever feasible, for example, nutrition information, calorie count, and the dangers in misusing an item. recall the failure to warn element of strict liability and the mcdonald‟s hot coffee case and the “moral of the story” therein: it is cheaper to warn than to be sued for selling a defective product. since pursuant to strict liability law a manufacturer or any entity on the food-chain is strictly liable for “defective” food or beverage products, regardless if the manufacturers or others exercised due care, the authors would advise these parties to do the following: first to be cognizant of safety developments to keep up with the state-of-the-art; second, to exercise even greater care; third, to obtain products liability insurance in the form of food safety insurance as well as premises liability insurance, if warranted; and lastly, perhaps, to increase the price of the products to reflect the heightened safety standards and modifications and typically expensive insurance premiums. 7. summary consumers have a legal and ethical right to know and to expect that the food and beverages sold by manufacturers, supermarkets, grocers, as well as restaurants, are in safe, wholesome, and unadulterated condition as well as properly branded and labelled. the aforementioned entities on the food chain are in a considerably more advantaged position compared to the consumer due to their knowledge and expertise and their role in making, storing, selling, preparing, and serving food. thus these entities are under legal as well as ethical duties to take special care to try to ensure that the consumer is not harmed by adulterated and contaminated food products. this article has sought to examine three major legal theories of liability – negligence, warranty, and strict liability – in the context of adulterated and contaminated food and beverages sold or provided by manufacturers, supermarkets, and grocers, as well as restaurants. the authors provided a basic explanation of the principles and elements underpinning these legal theories; and then illustrated their application by reference to and discussion of case law and legal and management commentary. based on the legal analysis the authors then discussed the legal implications 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[accessed september 22, 2016]. wyeth v. levine, 2009. 555 u.s. 555 (supreme court 2009). author biographies frank j. cavico is a professor of business law and ethics at the huizenga college of business and entrepreneurship of nova southeastern university in ft. lauderdale, florida. he has served as a faculty member at the school for 30 years. he teaches business law and business ethics classes primarily at the graduate level in the mba program; and professor cavico also teaches in the mpa program where he teaches the required administrative law and ethics course. he has been the recipient of the professor of the year and faculty of the year awards at the huizenga school; and he was a nominee for the professor of the year award for the university. he is the author of several books and numerous law review and management journal articles. professor cavico holds an ll.m degree from the university of san diego, a j.d. from st. mary‟s university, a master‟s degree in political science from drew university, and a b.a. in political science from gettysburg college. economy, 2018, 5(1): 17-39 39 bahaudin g. mujtaba is a professor of human resources management at the huizenga college of business and entrepreneurship of nova southeastern university. for 16 years, bahaudin worked in the supermarket industry and was a certified professional food managers in the state of florida. bahaudin was also a servsafe trainer for retail managers in florida. bahaudin is the author and coauthor of books dealing with diversity, ethics and business management. during the past thirty years, he has had the pleasure of working with managers and human resource professionals in the united states, brazil, india, afghanistan, pakistan, st. lucia, grenada, vietnam, malaysia, thailand, bahamas, and jamaica. this diverse exposure has provided him many great insights in management from the perspectives of different firms, people groups, and countries. stephen muffler is a full-time attorney and member of the florida bar since 1993 and an adjunct professor of business law and ethics at nova southeastern university in ft. lauderdale, florida since 1999. he was awarded the adjunct professor of the year at h. wayne huizenga school of business and entrepreneurship of nova southeastern university in 2007. professor muffler has taught graduate business law, international business law and business ethics classes in five countries and also currently teaches business law and criminal justice classes at broward college in broward county florida. he was a former legal assistant to the florida bar‟s ethics enforcement branch in miami florida and former special public defender for the 17th judicial circuit, in and for broward county florida. he currently is an assistant general counsel to the broward county sheriff‟s department, the largest fully accredited public safety agency in the state of florida. professor muffler‟s civic service has included being the chairman of the city of fort lauderdale‟s citizen police review board and the executive director of the city of key west‟s citizen review board, both of which investigate and/or review administrative complaints against municipal police officers. he has authored and co-authored various articles on legal & ethical topics, and occasionally lectures by invitation to national and local organizations. he holds a ll.m in international law from the university of miami, school of law and graduated with honors with a j.d. from nova southeastern university and a b.s. in criminal justice from university of missouri-st. louis. marissa samuel is an adjunct professor of business law, ethics and management at the h. wayne huizenga college of business and entrepreneurship at nova southeastern university. marissa also specializes in test preparation, focusing on the lsat and gmat exams. outside of teaching, marissa is a transactional attorney for small businesses. prior to teaching for nova, marissa worked at the miami office of mcdermott, will & emery, where she practiced corporate law, primarily in the area of mergers and acquisitions. marissa holds a j.d. from columbia law school, an m.b.a from columbia business school, and a b.s. in industrial & labor relations from cornell university. nicolas-michel polito is a graduate of rutgers university, the culinary institute of america, and nova southeastern university. he has an mba in finance from nova southeastern. currently, he is in the master of accounting program at fairleigh dickenson university. previously nick has worked for the 3 michelin star restaurant, per se, in new york city. nick currently is working as a chef developing recipes, frozen entrees, and read-to-eat foods notable for nutritional ingredients, cost-value, and strict compliance with government standards. also, nick works as a consulting chef for the following organizations: wegmans, kings, shoprite, fairway, babeth's feast, amtrak, and thumann‟s. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. 175 © 2025 by the authors; licensee asian online journal publishing group economy vol. 12, no. 2, 175-181, 2025 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/economy.v12i2.7726 © 2025 by the authors; licensee asian online journal publishing group safe haven or risky bet? a study of gold prices during indian stock market volatility amalendu bhunia1 amit das2 ( corresponding author) 1university of kalyani, west bengal, india. 1email: bhunia.amalendu@gmail.com 2surendranath evening college, kolkata, india. 2email: amitdas8121984@gmail.com abstract the purpose of this study was to investigate whether gold served as a safe haven or a risky asset during periods of heightened volatility in the indian stock market. given india’s cultural and economic attachment to gold, this study explored the dynamic relationship between gold prices and stock market fluctuations, particularly during times of financial uncertainty. using daily data from 2005 to 2023, the research employed garch (1,1), egarch (1,1), and dcc-garch models to analyze both the unconditional and time-varying correlations between gold returns and nifty 50 returns. the findings revealed that gold exhibited significant safe-haven characteristics during extreme market downturns, offering protection to investors against stock market losses, with strong volatility persistence in both markets and significant leverage effects in the stock market. the dcc-garch model showed that gold exhibited a negative correlation with equities, particularly during periods of global financial crisis (2008–09), covid-19 crash (2020), and russia-ukraine conflict (2022), confirming its role as a safe haven. the practical implications of this study are particularly relevant for investors, portfolio managers, and policymakers. investors can use gold as an effective diversification tool to mitigate stock market risk, while policymakers can monitor gold price movements as indicators of investor sentiment and financial stability. the study contributed to the understanding of gold’s dual role in the indian financial system as both a safe-haven asset and a speculative instrument, depending on market conditions. keywords: crisis period, garch models, gold prices, safe haven, stock market volatility. citation | bhunia, a., & das, a. (2025). safe haven or risky bet? a study of gold prices during indian stock market volatility. economy, 12(2), 175–181. 10.20448/economy.v12i2.7726. history: received: 9 october 2025 revised: 27 october 2025 accepted: 3 november 2025 published: 18 november 2025 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. institutional review board statement: not applicable. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. this study followed all ethical practices during writing. competing interests: the authors declare that they have no competing interests. authors’ contributions: both authors contributed equally to the conception and design of the study. both authors have read and agreed to the published version of the manuscript. contents 1. introduction .................................................................................................................................................................................... 176 2. literature review .......................................................................................................................................................................... 177 3. data and methodology ................................................................................................................................................................. 177 4. empirical results and analysis ................................................................................................................................................... 178 5. conclusion ....................................................................................................................................................................................... 180 references ............................................................................................................................................................................................ 180 mailto:bhunia.amalendu@gmail.com mailto:amitdas8121984@gmail.com https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v12i2.7726 https://orcid.org/0009-0005-3142-1822 economy, 2025, 12(2): 175-181 176 © 2025 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study documents that its originality lies in the application of advanced volatility models (garch, egarch, and dcc-garch) to indian market data. it focuses on the time-varying safe-haven behavior of gold during different phases of market stress, thereby providing a nuanced, crisis-specific perspective that was absent in prior indian empirical research. 1. introduction in the complex design of global financial markets, investors constantly seek assets that can preserve value during turbulent times. among the wide array of financial instruments, gold has historically maintained a reputation as a “safe haven” asset. this perception is largely rooted in its historical performance, intrinsic value, limited supply, and psychological appeal as a store of wealth during times of uncertainty and economic distress (baur & lucey, 2010). as global markets become increasingly integrated and volatile, the need to understand the role of gold in relation to stock markets becomes more relevant than ever, especially in emerging economies like india. india is among the world's largest consumers of gold, both in physical and financial forms. culturally embedded in the traditions, rituals, and personal finance of indian households, gold has been more than just a commodity; it serves as a form of informal savings and wealth preservation tool across generations. this longstanding relationship with gold sets india apart from many other countries in terms of investor behavior and asset preferences (world gold council, 2022). as a result, any shifts in global or domestic financial markets may significantly influence gold investment behavior in india. the indian stock market, comprising major indices such as the bse sensex and nse nifty 50, is known for its rapid growth, diversity, and exposure to both domestic and international shocks. events such as the global financial crisis of 2008, the covid-19 pandemic, the russia-ukraine conflict, and frequent changes in global interest rates have all triggered sharp fluctuations in the indian equity market. during such turbulent times, riskaverse investors reassess their portfolios, reallocating capital to perceived safer assets like gold. for example, during the covid-19 pandemic in 2020, while indian stock indices plunged in march due to panic and uncertainty, gold prices surged sharply, reinforcing its reputation as a safe haven. however, the behavior of gold is not always consistent. there have been periods when gold has shown high volatility itself, reducing its efficacy as a safety asset. this has led to a growing academic and practical interest in evaluating whether gold is truly a safe haven or merely a risky bet during times of financial instability in india. the concept of a “safe haven” asset is distinct from that of a “hedge.” as baur and lucey (2010) clarify, while a hedge is negatively correlated with another asset on average, a safe haven is negatively correlated specifically during times of extreme market stress. in other words, a safe haven provides protection during adverse market conditions but may not necessarily offer negative correlation during stable periods. gold, due to its liquidity, lack of default risk, and historical performance, is considered one of the few assets with potential safe-haven characteristics. various international studies have sought to validate gold’s role as a safe haven. for instance, baur and mcdermott (2010) found that gold acts as a safe haven in major economies like the united states, united kingdom, and germany. however, they also pointed out that gold's safe-haven role varies across time and markets. in emerging economies, including india, the relationship between gold and equity returns may be influenced by additional factors such as currency fluctuations, inflation expectations, government import duties, and global commodity market dynamics (sadorsky, 2014). india’s relationship with gold is multifaceted. beyond its financial attributes, gold is deeply intertwined with social customs and is considered a symbol of wealth and security. this dual nature of gold, both as a consumption good and an investment vehicle, complicates its behavior in financial models. moreover, india’s gold market is heavily influenced by policy measures such as gold import duties, the goods and services tax (gst), and the reserve bank of india’s gold monetization scheme (choudhry, hassan, & shabi, 2015). all these factors impact the investment decisions of retail and institutional investors. additionally, india's high dependence on imported gold exposes domestic prices to global gold price trends and usd-inr exchange rate fluctuations. hence, any attempt to evaluate gold’s safe-haven status in india must consider these external influences, alongside domestic market volatility. empirical studies focusing on india have yielded mixed results. jain and ghosh (2013) observed that gold acted as a hedge but did not exhibit strong safe-haven properties in the indian context. conversely, kumar (2014) found evidence supporting gold’s role as a refuge during periods of intense equity market stress. these conflicting results indicate the need for a more nuanced and data-driven exploration using advanced timeseries econometric tools such as garch and dcc-garch models, which can account for time-varying correlations and volatility spillovers. the covid-19 pandemic dramatically reshaped global and indian financial markets. during 2020, investors flocked to gold as uncertainty loomed, and global central banks unleashed record levels of stimulus. however, the situation reversed in 2021–2022 as global interest rates began rising, inflation surged, and equity markets regained momentum. these rapid changes have reignited debates over the reliability of gold as a safe haven. in india, retail participation in the stock market has grown significantly over the past five years, facilitated by digital trading platforms, low brokerage costs, and financial literacy campaigns. simultaneously, gold investment has evolved beyond traditional jewelry purchases, with increasing adoption of gold exchange-traded funds (etfs), sovereign gold bonds (sgbs), and digital gold products. these shifts make it timely and relevant to reassess gold’s role during equity market volatility from both a behavioral and empirical perspective. this study is grounded in modern portfolio theory (mpt), which emphasizes diversification to minimize risk. according to mpt, assets that are uncorrelated or negatively correlated, during times of crisis, can help investors achieve optimal risk-return tradeoffs. gold is recommended for inclusion in diversified portfolios due to its perceived counter-cyclical nature. additionally, behavioral finance theory is also relevant, as investor psychology, fear, and herd behavior drive movements toward safe-haven assets in volatile times (tversky & kahneman, 1974). by testing these assumptions in the indian context, this study aims to add empirical weight to theoretical propositions and provide practical insights for investors, policymakers, and financial advisors. economy, 2025, 12(2): 175-181 177 © 2025 by the authors; licensee asian online journal publishing group 2. literature review the role of gold as a safe-haven asset has garnered widespread academic interest, especially during periods of financial turmoil. a substantial body of literature has sought to assess whether gold provides a cushion against equity market volatility, acts as a hedge in normal times, or simply performs as another risky asset in a dynamic market environment. this review synthesizes the global and india-specific empirical evidence on the subject, while identifying methodological gaps that justify further exploration in the indian context. the foundational work of baur and lucey (2010) distinguished between a hedge, which is negatively correlated with another asset on average, and a safe haven, which is uncorrelated or negatively correlated specifically during periods of market stress. their empirical analysis across major developed markets found that gold acted as both a hedge and a safe haven, depending on market conditions. extending this framework, baur and mcdermott (2010) confirmed the safe-haven behavior of gold during global stock market crises but also highlighted significant regional variations. the findings from these seminal studies laid the groundwork for subsequent research using both static and time-varying econometric models to test gold’s safe-haven role across markets and time horizons. several international studies examined gold's behavior across different asset classes and economic scenarios. capie, mills, and wood (2005) found that gold acts as a hedge against exchange rate fluctuations, especially against the u.s. dollar. ciner, gurdgiev, and lucey (2013), analyzing shortand long-run relationships, revealed that gold's hedge and safe-haven properties were unstable and time-dependent. sadorsky (2014) emphasized the importance of modeling dynamic correlations and demonstrated that gold’s behavior relative to stock markets can be significantly influenced by commodity price shocks and macroeconomic events. al-yahyaee, rehman, mensi, and al-jarrah (2019) used multifractal analysis to show that gold exhibited non-linear safe-haven characteristics during turbulent financial periods in both emerging and developed markets. while the consensus among global studies supports gold’s potential as a safe haven, it also warns against assuming a universal, static relationship across markets and time periods. india’s unique socio-economic affinity for gold provided fertile ground for evaluating its performance during stock market volatility. however, the number of rigorous studies focusing solely on india remains limited compared to developed markets. jain and ghosh (2013) examined the dynamic interrelationship between gold prices, stock market indices, and exchange rates in india using co-integration and granger causality tests. they found that while gold served as a hedge over the long term, it did not exhibit robust safe-haven characteristics during short-term equity market turbulence. in contrast, kumar (2014) analyzed the return and volatility transmission between gold and indian equities using garch models and reported evidence that gold served as a volatility buffer during major market downturns, thus supporting the safe-haven hypothesis. sharma and mahendru (2010) focused on the co-movement of gold and equity markets during financial crises and found significant negative correlation during periods of uncertainty. however, they cautioned that gold’s performance was also influenced by inflation, interest rates, and currency values. a variety of econometric techniques were applied to examine the gold-equity relationship. while early studies relied on basic regression, co-integration, and causality analysis, more recent works adopt time-varying volatility models such as garch, egarch, and dcc-garch frameworks to better capture dynamic interactions. bouri, jain, roubaud, and kristoufek (2017) used a dcc-garch model to explore volatility spillover between gold and oil markets and showed that the co-movement increased significantly during periods of global economic stress. applying such models to the indian gold-equity relationship would enable more precise analysis of time-varying correlations during periods of market volatility. patra and patnaik (2020) employed a combination of arch-type models and rolling correlation techniques to demonstrate that gold’s role in indian portfolios strengthened during periods of sharp equity corrections. however, their study called for deeper exploration of causality and cross-asset volatility effects using multivariate models. furthermore, most indian studies to date have focused primarily on physical gold or spot prices. with the rise in popularity of gold etfs, sovereign gold bonds, and digital gold, there is a need to explore whether these instruments mirror the safe-haven behavior of physical gold, particularly during market stress. while existing literature offers useful insights into gold’s potential role as a hedge or safe haven, especially in developed markets, there remains a clear research gap in understanding the time-varying, crisis-specific, and behaviorally influenced relationship between gold and indian equity markets. most indian studies either rely on static models or overlook key factors such as investor psychology, policy interventions, and international influences. this study sought to address these gaps by applying advanced time-series econometric models to explore the dynamic relationship between gold prices and indian stock market volatility. it also considered the unique sociocultural and macroeconomic dimensions that influence gold investing in india, especially during the covid-19 pandemic and recent geopolitical events. 3. data and methodology this study utilized secondary daily time-series data spanning from january 2005 to december 2023 to explore whether gold served as a safe-haven asset during periods of heightened indian stock market volatility. the dataset included daily closing prices of gold (inr per 10 grams) sourced from the world gold council and mcx, the nifty 50 and bse sensex indices from nse and bse websites, and the usd/inr exchange rate from the reserve bank of india to control for currency effects on gold valuation. all price data were transformed into log returns, defined as rt=ln(pt)−ln(pt-1), to ensure stationarity and homoscedasticity. to empirically assess gold’s hedging and safe-haven properties, the methodology adopts a multipronged econometric framework. descriptive statistics and pearson correlation coefficients were computed to examine average relationships between gold and stock returns, both across the full sample and during crisis periods, including the global financial crisis (2008–09), the covid-19 crash (2020), and the russia-ukraine conflict (2022). volatility modeling was conducted using the garch (1,1) and egarch (1,1) models (bollerslev, 1986; nelson, 1991) to estimate time-varying volatility and capture asymmetric shocks. the garch (1,1) model, economy, 2025, 12(2): 175-181 178 © 2025 by the authors; licensee asian online journal publishing group specified as σ2 t=α0+α1ϵ2 t−1+β1σ2 t−1, captured persistence and clustering in volatility, while the egarch model, expressed as ln(σ2 t)=ω+βln(σ2 t−1)+γϵt−1/σt−1+α(∣ϵt−1/σt−1∣−2/π), accounted for asymmetric effects of positive and negative shocks. to examine the time-varying relationship between gold and equities, the dynamic conditional correlationgarch (dcc-garch) model proposed by engle (2002) was employed. the model decomposed the conditional covariance matrix as ht=dtrtdt, where dt represents the time-varying standard deviations of individual assets and rt captures dynamic correlations. furthermore, to test whether gold acted as a safe haven during market crises, a linear regression model with interaction terms was estimated: rgold,t=α+β1rstock,t+β2dcrisis+β3(rstock,t×dcrisis)+ϵt, where a significantly negative β3 implied that gold moves inversely with stocks during turbulent periods, indicating safe haven behavior (baur & lucey, 2010). crisis periods were represented using dummy variables (dcrisis = 1 during periods of sharp equity declines). robustness checks include rolling-window correlations (30-day intervals) and sub-sample analyses, while alternative gold investment instruments such as gold etfs and sovereign gold bonds are evaluated for consistency. this methodological framework allowed for a nuanced perception of gold’s dynamic role in indian portfolios, whether as a hedge during normal periods or as a true safe haven during financial turmoil, filling a key gap in the literature on emerging markets’ asset behavior during systemic shocks (baur & mcdermott, 2010; sadorsky, 2014). table 1. descriptive statistics. index mean return s.d. skewness kurtosis jarque-bera (p-value) full sample gold 0.03 1.14 0.17 3.82 0.00 nifty 50 0.04 1.71 -0.63 5.42 0.00 global financial crisis (2008–09) gold 0.09 1.26 0.31 3.67 0.00 nifty 50 -0.13 3.45 -1.02 6.11 0.00 covid-19 crash (2020) gold 0.14 1.31 0.51 4.10 0.00 nifty 50 -0.09 2.95 -0.87 5.73 0.00 russia-ukraine conflict (2022) gold 0.05 1.22 0.20 3.85 0.00 nifty 50 -0.04 2.21 -0.59 4.92 0.00 4. empirical results and analysis 4.1. descriptive statistics table 1 demonstrated that mean returns of gold showed positive mean returns across all periods, especially during crises, suggesting it performed well as a hedge or safe haven. nifty 50, on the other hand, experienced negative returns during all crisis periods, most severely during the global financial crisis and the covid-19 crash. the standard deviation (volatility) of nifty 50 displayed higher volatility than gold across all periods, particularly during the global financial crisis and covid-19 crash, confirming stock market instability during crises. gold volatility increased during crises, but to a lesser extent, indicating relative stability. skewness & kurtosis of nifty 50 showed negative skewness (left-tailed distribution), suggesting more frequent extreme losses. gold showed positive skewness, meaning gains were more frequent during uncertainty. both assets showed leptokurtic distributions, indicating fat tails and a higher probability of extreme events than a normal distribution. the pvalues of the jarque-bera test were 0.000 for all series, rejecting normality, supporting the use of garch-type models to account for non-normality and volatility clustering. 4.2. correlation analysis table 2 demonstrated that gold and nifty 50 showed a weak negative correlation for the full sample, indicating that in general, gold had a mild inverse movement with the stock market. it was a diversification tool, but not always a strong safe haven. correlation strengthened in the negative direction during the global financial crisis, which indicated clear safe-haven behavior. also, correlation strengthened in the negative direction during the covid-19 crash, which indicated gold appreciated as stocks fell or gold again served as a hedge. moreover, correlation was reinforced in the negative direction during the russia-ukraine conflict, which illustrated a slightly stronger hedge effect during geopolitical tension. this pattern aligned with baur and lucey (2010), who define a safe haven as an asset that is negatively correlated or uncorrelated with stocks during times of market stress. table 2. correlation analysis. index coefficient full sample gold -0.17 nifty 50 global financial crisis (2008–09) gold -0.31 nifty 50 covid-19 crash (2020) gold -0.26 nifty 50 russia-ukraine conflict (2022) gold -0.20 nifty 50 these results support the hypothesis that gold can serve as a risk-mitigating asset, especially when the indian stock market experiences stress. economy, 2025, 12(2): 175-181 179 © 2025 by the authors; licensee asian online journal publishing group table 3. garch (1,1) model test results. ω α β α + β full sample 0.000002** 0.09** 0.89** 0.98 0.000001** 0.12** 0.87** 0.99 global financial crisis 0.000003* 0.10** 0.87** 0.97 0.000002** 0.17** 0.80** 0.97 covid-19 crash 0.000002* 0.09** 0.90** 0.99 0.000003** 0.18** 0.78** 0.96 russia-ukraine conflict 0.000001* 0.08** 0.91** 0.99 0.000002** 0.15** 0.81** 0.96 note: **significant at the 1% level. *significant at the 5% level. 4.3. garch (1,1) model test results table 3 demonstrated that both assets are about 1, suggesting high volatility persistence and strong clustering with past shocks impacting current volatility during the full sample periods. the indian stock market is more sensitive to past volatility shocks than gold. gold’s lower arch coefficient indicates lower short-term response to shocks, making it a relatively stable asset. during the global financial crisis, gold’s volatility persistence declined slightly compared to the full sample but remains high. nifty 50 showed a higher arch effect, indicating strong immediate response to market shocks during the crisis. gold maintained stability with lower arch, reaffirming its role as a safe haven. during the covid-19 crash, gold showed higher volatility persistence than the nifty 50 in this period. gold’s lower arch effect again confirmed a less short-term shock reaction, reinforcing its safe-haven status. nifty 50’s behavior was more reactive, but its volatility dissipated quicker than during the global financial crisis. during the russia-ukraine conflict, nifty 50 displayed higher arch (shock sensitivity) and slightly lower persistence. gold remained highly persistent in volatility, but its low α means that gold absorbed shocks gradually, making it less erratic during geopolitical crises. the market reacted strongly to geopolitical shocks. 4.4. egarch (1,1) model test results egarch helps detect leverage effects, i.e., whether negative impacts have a stronger effect on volatility. table 4. egarch (1,1) model test results. parameter ω α β γ full sample -0.12** 0.07** 0.93** 0.01 (p=0.37) -0.10** 0.09** 0.92** -0.16** global financial crisis -0.09* 0.06** 0.94** 0.01 (p=0.29) -0.11** 0.09** 0.92** -0.18** covid-19 crash -0.14** 0.07** 0.95** 0.00 (p=0.6) -0.12** 0.09** 0.90** -0.17** russia-ukraine conflict -0.11** 0.06** 0.96** 0.01** -0.10** 0.09** 0.89** -0.15** note: **significant at the 1% level. *significant at the 5% level. table 4 demonstrated that gold's γ was statistically insignificant, meaning no significant leverage effect during the full sample periods. negative and positive shocks affected volatility similarly. nifty 50 showed a strong negative and confirmed leverage effect, which indicated that bad news led to greater volatility in equity markets. gold's high β showed persistent volatility, but relatively symmetric behavior over time. during the global financial crisis, gold remained relatively symmetric in response to news (γ not significant), nifty 50 experienced intense asymmetry, showing investors panicked more with bad news, and gold continued to display safe haven properties even in a systemic shock scenario. during the covid-19 crash, gold remained symmetric, indicating shock absorption capacity even during a health and economic crisis. nifty 50 again showed highly negative and significant γ, confirming risk amplification from negative returns, and gold maintained its role as a volatility stabilizer. during the russia-ukraine conflict, gold showed no leverage effect (γ insignificant), acting as a riskmitigating asset. nifty 50 showed significant leverage, with investors reacting strongly to uncertainty, reinforcing the conclusion that gold behaves as a hedge against political instability. 4.5. dcc-garch model test results the dcc-garch model, proposed by engle (2002), is widely used to model time-varying correlations between financial assets. it is particularly useful in understanding whether gold diversifies risk during market stress and how the correlation between gold and stock market returns changes during turbulent periods. economy, 2025, 12(2): 175-181 180 © 2025 by the authors; licensee asian online journal publishing group table 5. dcc-garch model test results. parameter estimate std. error z-statistic prob. full sample α (dcc1) 0.02 0.01 5.49 0.00 β (dcc2) 0.95 0.01 142.69 0.00 mean correlation -0.07 — — — min correlation -0.21 — — — max correlation 0.14 — — — global financial crisis α (dcc1) 0.04 0.01 7.17 0.00 β (dcc2) 0.92 0.01 127.83 0.00 mean correlation -0.12 — — — min correlation -0.21 — — — max correlation 0.08 — — — covid-19 crash α (dcc1) 0.04 0.01 7.48 0.00 β (dcc2) 0.90 0.01 106.17 0.00 mean correlation -0.09 — — — min correlation -0.22 — — — max correlation 0.11 — — — russia-ukraine conflict α (dcc1) 0.03 0.01 5.33 0.00 β (dcc2) 0.93 0.01 122.62 0.00 mean correlation -0.08 — — — min correlation -0.19 — — — max correlation 0.12 — — — table 5 revealed that the high β value showed persistent correlation behavior during the full sample periods, low α indicated slow reaction to shocks. generally, the correlation between gold and nifty 50 was slightly negative, suggesting gold may serve as a hedge. the fluctuation between -0.21 and +0.13 implied that this hedge effect was time-varying. during the global financial crisis, stronger negative average correlation was observed, and gold acted as a safe haven. with high β and slightly higher α compared to the full sample, gold exhibited dynamic but persistent behavior. the dcc fell more during crisis shocks, indicating gold's decoupling from equities when panic rises. during the covid-19 crash, gold and nifty again showed a moderately negative average correlation, with the correlation dipping as low as -0.221, demonstrating gold's effectiveness as a crisis hedge. the increased α reflected higher reactivity to shocks during a public health and financial panic. during the russia-ukraine conflict, negative average correlation persisted, reaffirming gold’s decoupling tendency during geopolitical risk. the market remained sensitive, though correlation persistence stayed high, and gold maintained its role as a risk diversifier. 5. conclusion this study investigated the dynamic relationship between gold prices and indian stock market volatility, focusing on whether gold acts as a safe haven, a hedge, or a risky asset, especially during periods of market distress using garch(1,1), egarch(1,1), and dcc-garch, and data spanning normal periods and crises including the global financial crisis (2008–09), covid-19 crash (2020), and russia-ukraine conflict (2022). several insightful conclusions emerge. the garch (1,1) results for both gold and nifty 50 confirmed strong volatility clustering, indicated by the high persistence values, reflecting that shocks to returns had long-lasting effects. the egarch results revealed significant leverage effects in nifty 50 returns (γ negative and significant), suggesting that negative news impacted volatility more than positive news. for gold, however, the leverage term (γ) was statistically insignificant, reinforcing gold's role as a stabilizing asset in turbulent markets. the dcc-garch model provided the most nuanced understanding. over the full sample period, gold and nifty 50 showed a slightly negative but time-varying correlation, indicating that gold can act as a weak hedge against indian equities. however, during crisis periods, the correlation became more strongly negative, especially during the global financial crisis, confirming gold’s role as a safe haven asset when financial markets experienced extreme distress. 5.1. policy implications the negative and dynamic correlation between gold and nifty 50 during crises implied that investors and portfolio managers should consider gold as a strategic component of investment portfolios, particularly during volatile market conditions. allocating a portion to gold can reduce portfolio risk and enhance stability in uncertain times. retail investors in india turn to gold as a traditional investment. these findings supported that such behavior was empirically justified, especially during financial turmoil. financial educators and advisory firms should emphasize gold’s hedging and safe haven properties in risk-focused investment education. gold reserves continue to play a vital role for the rbi. these results reinforce the need for maintaining and strategically managing gold reserves, especially in anticipation of external shocks, currency volatility, or geopolitical crises. during periods of systemic risk, policy responses can include stabilizing commodity markets, ensuring gold market liquidity, and monitoring speculative behavior. gold’s inverse relationship with equities during crises can be used as a real-time indicator of investor sentiment and stress in financial markets. the results justify further innovation in gold-based etfs, mutual funds, and derivatives that can be more widely accessible to retail and institutional investors. sebi could encourage the development of hedging tools linked to gold for managing equity portfolio risk. 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(2022). gold demand trends – full year 2021. united kingdom: world gold council. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. https://doi.org/10.1111/j.1540-6288.2010.00244.x https://doi.org/10.1016/j.jbankfin.2009.12.008 https://doi.org/10.1016/0304-4076(86)90063-1 https://doi.org/10.1016/j.intfin.2004.07.002 https://doi.org/10.1016/j.irfa.2015.03.011 https://doi.org/10.1016/j.irfa.2012.12.001 https://doi.org/10.1198/073500102288618487 https://doi.org/10.1016/j.resourpol.2012.10.001 https://doi.org/10.1016/j.iimb.2013.12.002 https://doi.org/10.2307/2938260 https://doi.org/10.1016/j.eneco.2014.02.014 https://doi.org/10.1126/science.185.4157.1124 1 © 2023 by the authors; licensee asian online journal publishing group economy vol. 10, no. 1, 1-9, 2023 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/economy.v10i1.4517 © 2023 by the authors; licensee asian online journal publishing group fundamental factors and stock price volatility of listed banking firms in nigeria inim, victor edet1 mohammed, abdulrazak2 bassey ime frank3 ( corresponding author) 1,2department of accounting, nile university of nigeria, abuja, nigeria. 1email: victor.inim@nileuniversity.edu.ng 2email: mabdulrazak@see.gov.ng 3department of insurance, university of uyo, uyo, akwa ibom, nigeria. 3email: basseyifrank@uniuyo.edu.ng abstract the study examined the impact of fundamental factors on the stock prices of nigeria's listed banking sector companies. using panel data analysis, the effects of five fundamental variables on share prices of listed banks in nigeria, which include return on assets (roa), return on equity (roe), earnings per share (eps), dividend per share (dps), and growth in net interest income (nii), as well as two control variables (firm size and firm age), were analyzed. data were gathered from eleven sampled banks' annual reports from 2006 to 2020. based on the hausman test, fixed effect model was estimated and regression results indicated that the coefficients of roe, eps, dps, nii and size were positive but roe and size were statistically not significant. on the other hand, the coefficients of roa and age were negative but statistically significant. the study recommended that; regulators should pay attention to earnings management by banks to monitor any attempts to smooth dividend; existing shareholders should pay more attention on high dividend paying banks for capital gain; and boards of directors of banks should strive to maintain adequate dividend payment, specifically by reducing the proportion of yearly retain earnings while minimizing cost. keywords: dividend per share, earnings per share, fundamental factors, net interest income, return on asset, return on equity, volatility. jel classification d53; e44; g21. citation | edet, i. v., abdulrazak, m., & frank, b. i. (2023). fundamental factors and stock price volatility of listed banking firms in nigeria. economy, 10(1), 1–9. 10.20448/economy.v10i1.4517 history: received: 2 september 2022 revised: 7 february 2023 accepted: 24 february 2023 published: 9 march 2023 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. authors’ contributions: all authors contributed equally to the conception and design of the study. competing interests: the authors declare that they have no conflict of interest. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study followed all ethical practices during writing. contents 1. introduction ......................................................................................................................................................................................... 2 2. theoretical framework ..................................................................................................................................................................... 4 3. methodology ........................................................................................................................................................................................ 4 4. data analysis and results ................................................................................................................................................................. 6 5. discussion of findings ....................................................................................................................................................................... 8 6. conclusions and recommendations ................................................................................................................................................ 9 references ................................................................................................................................................................................................. 9 mailto:victor.inim@nileuniversity.edu.ng mailto:mabdulrazak@see.gov.ng mailto:basseyifrank@uniuyo.edu.ng https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v10i1.4517 https://orcid.org/0000-0001-7895-2114 https://orcid.org/0000-0003-0800-4834 economy, 2023, 10(1): 1-9 2 © 2023 by the authors; licensee asian online journal publishing group contribution of this paper to the literature the study contributes to existing literature by investigating the impact of fundamental factors on the stock prices of nigeria's listed banking sector companies. 1. introduction there are many important roles played by financial markets in an economy. it encompasses mobilization of financial resources from the surplus units to the deficit units of the economy, also including the provision of the medium for; separating ownership and management, risk sharing, efficient allocation of financial resources and ascertainment of current and future consumption requirements, among others. as stated by fouzan, tahtamouni, and al-qudah (2016), listed institutions can deploy securities and increase fund through various market securities. more specifically, the stock market, which is a critical segment of the financial markets, assist in the process of evaluating managerial performance through investors’ sentiments that are contained in market prices of financial instruments. hence, how much the equity of a company is worth arises from the aggregation of diverse opinions of market participants. the market, by means of financial or non-financial disclosures, helps management gauge opinion on its investment plans and future actions through market positive or negative reactions to stock prices. stock market plays a substantial part in the allocation of resources, both directly as a source of funds and as a determinant of firms' value and its borrowing capacity (tease, 1993). based on the underlying assumption of efficient market hypothesis, a market is said to be efficient where asset prices reflect all available information. since market prices should only react to new information, it is therefore important to state that most factors that influence investment decision and the environment which businesses thrives ultimately impact share prices. by implication, this indicates that stocks are always trading at their current fair market value. many investors are in dilemma with regard making a choice about profitable investment. one of the determining factors in taking decision is the share price of the stock which are constantly changing due to various factors in the market. investors have various methods they may adopt in analyzing the investment, which may include bottom-up analysis or a topdown approach. the choice for any of these approaches depends on what motive drives the investor’s decision. some investors may adopt a technical analysis approach, where their focus is on the movement of the stock price in the market by relying on the historical prices and the volume of shares that were traded, or they conduct a fundamental analysis, where the main aim is to check the financial health of firms and the whole economy in order to take informed decision about the available stocks in the market. whether stock prices are impacted by firm fundamentals has become a hot topic in financial economics recently. however, there is absolutely no agreement among academics as to the key variables that affect stock values. in light of this, the goal of this study was to examine the potential relationships between the stock prices of nigeria's listed banks and their underlying financial metrics, including their return on equity, return on assets, earnings per share, dividend per share, and growth in net interest income. it is tempting to encourage research into the factors that cause apparent volatility in stock prices as well as the ongoing and sporadic changes in accounting and market ratios. the results of this study can undoubtedly affect regulatory policy, motivate businesses to improve performance, and help investors make wise stock market investing choices. 1.1. statement of the problem the onset of 2007/2008 global financial crunch wiped out the growth and investors’ confidence and it became worrisome to see that even corporations with proven record of success were not spared from these volatilities, especially those companies with sound fundamentals such as dividend pay-out and earnings and its components. however, as a result of the negative impact of the 2008-2010 global financial crises and 2015-2017 recession in nigeria, all-share index plummeted down to 20,838.90 points in 2009 and remained below 30,000 points 10 years after, precisely 26,842.07 points as at 31st december 2019. it becomes expedient to consider the interdependence between stock market prices and company fundamentals. even with the potentials to make nigerian listed companies’ financials comparable with their foreign counterparts, it is observed that the stock market is yet to return to its old glory, with share prices of most listed companies in nigeria remaining below pre-2008 financial crisis. investors are also perplexed as to which investment to commit their financial resources in order to have optimum returns. in recent times, studies have been conducted to determine the impact of certain fundamental factors on the prices of stocks in nigeria. thus, examining the impact of fundamental factors on the stock prices of nigeria's listed banking sector companies is the primary goal of this study. other specific goals include assessing the impact of return on asset (roa), return on equity (roe), net interest income (nii), earnings per share (eps), and return on equity (roe) on the stock prices of listed banking companies in nigeria, as well as looking at the impact of the threshold effect on stock prices of listed banking companies in nigeria. in line with the stated objectives, the hypotheses of the study are stated in null forms thus: ho1: return on asset (roa) has no significant effect on stock prices of listed banking companies in nigeria. ho2: return on equity (roe) has no significant effect on stock prices of listed banking companies in nigeria. ho3: net interest income (nii) has no significant effect on stock prices of listed banking companies in nigeria. ho4: earnings per share (eps) has no significant effect on stock prices of listed banking companies in nigeria. ho5: dividend per share (dps) has no significant effect on stock prices of listed banking companies in nigeria. previous studies, like karki (2018), pradhan and laxmi (2017), shafiqul, rubel, and abdul (2016) and fouzan et al. (2016), were conducted to examine the impact of some fundamental factors on stock prices of some selected firms in foreign countries with certain peculiar economic variables, using one fundamental factor in some cases thus leaving out other fundamental factors which may have had some influence on the stock prices of those firms. however, since findings from empirical studies reviewed were quite mixed for different markets and industries, the unique feature of this paper is that, first, it lengthened the study period to 15 years ending 2020 to cover period of capital market boom, crash and period of stability. second, it incorporated growth in net-interest income not used in any study in nigeria, which is banking industry specific measure of profitability, to determine its influence together with four other dominant fundamental factors, on stock price of banking sector stock. finally, the study lengthens the current economy, 2023, 10(1): 1-9 3 © 2023 by the authors; licensee asian online journal publishing group discussions on stock prices of firms, thereby adding to the existing literature in the region of fundamental factors as they affect share prices. 1.2. concept of stock prices stock price is an indicator, reflecting a security or company's current market value. it is the price agreed by both a buyer and a seller at a particular point in time or at an agreed further date. in a market driven economy, share price is determined by the forces of demand and supply. usually, where there are more buyers than sellers, the stock price will climb and vice-versa the price may decline. to a large extent, volatility in stock prices could be attributed to concern about or the direction of economic indicators such as interest rates, tax changes, inflation rates, and other monetary policies. share prices can also be influenced by industry dynamics, domestic and global events. 1.3. return on asset the ability of a business to use its assets to generate net profit is measured by return on asset (roa). in a perfect market, a stock with a higher roa ought to be costlier. return on assets is the ratio of a company's annual net income to its average annual total assets (roa). it displays how effectively a business uses its resources to produce net income. the profitability ratio is as follows (zutter & gitman, 2012). a growing roa demonstrates an organization's ability to fully utilize its resources. it also shows that management is skilled at making the most of the resources at its disposal to generate higher cash flows with the same or less capital. 1.4. return on equity the return on equity (roe) formula calculates the amount of profit a company generates for each dollar invested in shares by shareholders. it is determined by dividing the relevant net income of the firm by the typical equity capital. if both ordinary and preference shares have equity rights, the appropriate net income will be the profit after tax, which is the amount available to ordinary and preference shareholders for distribution. when preference shares are excluded from the definition of equity, the pertinent returns will be net of earnings after tax and dividends on preference shares. to calculate average equity, one can use either the simple average or the weighted average approaches. in addition to examining the company's profitability, roe also evaluates its efficacy. an increasing roe shows that a company is getting better at generating profit while requiring less capital. higher roe is also advantageous for investments. the return on equity demonstrates how well and successfully the shareholders' money was managed by the company (ugwudioha, 2019). therefore, it is presumed that roe and stock price have a positive relationship. 1.5. net interest income it is a metric of profitability unique to the business for banks and other financial institutions that lend out interestearning assets. net interest income is the difference between interest collections and costs (nii). the interest payments that banks earn on their interest-bearing assets are known as interest revenues, while the costs related to servicing the interest payments that banks make to their depositors are known as interest expenses. banks receive interest through loans, mortgages, and other items that bear interest. on the other hand, in addition to income on deposit accounts like savings and cds, they also deduct interest on any additional debt the bank may have. a significant source of income for banking institutions, net interest income is thought to include the cost of financial intermediation. the difference between what borrowers pay for their loans and what lenders make from lending is consequently what it is. in addition to other measures, banks might use net interest income to assess a company's internal profit potential. investors who are looking at a bank's financial accounts might find this metric fascinating. 1.6. earnings per share profit expressed per outstanding share of stock is known as earnings per share (eps), and it is a key financial metric of a company's performance. the share price of a corporation is determined using it. a high eps implies that the company is more successful and has more profits to distribute to shareholders. this ratio establishes a correlation between potential growth prospects and higher investor returns. in light of this, it seems to reason that eps, which illustrates a company's growth, would have a positive effect on share prices. 1.7. dividends per share dividend per share shows how much a corporation pays out in annual dividends in relation to each of its shares. without any capital gains, dividend is the stock's return on investment. according to ugwudioha (2019) investors frequently inquire about a company's dividend per share in order to assess the viability of the business and the value of each share. 1.8. empirical review karki (2018) used information from nepalese commercial banks to examine the fundamentals of common stock pricing. the focus of the work was to establish the causal relationship between the fundamental factors and the changes in the nepalese commercial banks’ stock prices, using earnings per share, book value per share, cash dividend per share, stock dividend per share, price earnings ratio, and firm size as proxies for fundamental factors. using secondary data, a balance panel data from 150 observations were utilized from year 2000 to year 2014. the result indicated that earnings per share and stock dividend per share had a greater impact on commercial banks' stock values in nepal than other variables. from the analysis it was observed that the stock dividend was statistically and economically the most significant of the six fundamental variables analyzed. pradhan and laxmi (2017) studied the effect of fundamental determinants on stock prices in the nepalese commercial banks. in the study, market price per share and change in market price per share were the dependent variables while return on assets, return on equity, net interest income, earnings per share, and dividend per share were the independent variables. sourcing the needed data from annual reports of the chosen commercial banks as well as the banking and financial statistics and bank supervision report released by nepal rastra bank, the research economy, 2023, 10(1): 1-9 4 © 2023 by the authors; licensee asian online journal publishing group included 104 observations from 13 nepalese commercial banks between 2007 and 2014. results from the regression analysis showed a favorable relationship between the stock price and dividend per share (dps), return on assets (roa), and earnings per share (eps) (market price per share and change in market price per share). this suggested that a greater dps, roa, and eps would result in a higher stock price. net profit margin was, however, inversely correlated with stock price. with market price per share at a 5% level of significance, the regression result revealed that the beta coefficients for dps and eps were positively significant. shafiqul et al. (2016) examined the factors that influence stock prices in listed cement businesses at the dhaka stock exchange in bangladesh, using a panel data set of seven cement industry businesses that were listed on the dhaka stock exchange (dse) between 2006 and 2015. employing an ordinary least square (ols) regression with fixed effects and random effects models, six fundamental and technical factors, namely: earnings per share (eps), net asset value per share (navps), price earnings (p/e), gross domestic production (gdp), consumer price index (cpi), and interest rate spread (irs), were identified. findings from the analysis showed that all the factors had significant impact on the share prices of companies in bangladeshi stock market involved in the cement businesses. fouzan et al. (2016) examined factors influencing stock market pricing in insurance businesses listed on the amman stock exchange. the study looked at how certain variables, such as return on asset (roa), return on equity (roe), debt ratio, age of the company, and size of the company, affect stock market prices. using simple and multiple linear regression, 20 insurance businesses listed on the amman stock exchange between 2011 and 2015 were analyzed. results from the analysis showed that there is a relationship between stock market price and roa, debt ratio, age of the company, and size of the company in the firms studied. however, there was no relationship between roe and stock prices of the firms studied. 2. theoretical framework 2.1. efficient markets theory the efficient markets theory by wallace and thomas (1975) has been discovered to be the most appropriate theoretical framework for this investigation (1975). according to this hypothesis, investors purchase stocks they anticipate will have higher-than-average returns and sell those they anticipate will have lower returns. they have a tendency to raise the prices of stocks with higher-than-average return expectations and drop the prices of stocks with lower-than-average return expectations. as soon as the predicted returns, taking into account risk, are equal for all stocks, the stock prices start to change. equalization of expected returns implies that expectations or projections of investors are included into or reflected in stock prices. it actually means that stock prices adjust in such a way that, after taking into account information like dividends, bonuses, the time value of money, and other risks, they equal the best estimate of the future price made by the market. therefore, only unpredictable, random elements that are impossible to predict in advance can affect stock price. according to the efficient market hypothesis, a change in the company's fundamentals has the most immediate impact on a stock's price. because of this, a rise in the share price is anticipated whenever revenues and earnings increase. on the other hand, if profit is dropping with no sign of change, investors start to give up on stocks, which thus causes the stock price to fall. this hypothesis’ claim is that changes in the underlying business typically have impacts on share prices. therefore, investors with keen, quick and imaginative thinking would have predicted a shift even before prices of the stocks were affected and thus would have taken an informed decision before the changes occur. 3. methodology the 22 nigerian commercial banks that have been granted licenses make up the study's population. as of 2020, thirteen (13) banks and corporations with subsidiaries that held commercial banking licenses and were listed on the nigerian stock exchange (nse) made up 59% of the 22 banks that fell under the commercial banking license category. due to the availability of quoted stock prices for the banks, convenient sampling was used to concentrate the analysis on listed institutions. a few filtration processes have been used to remove some of the banks that were deemed unsuitable for the study due to the requirements of the empirical models used in this investigation. first, only surviving firms' data is used for the study's empirical portion. second, institutions with either missing value for the relevant variable were disqualified. ecobank transnational incorporated (eti) and sterling bank plc are two of the excluded banks. following the above-mentioned screening methods, the study's final sample, which is given in table 1, consists of 11 banks listed on the nigerian stock exchange, eight of which were among the top 10 banks in nigeria according to answer africa's ranking (list of largest commercial banks in nigeria in 2020). following is a list of the sampled banks along with the date of their incorporation: the study used secondary data extracted from the individual financial statements of eleven (11) sampled banks over a period of 15 years. hence, the analytical framework used is panel data regression, in view of the cross-sectional and time series dimensions of the sampled observations. the use of panel data analysis reduces the phenomenon of multicollinearity of the variables. 3.1. model specification in order to examine the influences of roa, roe, nii, eps, and dps on the stock prices of listed banks in nigeria, this study uses an econometric approach of data analysis. in order to analyze the association between one dependent variable, five explanatory factors, and a control variable, the study specifically uses the panel ordinary least square (ols) approach. to offer details on individual bank behavior over a range of individual characteristics and over time, a balanced panel ols model is used (2006 2020). consequently, the three popular models used in panel regression-pooled ols, fixed effect, and random effects-are as follows: economy, 2023, 10(1): 1-9 5 © 2023 by the authors; licensee asian online journal publishing group table 1. list of sampled banks. s/n symbol security name date listed date of incorporation 1 access access bank of nigeria plc november 18th 1998 february 8th 1989 2 fbnh fbn holdings plc november 26th 2012 august 13th 2012 but originating company existed since 1894 3 fidelitybk fidelity bank plc may 17th 2005 november 19th 1987 4 fcmb fcmb group plc june 21st 2013 november 20th 2012 but originating company existed since 20 april, 1982 5 guaranty guaranty trust september 9th 1996 july 20th 1990 6 stanbic stanbic ibtc holdings plc november 23rd 2012 march 14th 2012 but originating company existed since 2 february 1989 7 uba united bank for africa plc march 31st 1970 february 23rd 1961 8 ubn union bank of nigeria plc since 1971 since 1917 9 unitybnk unity bank plc december 22nd 2005 april 27th 1987 10 wemabank wema bank plc february 13th 1991 may 2nd 1945 11 zenithbank zenith international bank plc october 21st 2004 may 30th 1990 source: nse fact books (2020). the pooled model specification, assuming constant coefficients is represented in equation 1: 𝑆𝑃𝑖, = 𝛼 + 𝛽𝛸𝑖, + 𝜑𝑌𝑡 + 𝑢𝑖,𝑡 (1) 𝑖 ~ 1, 2, . . . , 11 and 𝑡 ~ 1, 2, . . . , 15 𝑆p𝑖, represents stock price for bank i at time t; 𝚾𝑖, is a vector of bank specific variables (roa, roe, nii, eps dps, age and size), which varies across banks and time. 𝐘t is a vector of time, varying banking sector specific variables. 𝑢𝑖, are the disturbances across individual banks and time, and it is assumed to be independently identically distributed; and 𝛼, and 𝜑 are constant coefficients for all banks. the heterogeneity that occurs among banks is denied by pooled ols because this model does not change among individual banks. it is impossible to presume homogeneity in this study because organizational goals and culture vary between organizations. as a result, the fixed effect and random effect models were used in the study rather than the pooled ols. this heterogeneity of the banks was captured with 𝛼𝑖. a fixed effect model is established if 𝛼𝑖 are correlated with the explanatory variables, otherwise random effect is established. equation 2 specified the fixed effect model; 𝑆𝑃𝑖, = 𝛼𝑖 + 𝛽𝛸𝑖, + 𝜑𝑌𝑡 + 𝑢𝑖,𝑡 (2) the variables in equation 2 are as defined in equation 1 above and 𝛼𝑖 measures the individual bank’s effect on stock price. a fixed effect model allows the individual banks to have different intercept term but the same slope parameters. in the same vein, the random effect model is specified as 𝑆𝑃𝑖, = 𝛽𝛸𝑖, + 𝜑𝑌𝑡 + (𝛼𝑖 + 𝑢𝑖,𝑡) (3) the impacts of that bank are taken into account in the random effect model via the intercept parameter i although each bank is chosen at random. the hausman test is used to evaluate the significance of the difference between fixed and random estimates in order to choose the best panel model. only factors that are strictly cross sectional and particular to a given bank are used in the test, though. yt in equations 1, 2, and 3 above would be disregarded as a result. the hausman test is based on a test of the null hypothesis that there is no association between the random effect and explanatory variables, and the outcome is distributed according to a chi-square formula. the fixed effect model is regarded as having the best fit in cases where the null hypothesis is rejected. this study is based on partial logarithm form of equations 1, 2, and 3, hence restating the 𝚾 vector (i.e. 𝛽1, 𝛽2, 𝛽3, 𝛽4, 𝛽5, 𝛽6 and 𝛽7 representing the coefficients of roa, roe, nii, eps, dps, age and size as follows and ignoring yt, the modified model specifications are as follows; 𝐿𝑜𝑔(𝑆𝑃𝑖,𝑡) = 𝛼𝑖 + 𝛽1 ∗ 𝑅𝑂𝐴 + 𝛽2 ∗ 𝑅𝑂𝐸 + 𝛽3 ∗ 𝑁𝐼𝐼 + 𝛽4 ∗ 𝐸𝑃𝑆 + 𝛽5 ∗ 𝐷𝑃𝑆 + 𝛽6 ∗ 𝐴𝐺𝐸 + 𝛽7 ∗ 𝐿𝑜𝑔(𝑆𝐼𝑍𝐸) + 𝑢𝑖,𝑡 (4) equation 4 above represents the modified model specification of the variables, excluding the banking sector specific variable, yt. modified fixed effect model 𝐿𝑜𝑔(𝑆𝑃𝑖,𝑡) = 𝛽1 ∗ 𝑅𝑂𝐴 + 𝛽2 ∗ 𝑅𝑂𝐸 + 𝛽3 ∗ 𝑁𝐼𝐼 + 𝛽4 ∗ 𝐸𝑃𝑆 + 𝛽5 ∗ 𝐷𝑃𝑆 + 𝛽6 ∗ 𝐴𝐺𝐸 + 𝛽7 ∗ 𝐿𝑜𝑔(𝑆𝐼𝑍𝐸) + (𝛼𝑖 + 𝑢𝑖,𝑡) (5) the modified fixed effect model of the variables is represented by equation 5, which would be used to decide on the hypotheses. modified random effect model the study expects the coefficient of 𝛽1, 𝛽2, 𝛽3, 𝛽4, 𝛽5, 𝛽6 and 𝛽7 to be positive (non-negative). that is the a priori expectation of the constant term and 𝛽1, 𝛽2, 𝛽3, 𝛽4, 𝛽5, 𝛽6 and 𝛽7> 0. 3.2. justification of variables to study gt the effect of fundamental factors on firms, variables like return on asset (roa), return on equity (roe), net interest income (nii), earnings per share (eps) and dividend per share (dps) may be employed. previous works (fouzan et al., 2016; karki, 2018; pradhan & laxmi, 2017; shafiqul et al., 2016) employed the variables in their studies at different times to examine the impact of fundamental factors on stock prices of firms in various industries. the variables help in determining the performances of the firms based on what objective the investor wish to achieve. employing these variables in this study will help in achieving the objectives of this study. economy, 2023, 10(1): 1-9 6 © 2023 by the authors; licensee asian online journal publishing group table 2. estimation procedure. s/n variable estimation variable interaction 1 dependent stock prices (sp) end-of-period closing share prices measured in naira share prices is determined by the forces of demand and supply. they are significantly affected by company’s fundamental, industry changes, national and global events. therefore, share price movement results from investor’s perception of the available information specific or general about the entity or market. 2 explanatory return on assets (roa) profit after interest and tax divide by average total assets measured in percentage roa indicates the capability of a company to utilize its assets to generate net profit. in an ideal market, a stock with higher roa should have a higher price. therefore, roa should have positive and significant relationship with stock price. 3 return on equity (roe) profit after interest and tax divide by average total equity measured in percentage return on equity (roe) calculates how many nairas of profit a company generates with each naira of shareholders' equity. hence, represents a measure of company’s efficiency. a rising roe suggests that a company is increasing its ability to generate profit without requiring much capital. in other words, higher roe is better for investment. therefore, roe is presumed to have positive relation with stock price. 4 net interest income (nii) measured as the annual growth in percentage of the difference between interest income and interest expenses. nii is the primary source of income and cost of financial intermediation, which provide the measure of the ability of banks to earn profits. the consistency to sustain growth in nii in excess of operating cost and impairment on loan assets increases the ability of a bank to reward investors and consequently impact share price. 5 earnings per share (eps) profit after interest and tax divide by total number of shares measured in naira from the perspective of an investor, higher the eps the better it is, as it indicates the future prospects of the company's business, potential growth opportunities and higher returns for the investors. hence, earnings per share has a positive relationship with market price, that is, higher the earning per share, higher would be the market price per share. 6 dividend per share (dps) total amount of dividend divides by total number of shares measured in naira dividends generally influence the share price in a positive direction. dividend per share shows how much a company pays out in dividends each year relative to each of its share. in the absence of any capital gains, dividend is the return on investment for a stock. therefore, dps and stock price is supposed to have a positive relationship. 7 control age of the bank (age) the age of the bank from the date of incorporation companies with longer existence and with history of consistence performance tend to enjoy investors’ patronage and thus may impact it share price. the above (table 2) represents a tabular presentation of explanation of the variables and other factors used in the analysis of the study. it highlights the relevance of the variables and how they are situated in this study to help in achieving the study’s objectives. table 3. sample descriptive statistics of the variables. variables* dependent explanatory control sp dps eps roa roe nii age size mean 11.356 0.610 1.260 1.340 11.006 28.746 47.727 1.80e+09 median 7.600 0.250 0.890 1.760 12.710 15.050 31.000 1.17e+09 maximum 49.500 3.600 8.300 9.930 346.680 250.390 126.000 8.68e+09 minimum 0.500 0.000 -20.810 -29.3200 -252.920 -235.730 17.0000 1.07e+08 std. dev. 11.474 0.792 2.866 4.090 45.065 56.293 32.591 1.80e+09 skewness 1.479 1.715 -3.045 -4.380 1.301 0.754 1.1355 1.691810 kurtosis 4.701 5.429 26.481 29.874 31.618 8.599 2.880 5.667539 jarque-bera 80.095 121.533 4045.609 5493.060 5677.462 231.202 35.559 127.6320 probability 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 sum 1873.820 100.6600 208.0406 221.2100 1816.150 4743.100 7875.000 2.98e+11 sum sq. dev. 21591.21 103.0487 1347.225 2743.834 333067.6 519713.7 174202.7 5.32e+20 observations 165 165 165 165 165 165 165 165 note: *sp = share price (naira), roa = return on assets (%), roe= return on equity (%), nii = net-interest income (%), earnings per share (naira), dps= dividend per share (naira), age= age of the bank (years) since establishment size = logarithm of annual total assets. table 3 above represents the description of the statistics employed in the study. it shows the value position of each of the variables in relation to the mean, median, standard deviation, jargue-bera and the probability of the variables. 4. data analysis and results 4.1. correlation matrix table 4 below shows the correlation matrix, showing the relationship between the dependent variable and explanatory variables, on the other hand, the matrix indicates the direction of the relationship which assist establishing the extent of multicollinearity among all the variables considered. the table indicates that there is a positive relationship between the dependent variable and all the other variables, except one of the control variable, age. this revelation suggests a likelihood that all explanatory variables affect the share price of sampled listed banks in nigeria. in a similar vein, the degree of relationship between these variables are not too high which is an indication of absence of multicollinearity among all the explanatory variables considered in this study. in relation to the dependent variable, the result showed a strong positive correlation between sp and dps compared to the other variables. economy, 2023, 10(1): 1-9 7 © 2023 by the authors; licensee asian online journal publishing group table 4. correlation matrix for the sample observations, which are the variables. variables sp dps eps roa roe nii age size sp 1.000000 a ---- b ---- dps 0.7500 1.000000 a 14.477 ---- b 0.0000* ---- eps 0.460 0.642 1.000000 a 6.620 10.711 ---- b 0.0000* 0.0000* ---- roa 0.267 0.357 0.730 1.000000 a 3.551 4.893 13.652 ---- b 0.0005* 0.0000* 0.0000* ---- roe 0.192 0.178 -0.105 -0.320 1.000000 a 2.507 2.321 -1.350 -4.322 ---- b 0.0131** 0.0215** 0.1788 0.0000* ---- nii 0.0750 -0.038 -0.049 0.239 0.030 1.000000 a 0.961 -0.497 -0.638 3.147 0.387 ---- b 0.337 0.619 0.524 0.0020* 0.6990 ---- age -0.073 -0.190 -0.180 -0.195 -0.049 -0.221 1.000000 a -0.947 -2.473 -2.338 -2.546 -0.633 -2.897 ---- b 0.3449 0.0144** 0.0206** 0.0118** 0.5271 0.0043* ---- size 0.176 0.488 0.408 0.168 0.095 -0.204 0.220 1.000000 a 2.288 7.148 5.713 2.180 1.224 -2.664 2.886 ---- b 0.023** 0.0000* 0.0000* 0.0307** 0.2226 0.0085* 0.0044* ---- note: ** correlation is significant at the 5% level. *correlation is significant at the 1% level, a:t-statistics and b-p-value. 4.2. estimated regression result the results of the estimated models (pooled, fixed and random effect) and hausman test are presented in table 5 and 6 respectively. the amounts in brackets represent the standard errors of the estimations and the corresponding probabilities. the fixed effect model has a superior fit, according to a summary of the models' statistics in terms of r-squared, standard error of the regression, and durbin-watson statistic, whereas the value of cross-section random error is very minor in comparison to the idiosyncratic random. the hausman test result showed a chi-square statistic value of 320.63 and a p-value of 0.000 with 7 degrees of freedom, suggesting that the null hypothesis that there is no connection between the explanatory factors and the random effect has been rejected at a 1% significant level. this suggests that fixed effect is a better model for predicting share price in nigeria throughout the data period. table 5. determination of appropriate model: dependent variable: log(sp) and other independent variables variable pooled model fixed effect model random effect model dps 1.0379 (0.1329) (0000)* 0.5637 (0.0968) (0000)* 1.0251 (0.0767) (0000)* eps -0.0351 (0.0463) (0.4498) 0.088 (0.0285) (0.0024)* -0.0308 (0.0265) (0.2472) roa 0.0241 (0.0301) (0.4247) -0.0552 (0.0186) (0.0036)* 0.0206 (0.0172) (0.234) roe 0.0034 (0.0017) (0.0524)*** 0.0009 (0.00103) (0.3427) 0.0033 (0.001002) (0.0012)* nii 0.00462 (0.001) (0.0015)* 0.001705 (0.0008) (0.0523)*** 0.004563 (0.0008) (0000)* age 0.0055 (0.0024) (0.0224)** -0.0989 (0.0198) (0000)* 0.0054 (0.0014) (0.0002)* log(size) 0.0942 (0.0871) (0.281) 0.1141 (0.1204) (0.3451) 0.0807 (0.0504) (0.1117) c -1.19408 (1.7425) (0.4942) 3.7310 (1.7832) (0.0381)** -0.8963 (1.01006) (0.3762) r-squared 0.5220 0.8548 0.5080 adjusted r-squared 0.5007 0.8380 0.4861 f-statistic 24.5008 50.921 23.1638 prob(f-statistic) 0.000000 0.000000 0.000000 durbin-watson stat 0.7161 1.7637 0.7222 cross-section random 0.0373 (0.0055) idiosyncratic random 0.5009 (0.994) note: * significance at 1%, ** significant at 5% and *** significant at 10% level. economy, 2023, 10(1): 1-9 8 © 2023 by the authors; licensee asian online journal publishing group the study proposed that the explanatory variables would positively affect share price. according to table 5, the value of the r-squared coefficient of determination is 85.48%, and the corrected r-squared value is 83.80%. this coefficient expresses how much of the entire fluctuation in bank share prices can be accounted for by the explanatory factors used. this coefficient showed that the model explained 83.8% of the variation in the overall price of banks' shares. by extension, the independent variable used in this study cannot account for 16.2% of the overall fluctuation in the share price of banks. the f-statistics is significant at 1% and has a value of 50.92 with a p-value of 0.000. this finding shows that the econometric model used in the study is suitable for explaining the relationship between the share price of banks and the five key factors taken into account (dps, eps, roa, roe and nii). therefore, the following is the estimated fixed effect panel regression model: log(sp) = 3.73 0.055*(roa) + 0.001*(roe) + 0.002*nii + 0.088*(eps) + 0.564*(dps) – 0.099*age + 0.114*log(size) table 6. correlated random effects hausman test of chi-sq test summary chi-sq. statistic chi-sq. d.f. prob. cross-section random 320.636 7 0.0000 4.3. test of hypotheses ho1: return on assets (roa) do not significantly affect the stock prices of listed banks in nigeria. coefficient (roa) std. error t-statistics p-value -0.055 0.0186 -2.9595 (0.0036) decision: the study accept ho1 and conclude that roa do not significantly affect stock prices of banks since the coefficient return is negative coefficient rather than the expected positive value. however, the negative coefficient was significant at 1% ho2:return on equity (roe) do not significantly affect the stock prices of listed banks in nigeria. coefficient (roe) std. error t-statistics p-value 0.000987 0.0010 0.9519 0.3427 decision: the study accept ho2 and conclude that roe do not significantly affect the stock prices of listed banks in nigeria. the coefficient showed positive impact of roe as expected but is not statistically significant. ho3:growth in net interest income (nii) do not significantly affect the stock prices of listed banks in nigeria. coefficient (nii) std. error t-statistics p-value 0.001705 0.0008 1.9568 0.0523 decision: the study reject ho3 and conclude that growth in net interest income (nii) significantly affect the stock prices of listed banks in nigeria. the coefficient is positive as expected and significant at 10%. ho4: earnings per share (eps) do not significantly affect the stock prices of listed banks in nigeria. coefficient (eps) std. error t-statistics p-value 0.08814 0.0285 3.0860 0.0024 decision: the study reject ho4 and conclude that eps significantly affect the stock prices of listed banks in nigeria. the coefficient is positive as expected and significant at 1%. ho5: dividends per share (dps) do not significantly affect the stock prices of listed banks in nigeria. coefficient (eps) std. error t-statistics p-value 0.5637 0.0968 2.0922 0.0000 decision: the study reject ho5 and conclude that dps significantly affect the stock prices of listed banks in nigeria. the coefficient is positive as expected and significant at 1%. the above findings provide evidences for the rejection of three null hypotheses (ho3, ho4 and ho5), implying that that, nii, eps and dps positively impact share price of banks. thus, when banks want to boost their market value, they must strive to continuously leverage acquired assets to generate quality earnings, maintain optimum expense level to remain profitable as well as declare dividends. 5. discussion of findings regarding the explanatory variables, the model showed that the coefficient of dps, eps, nii and roe contribute positively to share price of the sampled banks while roa impact share price negatively. precisely, the coefficients of the model suggest that increase in the proportion units of dps, eps, nii and roe may result in 0.564, 0.088, 0.002 and 0.001 percentage point increase in share price. on the other hand, proportionate unit increase in roa could lead to 0.055 percentage point decrease in share price respectively. while the coefficient of nii was statistically significant at 10%, the coefficients of dps, eps and roa are significant at 1% level. the coefficient of roe was not statistically significant and hence suggest that the study accept the second hypothesis (h02) and conclude that roe does not significantly affect the stock prices of listed banks in nigeria. this finding is consistent with fouzan et al. (2016), whose work found that there is no effect between roe and stock market price of 20 insurance companies listed in amman stock exchange during the period 2011 to 2015. the possible conjecture of non-significance of the roe could relate to the fact that the equity positions of a few banks, as a result of post consolidation expansion drives, expanded dramatically from merger of medium sized banks, emerging in to larger banks, which has not translated in earnings capacity that could drive share prices of those banks to the height attained by leading banks on the nigerian stock market. the study found that it is not the leading banks in terms of assets, equity and/or earnings that are price leaders. the negative roa also differ from the a priori economy, 2023, 10(1): 1-9 9 © 2023 by the authors; licensee asian online journal publishing group expectation. this is likely as a result of the fact that the study covered both the period of capital market boom, when stock prices reached unprecedented high points, and the period of crash, precisely during the 2008 global financial crisis, when the market witnessed significant decline in stock prices. the later event eroded investors’ confidence and the stock market have not been able to surpass the height reached over a decade ago. the study found that as at close of 2020, only two out of the sampled eleven banks were able to reach or surpass the price levels they attained in 2007. coincidentally, the two banks were that best in terms of average roa and roe for the 15-year study period. in relation to the control variables (age and size), the coefficient on age is negative but statistically significant at 1% but was found to have insignificant inverse relationship with share price. the coefficient of size is positive but not significant. this result indicate that the share price of a nigerian bank with a larger size of assets is likely to be lower keeping every other variable constant. the study found that the share price of one of the leading banks in 2020 (in terms of assets) was less than 9 naira per share and the bank had assets 3 times a medium sized bank trading above 44 naira per share. 6. conclusions and recommendations in conclusion, the study has provided both empirical as well as statistical evidence on the utility of the explanatory variables (roa, roe, nii, eps and dps) and control variables (firm size and age) in explaining and predicting the share price of banks. on the bases of the findings of the research, the study concludes that there is a positive relationship between share price and some firm fundamental factors. also, dividend per share, earnings per share, growth in net interest income engender share price positively. while bank age negatively affects share price. with this, the study recommends that dividend is relevant fundamental factor in determining share price of bank quoted on the nigerian stock exchange. based on this revelation, boards of directors of firms should strive to maintain adequate dividend payments. some of the numerous ways of maintaining adequate dividend payment is by: (a) reducing the proportion of yearly retain earnings, (b) optimization of operational cost, (c) aggressive loan recovery to minimize loan assets impairments, and (d) credit risk management and strategic loan and advances to the real sector. also, the extent that dividend per share enhance share prices, it is recommended that existing shareholders pay more attention on high dividend paying companies for capital gain. finally, due to the enhancing role of dividend on share price, managers may want to window dress their earnings figure through dividend smoothing. therefore, regulators should pay extra attention on earnings management techniques employed by managers in the attempt to smooth dividend payments. references fouzan, a. q., tahtamouni, a., & al-qudah, m. (2016). factors affecting the market stock price-the case of the insurance companies listed in amman stock exchange. international journal of business and social science, 7(10), 81-90. karki, d. (2018). fundamentals of common stock pricing: evidence from commercial banks of nepal. saarj journal on banking & insurance research, 7(1), 4-32. https://doi.org/10.5958/2319-1422.2018.00001.2 pradhan, r. s., & laxmi, p. (2017). impact of fundamental factors on stock price: a case of nepalese commercial banks. nepalese journal of engineering, 4(2), 1-13. shafiqul, a., rubel, m., & abdul, k. (2016). analysis of factors that affect stock prices: a study of listed cement companies at dhaka stock exchange. research journal of finance and accounting, 7(18), 93 -113. tease, w. (1993). the stock market and investment. oecd economic studies, 20(spring), 41-63. ugwudioha, m. o. (2019). financial management; theory and practice. ile-ife, nigeria: obafemi awolowo university press. wallace, n., & thomas, j. s. (1975). rational expectations, the optimal monetary instrument, and the optimal money supply rule. journal of political economy, the university of chicago press, 83(2), 241-254. zutter, c. j., & gitman, l. j. (2012). principles of managerial finance 13th edited by donna battista. boston: pearson prentice hall. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. https://doi.org/10.5958/2319-1422.2018.00001.2 39 © 2023 by the authors; licensee asian online journal publishing group economy vol. 10, no. 1, 39-49, 2023 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/economy.v10i1.5274 © 2023 by the authors; licensee asian online journal publishing group does public debt disrupt economic growth in nigeria? a two-stage least squares approach innocent uchechukwu duru1 okorontah, chikeziem fortunatus2 iyaji danjuma3 chukwuemeka nwamuo4 uzoma kelechi promise5 ojo toluwalashe favour6 ( corresponding author) 1,2,4,5department of economics, rhema university nigeria, aba, abia state, nigeria . 1email: iud3x@yahoo.com 2email: chizim4teens@yahoo.com 4email: mekuzy2002@yahoo.com 5email: uzksboy@gmail.com 3department of economics, nigerian army university, biu, borno state, nigeria. 3email: danjumaiyaji@gmail.com 6ado-ekiti state university, ekiti state, nigeria. 6email: ojotoluwalashe1995@gmail.com abstract the impact of nigeria's public debt on economic growth was investigated in this study. additionally, it confirmed the validity of nigeria's debt burden and crowding-out hypotheses. the time series data used ranged from 1981 to 2021. for analysis, the two-stage least squares and toda yamamoto causality tests were employed. the findings contradicted the debt overhang effect hypothesis by showing that public debt had a positive and significant influence on economic growth. this proves that nigeria's public debt has no adverse effects on the economic growth of the nation. additionally, debt service has a detrimental effect on economic growth. this demonstrated that the crowding-out effect, often known as the crowding-out hypothesis, existed in nigeria. thus, servicing the national debt has a negative impact on nigeria's economic expansion. the results of the public debt model, however, showed that trade openness and real gross domestic product had a favourable effect on public debt. a bidirectional relationship between public debt and economic growth was revealed by the findings of the causality test. the results also showed a one-way relationship between debt service and economic growth. as a result, the study implies that the government can simultaneously pursue its two policy goals of economic growth and public debt. furthermore, decisions about debt repayment in nigeria should be made in a way that promotes the growth of the economy. nigeria should also improve institutional performance and boost its macroeconomic policy in the areas of inflation, foreign direct investment, trade, and exchange rates. keywords: 2sls, crowding out hypothesis, debt overhang hypothesis, economic growth, nigeria, public debt, simultaneous equation model, toda yamamoto causality. jel classification: o11; h63; o40; c22. citation | duru, i. u., fortunatus, o. c., danjuma, i., nwamuo, c., promise, u. k., & favour, o. t. (2023). does public debt disrupt economic growth in nigeria? a two-stage least squares approach. economy, 10(1), 39–49. 10.20448/economy.v10i1.5274 history: received: 10 october 2023 revised: 5 december 2023 accepted: 20 december 2023 published: 29 december 2023 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. institutional review board statement: not applicable. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. this study followed all ethical practices during writing. data availability statement: the corresponding author may provide study data upon reasonable request. competing interests: the authors declare that they have no competing interests. authors’ contributions: all authors contributed equally to the conception and design of the study. all authors have read and agreed to the published version of the manuscript. mailto:iud3x@yahoo.com mailto:chizim4teens@yahoo.com mailto:mekuzy2002@yahoo.com mailto:uzksboy@gmail.com mailto:danjumaiyaji@gmail.com mailto:ojotoluwalashe1995@gmail.com https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v10i1.5274 https://orcid.org/0000-0001-8958-0686 https://orcid.org/0009-0006-9305-3233 https://orcid.org/0000-0002-0275-6608 https://orcid.org/0000-0002-0304-4100 https://orcid.org/0009-0003-7218-323x economy, 2023, 10(1): 39-49 40 © 2023 by the authors; licensee asian online journal publishing group contents 1. introduction ................................................................................................................................................................................................... 40 2. literature review and theoretical framework ................................................................................................................................. 41 3. methodology and model specification .................................................................................................................................................. 44 4. data presentation, analysis and discussion of results ................................................................................................................... 45 5. conclusion and recommendations ......................................................................................................................................................... 47 references ........................................................................................................................................................................................................... 47 contribution of this paper to the literature in contrast to previous studies, this study deployed the 2sls technique to untangle the nexus between total public debt and economic growth in nigeria from 1981 to 2021. the study also utilized the 2sls to address endogeneity, regarded as a methodological improvement, a majo divergence from several past studies. 1. introduction the debate on the relationship between public debt and economic growth among academics, policymakers and economics in the economic literature has lasted for ages. evidence from the existing literature on the public debtgrowth nexus indicates that the laggard economies particularly have been at the receiving end because of its impact on their gross domestic product (gdp) growth rates through interest rates, saving, investment and total factor productivity. however, checherita-westphal and rother (2011) maintained that longstanding interest rates are the main conduit through which the negative consequences of public debt accumulation on growth are experienced. public debt is regarded by economists as a critical problem that inhibits economic performance. no wonder chongo (2013) stressed that it was a two-edged sword after an investigation of its consequences on the economy of zambia. owing to its unfavourable consequences on the performance of the economy, the widespread accumulation of public debt over time all over the world economy has become amazing. the issue of the buildup of public debt predominantly in lowand middle-income economies over time and its unfavourable consequences on the performance of these economies has further aroused the collective interests of some economists and policymakers. public debt is a possible catalyst for financing budget deficits in less developed countries (geleta, 2021). a surge has been recorded in internal and foreign debts owing to the need of the government to finance the deficit budget. on the other hand, the interest in the public debt-growth nexus in advanced economies among economists, policymakers, and scholars was strengthened by the great recession of 2008–09 and the substantial fiscal stimulus measures applied by governments (sabina, 2018). for instance, in the view of the european commission (2017), throughout the 2008–2009 global financial and economic crisis, the fiscal sustainability of innumerable european economies was severely dampened. this reinforced canbek (2014) contention that the level of public debt at the time was a subject of political discussion for both established and developing nations. moreover, canbek (2014) stressed that after the 2008 global financial crisis, the connection between public debt and growth was at the vanguard of macroeconomics literature. atoullo (2019) claimed that before the great recession of 2008, the body of research was merely focused on a particular cluster of rising economic powers and undeveloped countries that had meaningful external indebtedness. in the contention of leon, murillo, and hernandez (2019), public debt surfaced as one of the major dynamics influencing economic growth after the financial crisis of 2008. the debt-growth nexus in established countries was unearthed by reinhart and rogoff (2010a); reinhart and rogoff (2010b); reinhart and rogoff (2011) and reinhart, reinhart, and rogoff (2012). these narratives engendered a new series of discussions concerning the connection between debt and the fundamental health of the economy. reinhart and rogoff (2010a) investigated whether public debt began to cause contraction below a specific threshold. owing to the finding of reinhart and rogoff (2010a) that economic growth is significantly dampened if the public debt-to-gdp ratio approaches 90%, the research that has been executed to investigate the public debt-growth nexus in advanced countries and developing markets has increased. the political officeholders and decision-makers in nigeria could borrow a leaf from the outcome of this investigation in the formulation of strategies for handling the debt crisis in nigeria. also, it would underpin the creation of an enabling environment for inclusive sustainable economic growth by getting rid of the challenges nigeria has due to its debt problem. moreover, the outcome of this investigation could be critical to decision-makers in the design of a new nigerian public debt management strategy. while a considerable body of past investigation on the subject proposes a negative connection between public debt and economic growth (abbas & christensen, 2010; ahlborn & schweickert, 2016; akram, 2015, 2016; al kharusi & ada, 2018; clements, bhattacharya, & nguyen, 2003; egert, 2015; gomez-puig & sosvilla-rivero, 2018; hansen, 2002; huang, panizza, & varghese, 2018; kumar & woo, 2010; mhlaba & phiri, 2019; panizza & presbitero, 2014; reinhart & rogoff, 2010a; reinhart & rogoff, 2010b; sachs, 1989; schclarek, 2004; serieux & yiagadeesen, 2001; szabo, 2013; weeks, 2000; woo & kumar, 2015), two conflicting viewpoints still subsist. based on the first contention (abbas & christensen, 2010; adams & bevan, 2005; bua, pradelli, & presbitero, 2014; gomez-puig & sosvilla-rivero, 2018; greiner, 2011; owusu-nantwi & erickson, 2016; sanchez-juarez & garcia-almada, 2016; spilioti & vamvoukas, 2015), public debt has a positive effect on economic growth. the second contention is that public debt has no effects on economic growth (adams & bevan, 2005; akram, 2015, 2016; hansen, 2001; jalles, 2011; kourtellos, stengos, & tan, 2013; panizza & presbitero, 2012; pattillo, poirson, & ricci, 2002; schclarek, 2004; tchereni, sekhamptu, & ndovi, 2013). finally, a nonlinear connection between public debt and economic growth is reinforced by certain studies (baum, checherita-westphal, & rother, 2013; checherita-westphal & rother, 2010, 2011; eberhardt & presbitero, 2015; minea & parent, 2012; mupunga & le roux, 2015; pattillo et al., 2002; pescatori, sandri, & simon, 2014; reinhart & rogoff, 2010a). the empirical research on the causal relationship between public debt and economic growth is still in its early years, and the findings are conflicting. evidence from the existing empirical data points to changes that originated from time and cross-country divergence. in certain investigation, the connection between public debt and economic economy, 2023, 10(1): 39-49 41 © 2023 by the authors; licensee asian online journal publishing group growth was unidirectional (afxentiou, 1993; donayre & taivan, 2017; gomez-puig & sosvilla-rivero, 2015; kobayashi, 2015; woo & kumar, 2015), whereas, in other studies, the connection was found to be bidirectional (abbas & christensen, 2010; amoateng & amoako-adu, 1996; donayre & taivan, 2017; eberhardt & presbitero, 2015; ferreira, 2009; owusu-nantwi & erickson, 2016). however, certain investigations discerned no connection between public debt and economic growth (donayre & taivan, 2017; gomez-puig & sosvilla-rivero, 2015; jalles, 2011; panizza & presbitero, 2014; reinhart & rogoff, 2010a). despite efforts to lower its debt in 2005, which led to the paris club of creditors granting her debt relief, nigeria has continued to have trouble managing the servicing of its comparatively huge inventories of public debt. nigeria's thirst for increasingly expensive and unaffordable international loans has led to an increase in debt. it is extremely important to look into how nigeria's government debt and economic growth are related. the study seeks to provide answers to the following questions: is nigeria's government debt a barrier to the country's economy? what is the relationship between nigeria's economic growth and its governmental debt? do the debt overhang and crowdingout hypotheses apply to nigeria? in light of the foregoing, this study will empirically examine the effect of public debt on economic growth in nigeria and will also ascertain the existence of public debt overhang and crowding out effect on economic growth in nigeria. the remainder of the study is organized as follows: in section 2, the relevant theoretical and empirical literature are reviewed. in light of the literature review, section 3 explains the data source, methodology, and model development. section four of the study discusses the empirical findings. the findings are used to draw the conclusions and policy recommendations in section 5. 2. literature review and theoretical framework 2.1. empirical literature in-depth research has been done in the literature on the relationship between governmental debt and economic growth. both developed and developing countries have examined the connections between these two variables. depending on the country, different scholarly works using various types of data and models produce different outcomes. the same technique alone does not guarantee the same results (geleta, 2021). for instance, in zimbabwe, mavhinga (2015) used the vector error correction model (vecm) to examine the impact of external debt on economic growth from 1980 to 2013. also, the viability of the debt overhang and crowding out theories in zimbabwe was investigated. the results showed that external debt exerted a negative effect on economic growth. in addition, the findings validated the debt overhang idea. however, the results refuted the crowding out theory in zimbabwe. wangmo (2018) investigated the association between government debt and economic growth in bhutan from 1990 to 2016 using the vecm methodology. the results showed the long-term positive impact of government debt and tourism revenue on economic growth. however, unemployment, tax income, foreign aid, and population expansion had a detrimental impact on economic growth. the study examined how each component was impacted by the rupee currency problem as well as how it affected economic expansion. the results showed that bhutan's economic growth was significantly impacted by the financial crisis of 2012. iitula (2018) examined the impact of public debt on namibia's economic growth from 2003 to 2016 using information from a quarterly time series. the toda-yamamoto granger causality methodology was employed for the analysis. the results of cointegration showed that there are no long-term correlations between the variables. the results also revealed no connection between public debt and gdp growth. the results of the variance decomposition test showed that the burden of domestic debt on gdp growth was greater. the results of the impulse response function show that there was instability in gdp growth's response to public debt. for 17 organization for economic cooperation and development (oecd) nations, sabina (2018) looked into the potential nonlinearity in the relationship between public debt as a share of gdp and economic growth for each country independently from 1970 to 2014. employing the technique of hansen (1996) and hansen (1999), the consequent debt-value threshold is endogenously determined while simultaneously adjusting for additional growth drivers. the results show that the debt-value thresholds, cointegration, and nonlinearity between these two variables, as well as the effect of the public debt ratio on economic growth, are all country-specific. using the error correction model (ecm) methodology, elikana (2019) examined the impact of tanzania's public debt on economic growth from 1990 to 2017. the findings showed that external debt positively impacted economic growth. however, the repayment of external debt had a positive and insignificant impact on economic growth. the findings also showed that domestic debt has a negative impact on economic growth. the outcome of cointegration also demonstrated a long-term link between the variables. sanusi, hassan, and meyer (2019) used a non-linear autoregressive distributed lag (nardl) model within a panel framework to investigate the non-linear impacts of public debt on economic growth in the southern african development community (sadc). the findings supported the long-term non-linearity between public debt and economic growth, which suggests that public debt drives growth before counteracting it upon reaching the threshold level. additionally, the findings indicate that over the long term, the sadc's public debt ceiling is set at 57% of gdp. in latin america, leon et al. (2019) applied the vector autoregression technique to investigate the relationship between public debt and economic growth. the main results indicated that when the ratio of public debt to gdp is 75%, economic growth decelerates. conversely, the volatility of economic growth is enhanced when the ratio is 35%. the results further established that external shocks such as foreign capital flows and changes in the situations of trade affect the link between public debt and economic growth. rising levels of public debt undeniably increases the short-run vulnerability of the economy. however, growth becomes a catalyst for fiscal sustainability in the long term. the autoregressive distributed lag (ardl) model was utilized by atoullo (2019) to examine the impact of public debt on tajikistan’s economy. the short-run and long-run results showed that external debt has a detrimental effect on economic growth. the proposition that public debt is favourable in the short term and unfavourable in the long term was countered by this finding. however, it supported the suggestion that the link between public debt and economic growth in the short and long runs was negative. furthermore, the impact of debt service on economic growth in the short and long runs was inverse. njoroge (2020) used the methodologies of ardl and vecm to investigate the impact of public debt on economic growth in kenya. the findings indicated that public debt, investment and population growth had a positive economy, 2023, 10(1): 39-49 42 © 2023 by the authors; licensee asian online journal publishing group effect on economic growth. on the other hand, the openness of the economy and government consumption spending exerted a negative impact on economic growth. the findings further indicated that the primary budget balance had a positive effect on the public debt of kenya. this result implies that the public debt of kenya is manageable. utilizing data from 1970-2017, saungweme (2020) deployed the ardl bounds tests to cointegration to analyse the link among public debt, public debt service and economic growth in south africa, zambia and zimbabwe. the findings demonstrated that public debt had a favourable impact on the economic growth of zambia. nonetheless, it exerted a negative effect on the economic growths of south africa and zimbabwe respectively. furthermore, domestic public debt exerted a negative effect on the economic growths of zambia and zimbabwe. it, however, exerted a positive impact on the economic growth of south africa. moreover, foreign public debt affected zambia's economic growth positively. nevertheless, it exerted a negative effect on the economic growth of south africa and zimbabwe. the results of the causality test indicated that causality runs from economic growth to public debt in all the economies investigated. in all the countries studied, there was no proof of a positive relationship between public debt service and economic growth. in another study, nwanedo (2021) adopted the multiple regression technique and the granger causality test to examine the impact of public debt on economic growth in nigeria from 1981 to 2019. the results indicated that external debt had a negative effect on economic growth. however, domestic debt had a positive and insignificant impact on economic growth. the result of cointegration indicated the presence of a long-run equilibrium relationship among the variables. the test of the granger causality indicated a unidirectional relationship from external debt and domestic debt to economic growth. in a study of 18 sub-saharan african (ssa) countries, geleta (2021) employed panel data from 2005 to 2018 and the two-step system generalized method of moment (2ssys-gmm) and two-stage least squares approach.to examine the impact of public debt on economic growth. the findings indicated that public debt had a negative effect on the economic growth of the investigated sub-saharan african (ssa) countries. nevertheless, the non-linear link suggested by the laffer curve between public debt and economic growth was refuted by the outcome of this investigation. moreover, the results indicated that national savings, gross exports and broad money had a positive effect on economic growth. furthermore, the results indicated that there is no nexus between public debt and economic growth in the ssa economies investigated. mosikari and eita (2021) deployed the nardl approach in a diverse study to explore the asymmetric link between government debt and gdp growth in namibia. to begin with, the results indicated that government debt exerted a positive and insignificant effect on economic growth. however, government debt started to exert a negative influence on economic growth after a particular stage. owing to this, gdp growth has diverse responses to rising debt levels and falling debt levels. the response of the growth rate of gdp to declining values of debt is more favourable than to rising values of debt. in 14 european countries of austria, belgium, denmark, finland, france, germany, greece, italy, luxembourg, norway, portugal, spain, sweden, and turkey, yildirim and erdogan (2021) used the panel ardl approach to examine the nexus between public debt and economic growth from 1980 to 2017. the results indicated that except denmark and norway where public debt exerted a positive effect on economic growth, that it had a negative effect on the economic growth of the remaining countries. however, public debt exerted a positive and insignificant effect on the economic growth of sweden. adopting the ardl methodology and time series data from 1980 to 2022, uzoma, duru, uruakpa, and nzeribe (2023) investigated the connection between public debt and economic growth in nigeria. the results revealed that domestic debt had a negative effect on economic growth. however, external debt exerted a negative and insignificant effect on economic growth. facts from the reviewed literature indicate that most of the studies were executed in industrialized economies. also, it revealed that diverse methodologies have been deployed for the investigation of public debt-growth nexus. however, the vecm was the most common one in terms of frequency of use. there is a consensus among scholars that the keynesian theory, ricardian equivalence theory, and neoclassical theory have been utilized as the main theoretical framework for the investigation of the public debt-growth nexus (aero & ogundipe, 2016; eze & ogiji, 2016; lwanga & mawejje, 2014; njoroge, 2020; renjith & shanmugam, 2018). to the best of our knowledge, further evidence from the reviewed literature showed that egbetunde (2012); akomolafe, bosede, emmanuel, and mark (2015); nwanedo (2021) and uzoma et al. (2023) were the investigation executed in nigeria. the studies executed in nigeria on public debt and public debt-growth nexus were sparse. nevertheless, this issue had resulted in extensive studies in other developing and developed economies as evidenced by these researches (alves, 2014; atoullo, 2019; canbek, 2014; chongo, 2013; geleta, 2021; leon et al., 2019; mosikari & eita, 2021; njoroge, 2020; saungweme, 2020; soares, 2022; yildirim & erdogan, 2021). akomolafe et al. (2015) dwelt on public debt and private investment in nigeria. to the best of our knowledge, the only researchers their focal point was public debt-growth. nexus were egbetunde (2012); nwanedo (2021) and uzoma et al. (2023). deploying a vector autoregressive (var) technique, egbetunde (2012) utilized time series data from 1970 to 2010 to analyse the impact of public debt on economic growth in nigeria. the real gross domestic product (gdp) was the dependent variable. conversely, domestic debt and external debt were the independent variables. this study established a bidirectional relationship between public debt and economic growth. uzoma et al. (2023) deployed time series data from 1980 to 2022 to examine the link between public debt and economic growth in nigeria. the ardl approach was used for analysis. the real gdp was the dependent variable. however, domestic debt, external debt, inflation rate, and interest rate were the independent variables. the results indicated that domestic debt had a negative and significant impact on economic growth. on the other hand, external debt had a negative and insignificant effect on economic growth in nigeria. nwanedo (2021) on the other hand, used time series data from 1981 to 2019 and a multiple regression methodology to examine the connection between public debt and economic growth in nigeria. the real gdp was the dependent variable. conversely, the exchange rate, the consumer price index, the total stock of domestic debt, and the total stock of external debt were the independent variables. the findings indicated that external debt exerted a negative impact on economic growth. however, domestic debt exerted a positive and insignificant impact on economic growth. the results of the reviewed empirical studies on public debt-growth nexus were conflicting owing economy, 2023, 10(1): 39-49 43 © 2023 by the authors; licensee asian online journal publishing group to diverse datasets and methodologies. the results of studies executed in nigeria (egbetunde, 2012; nwanedo, 2021; uzoma et al., 2023) on the public debt-growth nexus were no exceptions. owing to this, the public debt-growth nexus is still open for discussion in nigeria. methodological problems are among the drawbacks of previous studies. the ordinary least squares (ols) approach was utilized by nwanedo (2021) for analysis. this could probably result in a problem of endogeneity due to the bidirectional link between public debt and economic growth. the resulting outcome would be biased and inconsistent in this regard owing to the ols application. this study deployed the two stage least square (2sls) approach which is at variance with the approaches adopted by egbetunde (2012); nwanedo (2021) and uzoma et al. (2023) to analyse the public debt-growth nexus. in contrast to the ols method, the 2sls has an added advantage since it removes the endogeneity amid the explanatory variables. moreover, the investigations by egbetunde (2012); nwanedo (2021) and uzoma et al. (2023) decomposed public debt into domestic and external public debt. the joint effect of total public debt (involving both domestic and external debt) on economic growth regarded as a critical gap in the public debt-growth literature was ignored by these studies as well. owing to this, the effect of total public debt on economic growth in nigeria was not investigated by any of these studies. no wonder elikana (2019) maintained that evaluations of public debt in developing economies have traditionally dwelt on external debt only. based on this, we joined domestic and external debt to spawn total public debt rather than separating it to examine the impact of total public debt (either domestic debt or external debt) on nigeria’s economic growth. in contrast to previous studies, our study expanded the sphere of investigation. this study included extra macroeconomic variables into the current empirical models to address one of the critical gaps in past research. 2.2. theoretical framework according to the theoretical analysis of the connection between public debt and economic growth, there is not just one explanation for it. the theoretical framework of this study will therefore be based on the neoclassical theory, the keynesian theory and the ricardian equivalence theory. this is because, according to the literature, these are the main ideas that scholars employ to explain how public debt and economic growth are related. in addition to these three fundamental theories, others can be used to analyze the connection between debt and economic growth, including the functional finance theory, dual gap theory, and tax smoothening theory (chongo, 2013; karazijiene, 2015). the classical strategy, which is based on the core idea that there is no basis for government interference in the economy outside of a few crucial sectors like military, health, and education, is elaborated upon by the neoclassical approach. when it comes to public debt, these two perspective-sharing approaches underline the detrimental effect of government expenditure on economic growth. according to the traditional view, society or future generations are ultimately responsible for repaying public debt, which includes both principal and interest (buchanan, 1958). this is because the neoclassical model suggests that public debt may be a constraint on economic growth because it crowds out private investment, according to diamond (1965) and panizza and presbitero (2013). also, this is because the neoclassical model gave a stronger role to crowding-out effects brought on by rising interest rates due to increased competition for funds in the financial markets. according to classical theory, public debt has a detrimental effect on economic expansion. this supports the claims made by early classical scholars like adam smith, jean baptiste say, and david ricardo, who opposed government debt because it distorts private capital and has a detrimental effect on capital accumulation and growth because government spending is unproductive (tsoulfidis, 2007). the neoclassical supports the idea that debt held by the government impedes economic growth. investors may view governmental debt as a pretext for future tax increases, interest rate rises, or debt-driven crises, all of which could discourage private investment and economic growth. the crowding-out effect of high debt levels is the term used to describe this phenomenon (akram, 2015). when foreign exchange resources are mostly used for debt service and only a small percentage is allocated to investment and growth finance, this phenomenon is known as crowding out (krugman, 1988). the crowding-out hypothesis is part of a broader body of neoclassical theory, which maintains that investment is driven away by deficit financing, leading to a decrease in capital formation and economic growth. elmendorf and mankiw (1999) assert that the signing of government debt to finance the budget deficit is one of the primary factors impeding private investment. therefore, the enormous servicing of public debt may lead to the misallocation of limited resources that could be used for public investment. therefore, the majority of the detrimental impact of public debt servicing on economic growth is explained by the crowding out hypothesis. another widely acknowledged theory is the debt overhang effect. the debt overhang effect is a theory that explains how public debt influences investment and economic expansion. borensztein (1989) and sachs (1989) define a debt overhang as a situation in which a country's ability to repay its public debt is less than the burden of public debt. the ratio of public debt to gdp is used to determine financial capacity. a high percentage suggests that a country's ability to generate enough income to pay off its national debt would be challenging. the accumulated debt stock deters investors from making investments in the private sector because they fear having to pay high taxes to the government (wangmo, 2018). at that moment, the debt overhang effect starts to work. a country's public debt is considered to be overhanging when it is beyond its repayment capacity. debt overhang can send organizations and nations into a vicious downward spiral since more cash flows and revenues are utilized to service current debt, which only helps to raise the total amount of debt (mensah, 2017). the negative impact of public debt on economic growth can be largely explained by the debt overhang hypothesis. the idea contends that governmental debt and economic growth are inversely correlated. myers proposed the debt overhang theory in myers (1977). however, the debt crisis in the mid-1980s prompted several important studies by sachs (1989); krugman (1988) and krugman (1989), which brought it into the realm of international finance literature. debt drives away the private sector, depletes resources due to debt and interest payments to borrowers, and throws doubt on the future health of the economy, according to this prognosis. the keynesian theory of public debt contends that rising debt levels encourage government expenditure, which in turn boosts economic growth. the keynesian hypothesis holds that boosting government spending by taking on additional debt from the public sector will increase economic activity at home and attract private investment (saungweme & odhiambo, 2018). the keynesian hypothesis therefore contends that debt boosts demand, which economy, 2023, 10(1): 39-49 44 © 2023 by the authors; licensee asian online journal publishing group ultimately encourages a rise in investment and production. according to keynesians, debt does not cost either the present or future generations because of the investments it generates. therefore, according to them buchanan (1958), the underlying burden of the national debt is not being passed on to future generations. according to this theory, production increases as a result of the accelerator effect, which happens when debt boosts investment more proportionately than demand (diallo, 2009). their rationale is that, according to oleksandr (2003) one of the sources for funding capital creation is external debt, and since capital formation financing encourages investment, it fosters economic growth. ewaida (2017) contended that this mechanism is dependent on the effectiveness of expansionary fiscal policy in increasing output and aggregate demand. additionally, this advantageous effect happens when public debt is utilized to fund either productive public capital or public amenities (attard, 2019; checherita-westphal & rother, 2012). the classical view, however, contends that debt prevents consumption and capital creation because it acts as a future tax (diallo, 2009; oleksandr, 2003; pattillo, poirson, & ricci, 2004; sheikh, abbasi, iqbal, & masood, 2014). therefore, due to its negative impact, the classical, debt overhang theorists, and crowding-out theorists do not advocate public debt for growth. finally, barro (1979) ricardian equivalence theory rejected both the keynesian and the neoclassical perspectives on public debt. however, according to this theory, there is either no relationship or a neutral one between public debt and economic growth (barro, 1989). to put it another way, as long as solvency is not a concern, government debt merely explains the distribution of financial resources among economic agents, with no changes to actual macroeconomic variables (barro, 1989). since rational people are aware that the government utilizes the power of levy to pay off its debt, they also understand that today's tax cut is equivalent to tomorrow's tax increase. the ricardian equivalence theory states that borrowing and taxation have equal effects when financing government debt (bernheim, 1989). consequently, in barro (1974) opinion, according to the ricardian equivalence hypothesis, public debt cannot be a tool for stimulating the economy. the so-called conventional view of debt, which mixes keynesian and neoclassical viewpoints and maintains that the economy exhibits keynesian behaviour in the short term and classical behaviour in the long term, is also mentioned in the literature (elmendorf & mankiw, 1999). in conclusion, there is disagreement over how public debt affects economic growth according to these ideas. the public debt, according to the neoclassicals, has a detrimental impact on economic expansion. the keynesians, on the other hand, believed that public debt had a beneficial effect on economic expansion. the ricardian equivalence theory also predicted that public debt would have no negative or positive effects on economic growth. bernheim (1987) analysed the keynesian, neoclassical, and ricardian schools of thought about deficit financing, arguing that the ricardian paradigm should be rejected on theoretical grounds because it is based on questionable premises. 3. methodology and model specification in this investigation, time series data from 1981 to 2021 was used. considering the accessibility of the data, this time frame was chosen. additionally, the debt crisis at the start of the 1980s had an impact on the majority of the least developed countries (ldcs). furthermore, the structural adjustment programme (sap) era, the debt relief phase of 2005, the global financial crisis of 2008, and the period of elevated public borrowing were included in our focus. data from the world bank (wb), world development indicators (wdi) and the central bank of nigeria (cbn) were used for the study. the data on the national debt was provided by the cbn. however, data for the remaining variables was gathered from the wb wdi. tables 1 and 2 present the variable definition, measurement, data source, and expected signals for economic growth and public debt models, respectively. table 1. variable definitions, measures and sources of data for the growth model. variable description expected sign source of data dependent variable gdp per capita growth rate gdp per capita (constant 2015 us$) dependent variable wb, wdi independent variables public debt stock public debt stock as a share of gdp +/cbn inflation inflation rate measured by the consumer price index wb, wdi openness to trade trade as a share of gdp + wb, wdi debt service total debt service as a percentage of exports of goods and services (% of exports) wb, wdi real effective exchange rate real effective exchange rate wb, wdi foreign direct investment foreign direct investment, net inflows as a share of gdp + wb, wdi table 2. variable definitions, measures and sources of data for the public debt model. variable description expected sign source of data dependent variable public debt stock public debt stock as a share of gdp dependent variable cbn independent variables gdp per capita growth rate gdp per capita (constant 2015 us$) wb, wdi inflation inflation rate measured by the consumer price index wb, wdi openness to trade trade as a share of gdp + wb, wdi debt service total debt service as a percentage of exports of goods and services (% of exports) + wb, wdi real effective exchange rate real effective exchange rate wb, wdi foreign direct investment foreign direct investment, net inflows as a share of gdp wb, wdi economy, 2023, 10(1): 39-49 45 © 2023 by the authors; licensee asian online journal publishing group to prevent problems with spurious regression, a time series stability test was conducted. using the augmented dickey-fuller (adf) and phillips-perrons unit root tests, we looked for stationarity in the series. economic growth and public debt have a two-way relationship. findings from a single equation method like ordinary least squares (ols) will be biased and conflicting (greene, 2003; gujarati, 2003). the two-stage least squares (2sls) methodology will be used in this study to address the endogeneity between economic growth and public debt and investigate their relationship. in terms of model specification, the study will specify two equations. the two equations are therefore those that relate to public debt and economic growth. the first equation will illustrate how public debt and economic growth are related, and the second equation will make clear what produces public debt. all of the variables were logged. the logarithm sign was represented by the symbol ln. the first model was adapted from those made by geleta (2021); forgha, mbella, and ngangnchi (2014), as well as chukwuagoziem (2012). however, the second model was modified using models from chongo (2013); forgha et al. (2014) as well as geleta (2021). the following is how these equations are shown: 𝐿𝑁𝑅𝐺𝐷𝑃𝑡 = 𝛽0 + 𝛽1𝐿𝑁𝑃𝑈𝐵𝐷𝑡 + 𝛽2𝐿𝑁𝐼𝑁𝐹𝑡 + 𝛽3𝐿𝑁𝑂𝑃𝐸𝑁 + 𝛽4𝐿𝑁𝐷𝐸𝐵𝑇𝑆𝑡 + 𝛽5𝐿𝑁𝑅𝐸𝐸𝑅𝑡 + 𝛽6𝐿𝑁𝐹𝐷𝐼𝑡 + 𝜀𝑡 (1) 𝐿𝑁𝑃𝑈𝐵𝐷𝑡 = 𝛽0 + 𝛽1𝐿𝑁𝑅𝐺𝐷𝑃𝑡 + 𝛽2𝐿𝑁𝐼𝑁𝐹𝑡 + 𝛽3𝐿𝑁𝑂𝑃𝐸𝑁𝑡 + 𝛽4𝐿𝑁𝐷𝐸𝐵𝑇𝑆𝑡 + 𝛽5𝐿𝑁𝑅𝐸𝐸𝑅𝑡 + 𝛽6𝐿𝑁𝐹𝐷𝐼𝑡 + 𝜇𝑡 (2) 𝑊ℎ𝑒𝑟𝑒: 𝐿𝑁𝑅𝐺𝐷𝑃 = 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 𝑖𝑛 𝑙𝑜𝑔𝑎𝑟𝑖𝑡ℎ𝑚 𝑓𝑜𝑟𝑚. 𝐿𝑁𝑃𝑈𝐵𝐷 = 𝑃𝑢𝑏𝑙𝑖𝑐 𝑑𝑒𝑏𝑡 𝑠𝑡𝑜𝑐𝑘 𝑖𝑛 𝑙𝑜𝑔𝑎𝑟𝑖𝑡ℎ𝑚 𝑓𝑜𝑟𝑚. 𝐿𝑁𝐼𝑁𝐹 = 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑖𝑛 𝑙𝑜𝑔𝑎𝑟𝑖𝑡ℎ𝑚 𝑓𝑜𝑟𝑚. 𝐿𝑁𝑂𝑃𝐸𝑁 = 𝑂𝑝𝑒𝑛𝑛𝑒𝑠𝑠 𝑡𝑜 𝑡𝑟𝑎𝑑𝑒 𝑖𝑛 𝑙𝑜𝑔𝑎𝑟𝑖𝑡ℎ𝑚 𝑓𝑜𝑟𝑚. 𝐿𝑁𝐷𝐸𝐵𝑇𝑆 = 𝐷𝑒𝑏𝑡 𝑠𝑒𝑟𝑣𝑖𝑐𝑒 𝑖𝑛 𝑙𝑜𝑔𝑎𝑟𝑖𝑡ℎ𝑚 𝑓𝑜𝑟𝑚. 𝐿𝑁𝑅𝐸𝐸𝑅 = 𝑅𝑒𝑎𝑙 𝑒𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑒𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑟𝑎𝑡𝑒 𝑖𝑛 𝑙𝑜𝑔𝑎𝑟𝑖𝑡ℎ𝑚 𝑓𝑜𝑟𝑚. 𝐿𝑁𝐹𝐷𝐼 = 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝑑𝑖𝑟𝑒𝑐𝑡 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑖𝑛 𝑙𝑜𝑔𝑎𝑟𝑖𝑡ℎ𝑚 𝑓𝑜𝑟𝑚. table 3. adf unit root test results. variable augmented dickey-fuller (adf) level first difference i(d) lnrgdp -1.1727 -4.0447*** i (1) lnpubd -3.1025** i (0) lninf -3.4972*** i (0) lnopen -2.0659 -7.7559*** i (1) lndebts -1.2803 -6.3650*** 1(1) lnreer -2.9636** 1(0) lnfdi -3.1537** 1(0) note: *** and ** indicate statistical significance at the 1% and 5% levels. 4. data presentation, analysis and discussion of results the variables were either i(0) or i(1), according to the findings of the adf unit root test in table 3. all other variables were stationary at the first difference, except for public debt, the inflation rate, the real effective exchange rate, and foreign direct investment. table 4. estimates of two-stage least-squares for the growth model. dependent variable: lnrgdp variable coefficient std. error t-statistic prob. lnpubd 0.0376 0.0149 2.5287** 0.0163 lninf 0.0059 0.0255 0.2302 0.8193 lnopen -0.1275 0.0481 -2.6491*** 0.0122 lndebts -0.1260 0.0129 -9.7446*** 0.0000 lnreer -0.0741 0.0443 -1.6732* 0.1035 lnfdi -0.0510 0.0294 -1.7328* 0.0922 c 7.8230 0.4298 18.2010*** 0.0000 model parameters r2 0.8543 adjusted r2 0.8286 f-statistic (prob.) 33.2350 (0.0000) durbin-watson statistic 0.9589 note: ***, ** and * indicate statistical significance at the 1%, 5% and 10% levels. the findings of the equation of economic growth are depicted in table 4. the results indicate that public debt has a positive effect on economic growth. thus, if public debt increases by one per cent, economic growth would increase by 0.04 per cent. this result agrees with the keynesian suggestions. consequently, the debt overhang hypothesis does not hold in nigeria. this is an indication that public debt does not dampen economic growth in nigeria. the results of mensah (2017); wangmo (2018); saungweme (2020) and njoroge (2020) support this result. the findings of chongo (2013); anning, ofori, and affum (2016); saungweme (2020) and geleta (2021) contravene this outcome. inflation has a positive and insignificant impact on economic growth against expectation. this suggests that nigeria's macroeconomic policy promotes economic growth slightly. the findings of oteng (2022) agree with this outcome. however, the deductions of njoroge (2020) violate it. unlike what was anticipated, trade openness had a negative effect on economic expansion. thus, it does not promote economic growth in nigeria. this suggests that a 0.13 per cent rise in trade openness would diminish economic growth. in nigeria, where primary commodities make up the majority of export earnings, this result economy, 2023, 10(1): 39-49 46 © 2023 by the authors; licensee asian online journal publishing group emphasizes the importance of varying export and import prices on economic growth, which is a substantial source of economic volatility. this observation is not consistent with those of duru et al. (2021). the real effective exchange rate has a negative effect on economic growth as forecasted. this implies that a 0.07 per cent per rise in real effective exchange rate would stifle economic growth. this result contradicts nsonwu (2016) submissions. contrary to expectations, foreign direct investment had a negative impact on economic growth. hence, it does not contribute to economic growth in nigeria. this implies that a 0.05 per cent rise in foreign direct investment would reduce economic growth. the findings of some earlier investigations (chongo, 2013; mavhinga, 2015; njoroge, 2020) do not support this. in addition, as was expected, debt service had a negative impact on economic growth. this implies that a 0.13 per cent rise in debt service would dampen economic growth. this result aligns with the findings of nsonwu (2016); elikana (2019); atoullo (2019); saungweme (2020) and oteng (2022). however, it contradicts mavhinga (2015) submissions. the crowding-out effect phenomenon or crowding-out hypothesis is consistent with this. this suggests that national debt servicing has a detrimental effect on nigeria's economic growth. the crowding-out effect hypothesis therefore applies to nigeria. as a result, there is a greater reliance on foreign loans due to the debt servicing load. furthermore, paying off debt uses up resources that could be used to support development initiatives, which has a direct detrimental effect on economic growth. this result contradicts mavhinga (2015) and elikana (2019) submissions. the explanatory factors were able to account for 85% of the total variation in the dependent variable, which suggests that the model fits the data well. the durbin-watson value of 0.9589 indicates the presence of positive autocorrelation. the p-value of the f-statistic indicates that the model as a whole is statistically significant. table 5. estimates of two-stage least-squares for the public debt model. dependent variable: lnpubd variable coefficient std. error t-statistic prob. logrgdp 4.2093 1.6646 2.5287*** 0.0163 loginf -0.0113 0.2698 -0.0419 0.9668 logopen 1.5112 0.4958 3.0482*** 0.0044 logdebts 0.2109 0.2640 0.7988 0.4299 logreer -0.8391 0.4657 -1.8018 0.0805 logfdi -0.2193 0.3227 -0.6795 0.5014 c -15.2952 14.6720 -1.0425 0.3045 model parameters r2 0.6691 adjusted r2 0.6107 f-statistic (prob.) 11.4577 (0.0000) durbin-watson statistic 0.4308 note: *** indicates statistical significance at the 1% level. the 2sls results as shown in table 5 indicates that real gdp per capita has a positive impact on the public debt. this means that a one per cent increase in real gdp per capita would increase economic growth by 4.21 per cent. however, foreign direct investment and the real effective exchange rate exerted a negative and insignificant effect on the public debt. the negative and insignificant link between the real effective exchange rate and the public debt violates the submissions of chongo (2013). as was expected, trade openness had a negative effect on public debt. this entails that a one per cent rise in trade openness would increase the public debt by 1.51 per cent. furthermore, the results indicated that 67% of the total variation in the dependent variable was accounted for by the explanatory variables. thus, the model has a good fit. the positive autocorrelation is present in our model due to the durbinwatson value of 0.4308. the model is statistically significant owing to the p-value and the f-statistic. table 6. toda and yamamoto multivariate causality test results. dependent variable sources of causation lnrgdp 𝜒 2 lnpubd 𝜒 2 lnrgdp 540.8503*** lnpubd 173.2946*** note: *** indicates significance at the 1 per cent level. table 7. toda and yamamoto multivariate causality test results. dependent variable sources of causation lnrgdp 𝜒 2 lndebts 𝜒 2 lnrgdp 2.7967 lndebts 26.2617*** note: *** indicates significance at the 1 per cent level. tables 6 and 7 show the outcomes of the toda and yamamoto multivariate causality tests. the result in table 6 showed a bidirectional correlation between economic growth and governmental debt in nigeria. additionally, this result raises the possibility that nigeria could simultaneously work toward reducing its public debt and growing its economy. the findings of reinhart and rogoff (2010a); egbetunde (2012); panizza and presbitero (2014); gomezpuig and sosvilla-rivero (2015); woo and kumar (2015); kobayashi (2015); donayre and taivan (2017) and iitula (2018) are at odds with those of this study. it does, however, concur with the arguments made by geleta (2021); donayre and taivan (2017); egbetunde (2012); owusu-nantwi and erickson (2016); abbas and christensen (2010) and ferreira (2009). on the other hand, table 7's findings showed that debt servicing in nigeria and real gdp per capita have a one-way causal relationship. the fact that debt servicing in nigeria results from economic growth rather than the other way around suggests that decisions about debt payment are not made in a way that would disproportionately encourage economic economy, 2023, 10(1): 39-49 47 © 2023 by the authors; licensee asian online journal publishing group expansion. the results of this study contradict those of afxentiou (1993); amoateng and amoako-adu (1996); jalles (2011) and chukwuagoziem (2012). 5. conclusion and recommendations the findings of the economic growth model disproved the debt overhang effect theory by demonstrating that the effect of public debt on economic growth was both positive and significant. the debt overhang hypothesis, then, does not hold in nigeria. this proves that nigeria's public debt has no adverse effects on the economic growth of the nation. furthermore, it supports the keynesian proposition. additionally, debt service has a detrimental effect on economic expansion. this demonstrates that the crowding-out effect, often known as the crowding-out hypothesis, exists in nigeria. this shows that nigeria's economic growth is negatively impacted by servicing the country's debt. due to the burden of debt servicing, there is a higher reliance on foreign loans. furthermore, paying off debt uses up resources that could be used to finance development initiatives, which has a detrimental effect on economic progress. the results of the public debt model demonstrated that real gdp and openness to trade have a positive effect on public debt. furthermore, it was demonstrated that there is a bidirectional relationship between economic growth and governmental debt in nigeria. it suggests that nigeria can pursue both economic growth and goals for public debt management simultaneously. it was also proven that there is a one-way causal relationship between nigeria's real gdp per capita and debt servicing. in nigeria, debt servicing arises from economic growth rather than the other way around, indicating that debt payment decisions are not handled in a way that would unduly favour economic growth. based on the study's findings, the following recommendations are made: the nigerian government can simultaneously pursue its goals for policy regarding public debt and economic growth. additionally, decisions about debt servicing in nigeria should be made in a way that supports economic expansion. it will be impossible for nigeria to pay off its public debt in the future without accruing extra debt and threatening its ability to develop; therefore, it must either adopt other measures to handle the issue or enhance its macroeconomic institutions and policies. nigeria should strengthen its macroeconomic policies in the areas of inflation, foreign direct investment, trade, and exchange rate, as well as the effectiveness of its institutions. effective debt management strategies are also required to ensure that borrowed money is used for desirable projects that produce foreign currency, rather than pointless undertakings, to promote growth. in addition, the government must ensure that loans are applied to capital projects that boost private sector participation. according to the findings, doing so would mitigate the negative effects of crowding out private sector expansion. to ensure that nigeria's public debt continues to promote economic growth, the strategies and policies for controlling debt should also be sustained. references abbas, a. s. m., & christensen, j. e. 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licensee asian online journal publishing group economy vol. 6, no. 2, 65-75, 2019 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2019.62.65.75 © 2019 by the authors; licensee asian online journal publishing group urban poverty and its determinants in debre markos city: a household level analysis debeli chala biyena1 endegena asmamaw beyene2 ( corresponding author) 1ethiopian biodiversity institute, ethiopia. 2arba-minch university, ethiopia. abstract this study is aimed at examining the extent of urban household poverty using the fgt approach and the national poverty line as a reference. the data were collected from a representative of 316 sample households drawn from each respective kebeles using a combination of simple random sampling and systematic sampling techniques. the findings of the study showed that, the proportion of the poor people is estimated to be 46.8% indicating that almost half of the people in the study area were unable to meet the monthly per adult equivalent consumption expenditure of 315 etb. the poverty severity index was also 37.4% in the study area while it was 2.9% and 3.2% at national level and in the region. the estimation result of the logit model also showed that, level of educational achievements, and household income was negatively and significantly correlated with the probability of being poor at 10% and 1% significance level respectively. whereas, the variables that were positively and significantly correlated with the probability of being poor were larger family size, unemployment, not owning a house, and household health status/disease at 1%, 10%, 10%, and 1% level of significance respectively. based on the result of the study, the following recommendation was made. efforts should be made to raise the real income of households through wellpaying and steady job creation by the setup of micro and small scale enterprises, with the increased provision of economic and social infrastructure of houses, education, and better water sanitation services for poverty reduction. keywords: urban poverty, poverty headcount, poverty gap, poverty severity, logit model. citation | debeli chala biyena; endegena asmamaw beyene (2019). urban poverty and its determinants in debre markos city: a household level analysis. economy, 6(2): 65-75. history: received: 9 august 2019 revised: 12 september 2019 accepted: 15 october 2019 published: 2 december 2019 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group acknowledgement: the authors would like to acknowledge all the local people for actively participating in the study. government officials and civil servants at different levels, who directly or indirectly involved in this study, are highly appreciated for their assistance especially during the data collection period. funding: this study was sponsored by the arba minch university. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. background of the study ................................................................................................................................................................ 66 2. statement of the problem .............................................................................................................................................................. 66 3. methodology of the study ............................................................................................................................................................. 67 4. result analaysis and disccussion ................................................................................................................................................. 68 5. conclusions and policy implications ........................................................................................................................................... 74 references .............................................................................................................................................................................................. 74 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2019.62.65.75&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ https://www.asianonlinejournals.com/index.php/economy/article/view/1137 https://orcid.org/0000-0002-5891-9250 https://www.asianonlinejournals.com/index.php/economy/article/view/1137 https://orcid.org/0000-0002-5891-9250 https://www.asianonlinejournals.com/index.php/economy/article/view/1137 https://orcid.org/0000-0002-5891-9250 economy, 2019, 6(2): 65-75 66 © 2019 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study contributes to existing literature by examining the extent of urban household poverty using the fgt approach and the national poverty line as a reference. 1. background of the study poverty is prevalent in large parts of the world and is one of the largest challenges of mankind in the 21st century. despite changes in development paradigms in the last half of the 20th century, the promise to bring wellbeing to all human beings remained unfulfilled. one of the major development problems facing the world today is growing phenomenon of poverty. it is estimated that over 1.3 billion people live on less than us$1.25 per day, and 1 billion people cannot meet basic requirements. furthermore, 415 million people (one in every two people) in sub saharan africa survive on less than us$ 1.25 per day and 184 million people (16 percent of african population) suffer from malnutrition (sharma et al., 2016). ethiopia is among the lowest income countries in the world with an average per capita income of merely us$ 550, a very low human development index (hdi) of 0.435 positioning the country at 173rd out of 187 countries, a poverty incidence (head count ratio) of 26 percent at us$ 1.25 a day in purchasing power parity (ppp), and urban unemployment rate of 16.5 percent (ministry of finance and economic development (mofed), 2013; united nations development programme, 2014). in 2015, ethiopia was facing drought due to the effects of el nino, and about 10.2 million persons were in need of emergency aid into 2016. according to the united nations development program of 2015, about 23 million ethiopians live in conditions substantially below the basic poverty line and food insecurity remains a major challenge. in the same report 44.2 percent of children under five are malnourished and stunted. according to the report by oxford university poverty and human development index (opjdi) in 2011, 87 percent of the ethiopian population was poor as measured by multidimensional poverty indicators (mpi), which means they were deprived in at least one-third of the weighted mpi indicators. this put ethiopia as the second poorest country in the world when using the mpi approach (ophdi, 2013). the multidimensional character of poverty in ethiopia is reflected in many respects such as, destitution of assets, vulnerability, and human development. poverty in ethiopia is also associated with certain household characteristics. for instance, as compared to richer households, poor households in urban centers tend to have a larger proportion of dependents, older household heads, more unemployed family members and more femaleheaded households (aredo, 2005). moreover, vulnerability to shocks is more serious in urban areas than in rural areas. this is partly due to the fact that urban households lack assets such as land and livestock, which are available in rural areas. the world is rapidly experiencing urbanization. as urbanization is increasing so also the incidence of urban poverty is increasing in depth and intensity in cities of most of developing countries of the world including ethiopia. the dimension of urban poverty that manifests in various ways may also include unemployment, poor housing condition characterized in overcrowding, lack of basic services and environmental degradation. in ethiopia, many urban people do not meet their basic needs (sumner and meera, 2015). in 2010, 11 percent of ethiopia’s poor lived in cities, but this percent rose to 14 percent in 2010/11. an estimate by mofed (2013) pointed out that 27.8 percent of ethiopian population was absolutely poor (unable to meet basic needs) of which 25.7 percent was urban. the number of poor people stayed almost constant between 2004/05 and 2010/11 at 3.2 million (mofed, 2013). even though, the government of ethiopia has tried to address some problems related to poverty, the focus given to urban areas are not gone with the extent of the problem. high population growth due to rural to urban migration and other internal factors have making life hard in urban ethiopia. this really can lead to high crime, strikes and other socio-economic and political problems. therefore, the issues that were addressed in this study can help the federal and local governments to design strategies for sound poverty reduction and to tackle the real problem of urban areas in general and the study area in particular. 2. statement of the problem for decades, both rural and urban poverty in ethiopia has remained pervasive and ever deepening. despite the decline in the level of poverty currently in ethiopia, there are about 22.6 million poor people in 2013/14 who are living under the poverty line (which is very close to ppp us$1.25 a day on food and non-food items) and who are unable to satisfy their basic needs (sumner and meera, 2015). besides, the severity of poverty is also increased between 2005 and 2011. therefore, reducing poverty among the poorest of the poor, insuring food security and reducing the number of poor people in the country remain priority agenda and area of intervention in the post millennium development goals period (sumner and meera, 2015). in the developing world, little is known about urban poverty from quantitative evidence mainly due to lack of data tracking from the same households overtime (kedir and mckay, 2003). similarly, in africa the analysis of urban poverty dynamics hampered by similar problems and there is diminutive substantiation on such an important dimension of poverty.earlier studies of poverty in ethiopia mainly focused on rural areas rather than urban areas (bigsten et al., 2003; dercon and pramila, 2003). there are few studies that explored the poverty situation of urban households in ethiopia in both a static and dynamic context (dercon and taddesse, 1997; disney et al., 2003). however, they concentrated on assessing the poverty condition of primate and large cities of ethiopia. in line with the above points, the urban sector in ethiopia has been neglected and unnoticed by researchers and policy analysts, and also ignored in debates on poverty issues. this has resulted in a’ rural bias.’ even though the effect of urban poverty in ethiopia is getting severe, the factors that account for the results are not studied very well. most of the studies have been conducted in rural areas of ethiopia and attempts on urban sectors are still scanty. even the studied ones were confined to the primate city addis ababa and secondary cities like, bahir dar, nazareth, awassa, and mekelle. poverty status in the amhara region remains multifaceted and complex. the 2010/11 hics survey result showed that in terms of food poverty index, the highest incidence was observed in amhara region (42.5%) and the total poverty index was 30.5% in the region. east gojjam zone is one of the sixteen (16) zones of the region and like other ethiopian urban areas poverty is a major challenge. according to the 2010/11 ethiopian government poverty assessment report poverty trend in the zone was persistence. economy, 2019, 6(2): 65-75 67 © 2019 by the authors; licensee asian online journal publishing group there were a number of issues that are considered as a limitation of the previous study and make the current study different from the previous one. among the issues that were considered as a research gap were; one, there is only one research attempt regarding poverty in the study area before 12 years ago by esubalew (2006). therefore, we try to estimate and compare the poverty situation of the study area before 12 years ago and the current ones based on different indicators like demographic characteristics, socio-economic indicators, and other households’ characteristics, it is quite different. second, the researcher applied the fei approach (which shows food poverty only) to address the situation of poverty and to identify poor and non – poor households in the study area. however, the study was conducted in one of the old medium – sized cities, debre markos and since cities have a monetized economy. therefore, as a big limitation in the previous study the researcher does not provide allowance for non – food items in measuring the situation of poverty which is the most important part. therefore, so as to fill the gap in this study the national poverty line set by the government was applied, which is based on the cost of basic needs (cbn) approach that provide allowance for nonfood items in measuring urban poverty. the last is the application of sampling techniques. for instance, the researcher purposely took 6 kebelles from 12 kebelles, and in that process he had selected 3 kebelles having high socio-economic status based on different indicators and 3 other kebelles having low-socioeconomic status and such action may result in sampling bias which might have a negative impact on the finding of the study. 3. methodology of the study debre markos, the capital city of east gojjam administrative zone is located in the north west of the capital city of ethiopia, addis ababa at a distance of 300kms and 265 kms to the capital city of amhara national regional state, bahir dar. specifically, it is located in the amhara regional state, east gojjam zone. until 1995, debre markos was the capital city of the province of gojjam and currently the town served as the capital city of east gojjam zone. the city is named as debre markos after its principal church, which was constructed in 1869 e.c and is devoted to saint mark. debre markos is one of the oldest and medium sized cities of ethiopia and currently, the city has seven (7) kebele administrations (debre, 2016). it has latitude and longitude of 100 20’ n, 370 43’ e and altitude of 2,446 meters above sea level and it has moderate temperature (debre, 2016). the area of debre markos city is 6,160 ha and has oval shape; its average annual temperature is 18.5 0c; mean annual rain fall is 1,380mm and the existing wind direction is from north to south. the city is administration and commercial center. there are 61 manufacturing industries, 37 wholesale trades, 2101 retail trades, 168 service trades and 6 fuel stations and 6 garages in the town. there are four government and three private banks and one microfinance giving services in the town. the major investment opportunities in the town are: agro-industry processing, constriction industry, hotel and tourism & social services. according to csa, 2007, economic activity rate was 44.2 for sexes, 48.3 and 40.4 for males and females respectively. the rate of unemployment in the same period was 11.8% for both sexes. the male and female unemployment rate was 9.1 and 14.1 respectively. debre markos town has economic linkages with the surrounding areas and addis ababa. the town gets grain products, livestock supply, natural resources (fuel wood and charcoal), and labor from surrounding areas manufactured and commercial products from addis ababa. according to csa (central statistical agency) (2007), the population of the city was 62,497. out of this 29,921(47.87%) were males and 32,576(52.1%) were females; 16,325(26.14%) were within the age group of 0-15 years, 42,185(67.49 %) were 16-60 years, and 3,987(6.37 %) were 61 years and above. the population growth rate at low variant was 2.4% while household family size in the city is calculated to be 3.2. according to csa (2013), the population projection of the city had been estimated 38,291 male and 41,689 female inhabitants which is a total of 79,980 populations. area of the city is expected to be 1214.9 sq.km and 65.85 km/sq. density. the primary and secondary data sources were used to carry out the study. the sources of the primary data are cross-sectional data collected from the sample that intends to represent the population. on the other hand, secondary data were collected from previous working literatures, the findings stated in published and unpublished documents and literatures related to the research problem. in this study, household survey was the main tool used to gather the necessary data from the sample households. to undertake the survey, structured questionnaire was prepared as instrument and an interview was held to gather information at a household level. the prepared questionnaire was prepared in english and then translated into amharic. the amharic version questionnaire was also pre-tested on 20 randomly selected households in similar communities. this was done purposely for clarity, acceptability, flow and reduction of repetition. finally, the survey was conducted by four selected interviewers and the researcher supervised these four interviewers. a multi-stage sampling technique was employed to get the required primary data. at the first stage, based on the current kebele administration structure, debre markos city has 7(seven) kebeles, therefore, in this study 4 kebeles were selected randomly. secondly, the 316 households were drawn using systematic random sampling proportionate to household head techniques. the household head list in each representative kebele was used as sampling frame to select sample households. finally, systematic sampling method was employed to select the first households from each of the kebeles. to make it precise, every 38th of the household were selected from the registration of each kebele based on their house number. table-1. number of sample households taken from sampled kebeles. no name of kebeles total no. of households in each kebele sample households in each kebele 1 kebele 01 1222 32 2 kebele 02 4529 118 3 kebele 03 3916 102 4 kebele 04 2463 64 grand total 12,130 316 in this study, logistic regression model was employed. the dependent variable takes a value of 1 if the household is being poor with the probability of pi, otherwise takes a value of 0, if the household is non poor with the probability of 1-pi. therefore, specification of the logit regression model can be shown as follows: ⌊ ⌋ (1) economy, 2019, 6(2): 65-75 68 © 2019 by the authors; licensee asian online journal publishing group logit (pi) scale ranges from negative infinity to positive infinity and is symmetrical around the logit of 0.5 (which is zero). the formula below shows the relationship between the usual regression equation ( + …+ ), which is a straight line formula in the logistic regression equation. the form of the logistic regression equation is: ⌊ ⌋ ⌊ ⌋ (2) where, pi = 1 is the probability that the household is being poor, 0 otherwise. 1-pi = the probability that the household is not poor. xi = explanatory variables. the probability of one becoming poor or non-poor based on the explanatory variables was calculated using the formula given below, which is simply another rearrangement of the formula given above. (3) in this study, the explanatory variables (xi) were selected based on available related literatures on the subject at issue. the variables include: age of the household head, sex, marital status, family size, education, main occupation, unemployment, income, home ownership, dependency ratio, health status, number of working hours, seasonality of work, and access to basic services. therefore, the model for household poverty status can be represented by: poverty = f(age,sex,marts,famsiz,educ,unemp,depr,ocup,income,homown,hhhs,nwkrs,sesowk,abs, ) (4) where, = is the random variable logitpi=β0+β1age+β2sex+β3marst+β4famsiz+β5educ+β6unemp+β7depenr+β8occup +β9income+β10homown+β11hhhhs+ β12nwkhrs+β13sesowk+β14abs+ (5) table-2. description of the explanatory variables used in the logistic regression model. variables description measurement expected sign age household head age number +/ gender household head sex male=1,0 otherwise + marital status household head maritalst married=1, 0 otherwise + family size number of people in household number + occupation household head main occpn gov’t employee =1, otherwise=0 +/ education educational status illiterate=1,otherwise=0 income level of income birr unemployment unemployed members number + dependency family dependents number + household health health status sick=1,otherwise=0 +/ number of working hours working hours/day number seasonality of work season impact yes=1, no=0 +/ home ownership housing status own house=1, otherwise=0 +/ access to basic services credit access yes=1, no=0 4. result analysis and discussion in this section, the socioeconomic and demographic characteristics of the data obtained in household survey were analyzed using descriptive and econometric methods of data analysis. the whole description takes national poverty line as a reference to identify the poor from the non-poor households. 4.1. poverty indices to measure the extent of poverty and poverty situation of households, headcount index (p0), poverty gap index (p1), and poverty severity index (p2) are the most important and widely used indices. in this study, based on the poverty line (315 etb per adult equivalent per month) and the data collected from sampled households, the three (3) poverty indices of the study area were computed as follows: headcount index (p0): p0 = poverty gap index (p1) ∑ ( ) 1 = ∑ ( ) = ∑ ( ) = ( ) = 0.3438 economy, 2019, 6(2): 65-75 69 © 2019 by the authors; licensee asian online journal publishing group poverty severity index (p2) = ∑ ( ) 2 = ( )2 = 37. 3639 table-3. poverty indices in the study area. poverty variables national urban(2010/11) regional urban(2010/11) study area debre markos (2017) headcount index(p0) 0.279(27.9 %) 0.292(29.2 %) 0.468(46.8 %) poverty gap index(p1) 0.073(7.3 %) 0.080(8.0 %) 0.344(34.4 %) poverty severity index(p2) 0.029(2.9 %) 0.032(3.2 %) 0.374(37.4 %) as can be seen in table 3 using real per adult consumption expenditure the levels of total urban poverty indices at national level, regional level and in the study area are provided. as apparent from the table above, the proportion of poor people (poverty headcount index) in the study area is estimated to be 46.8 percent. however, the proportion of poor people at regional level stood at 29.2 percent and at national level stood at 27.9 percent. similarly, the poverty gap index in the study area was estimated to be 34.4 percent while it was 8.0 percent in the region and 7.3 percent at national level. the poverty severity index in the study area was estimated to be 37.4 percent while it was 3.2 percent at regional level and 2.9 percent at national level. 4.2. descriptive data analysis based on sample households characteristics 4.2.1. household family size and poverty the average family size of the sampled households in the study area was 4.5 which were below the national average of 5 persons (csa, 2010). the incidence of poverty is invariably noted to be higher among those with larger family sizes. large households tend to associate with poverty (lanjouw and martin, 1995). there is also a widely held view that larger families tend to be poor in developing countries like ethiopia. as evidenced in table 4, the highest incidence of poverty which is 27.53% is observed in those households having 3-5 family members followed by households having 6-8 family members with poverty incidence of 16.77% and the lowest incidence of poverty 0.6 % is observed in those households having 1-2 family members. table-4. poverty incidence by households family size. household family size household poverty status headcount/ p0 poor households(n=148 non poor households(n=168) total frequency percent frequency percent 1-2 2 1.35 35 20.83 37 0.006 3-5 87 58.78 115 68.45 202 0.275 6-8 53 53.81 18 10.71 71 0.167 ≥ 9 6 4.05 1 0.59 7 0.019 grand total 148 100 168 100 31 0.468 4.2.2 level of educational achievements and poverty as human capital theory predicts, the best investment of all is the one made in people and therefore, greater educational attainment may imply a larger set of employment opportunities thereby increased earning potential and improve occupational and geographical mobility of labor. education can serve as an important tool for escaping from poverty. as table 5 reveals, the incidence of poverty is higher for those households having low level of educational achievements like illiterate households and those households able to read and write with 13.9 % and 11.4% of poverty incidence followed by households having primary and secondary education with poverty incidence of 7.3% and 5.4. in the case of those households having diploma/tvet and degree the incidence of poverty is lower than others and they have equal footings of 4.4%. table-5. poverty incidence by level of educational achievements. level of education household poverty status total headcount/ p0 poor households(n=148) non-poor households(n=168) frequency percent frequency percent illiterate 44 29.73 13 7.74 57 0.139 read & write 36 24.32 4 2.38 40 0.114 primary 23 15.54 23 13.69 46 0.073 secondary 17 11.48 29 17.26 46 0.054 diploma/tvet 14 9.46 40 23.81 54 0.044 degree& above 14 9.46 59 35.12 73 0.044 grand total 148 100 168 100 316 46.84 4.2.3 income and poverty in this study the average incomes of households per month in birr was taken as a base to classify households’ income as lower, middle and higher. therefore, the monthly income of households was divided as follows: the lower income ranges from 0-4040 birr, the middle income ranges from 4041-8000 birr, and the higher income ranges from 8001-1600 birr. as can be presented in table 6 in the study area about 87.16% of the poor households and 44.64% of the non-poor households were found in the low income level range of 0-4040 birr, 12.16% of the poor and 45.24% of the non-poor were found in the middle income range of 4041-8000 birr, and 0.67% of the poor and economy, 2019, 6(2): 65-75 70 © 2019 by the authors; licensee asian online journal publishing group 10.12% of the non-poor were found in the higher income range of 8001-1600 birr. as apparent from the table, the highest incidence of poverty (87.16%) was observed in those households who were in the lower range of 0-4040 birr. table-6. poverty incidence by level of household income. income range households poverty status total headcount/ p0 poor households(n=148) non-poor households(n=168) frequency percent frequency percent 0 – 4040 129 87.16 75 44.64 204 0.408 4041 – 8000 18 12.16 76 45.24 94 0.057 8001-16000 1 0.675 17 10.12 18 0.003 grand total 148 100 168 100 316 0.468 table-7. monthly income–expenditure gaps. does your monthly income cover your monthly expenditure? households poverty status total headcount/ p0 poor households(n= 148) nonpoor households(n= 168) frequency percent frequency percent yes 56 37.84 110 65.47 166 0.177 no 92 62.16 58 34.53 150 0.291 grand total 148 100 168 100 316 0.468 the households’ monthly income-expenditure gaps in the study area showed that from the poor category, 56(17.72%) of the households can able to cover their monthly consumption expenditure and 92(29.11) of the households were unable to cover their monthly consumption expenditure whereas in the non-poor category, majority of the households 110(34.81%) of the households can able to cover their monthly consumption expenditure and the remaining 58(18.35%) of the households were unable to cover their monthly consumption expenditure see table 7. table-8. way of filling income – expenditure gaps/coping strategy of the poor. ways of filling income-expenditure gaps/coping strategy of the poor household poverty status total poor households(n=148) non-poor households(n=168) frequency percent frequency percent by reducing amount of household consumption 51 55.43 28 49.12 79 by selling valuable assets 5 5.43 3 5.26 8 by purchasing low price &low quality items 36 39.13 26 45.61 62 grand total 92 100 57 100 149 the table 8 provides, the majority of the households 51(55.43%) said that they fill the income-expenditure gaps by reducing the amount of households monthly consumption, 36(39.13%) fill the gap by purchasing and consuming low price and low quality items, and the remaining 5(5.43%) fill the gap by selling their valuable assets whereas in the non-poor category, 28(49.12%) of the households fill the gaps by reducing the amount of households monthly consumption, 26(45.61%) fill the gap by purchasing and consuming low price and low quality items, and the remaining 3(5.26%) fill the gaps by selling their valuable assets. thus, the outcome of the survey shows that 94.56% of the poor households fill their income–expenditure gaps by reducing the amount of consumption and by purchasing low price and low quantity items as a coping strategy for survival otherwise leading a meager life. 4.2.4 unemployment and poverty from the total poor households, 58(39.19%) have zero unemployed family members, 66(44.59 %) of the households have one unemployed family member in their house indicating that majority of the households have zero or one unemployed family member, and 24(16.22 %) of the households have 2 unemployed family members. similarly, from the total non-poor households, 131(77.97 %) have zero unemployed family member, 30(17.86%) have one unemployed family members, and the remaining 7(4.17 %) have 2 unemployed family member. as apparent from table 9, the incidence of poverty was highest for those households having 1 unemployed family member with poverty incidence of 20.8 %, followed by households with zero unemployed family members and 2 unemployed family members with incidence of 18.4% and 7.6% respectively. even if majority of the households have zero or one unemployed family members 124(83.78 %) of the households couldn’t escape from poverty and they were in the poor category see table 9. table-9. poverty incidence by number of unemployed household members. unemployed family members household poverty status total headcount/ p0 poor households(n=148) non-poor households(n=168) frequency percent frequency percent 0 58 39.19 131 77.97 189 0.184 1 66 44.59 30 17.86 96 0.208 2 24 16.22 7 4.17 31 0.076 grand total 148 100 168 100 316 0.468 economy, 2019, 6(2): 65-75 71 © 2019 by the authors; licensee asian online journal publishing group 4.2.5 home ownership and poverty as table 10 reveals, 94(29.75%) of the sampled households were lived in their own house, 215(68.04%) of the households do not have their own house and lived in private/rental houses, and the remaining7 (2.22%) of the households were lived in their relative’s houses. majority of the sampled households were lived in private/rental houses and the incidence of poverty was also highest for these households with poverty incidence level of 35.4%. though, there was no equal proportion in the distribution of households, the lowest incidence level was observed for those households who were lived in their relative’s houses and those households who were lived in their own house with incidence of 1.9% and 9.5 % respectively. table-10. poverty incidence by households homeownership. household homeownership household poverty status poor households(n=148) non-poor households(n=168) total headcount p0 frequency percent frequency percent own house 30 20.27 64 38.09 74 0.095 private/rental 112 75.67 103 61.31 215 0.354 relative’s house 6 4.05 1 0.59 7 0.019 grand total 148 100 168 100 316 0.468 4.2.6 health and poverty household health status is one of the determinants for the aggravation or improvement of poverty as many literatures proved from theoretical underpinnings. in this study households were asked to say yes or no whether any of their household member frequently suffered from disease or not. as apparent from table 11 from the poor households 107(33.86%) said yes and the remaining 41(12.97%) said no, implying that there was no any household member who frequently suffered from disease. whereas in the nonpoor category, 92(29.11%) of the households said yes and the remaining 76(24.05%) of the households said no, indicating that there was no any household member who suffered from disease. the incidence of poverty was also highest for those households whose family member frequently suffered from disease with incidence level of 33.8% and the lowest level of incidence was observed for those households that any of their family member were not frequently suffered from disease with incidence level of 12.9% indicating that households’ health status/disease is the major determinant for the aggravation or improvement of the level of poverty in the study area. moreover, the finding of the study revealed that household health/disease has significant impact on the incidence of poverty. table-11. poverty incidence by household health status. household members frequently suffered from disease? household poverty status total headcount p0 poor households(n=148) non poor households(n=168) frequency percent frequency percent yes 107 72.3 92 54.76 199 0.338 no 41 27.7 76 45.24 117 0.129 grand total 148 100 168 100 316 0.468 as regarding the extent of city medical services provision status, the sampled households were asked about their evaluations about the quality and reliability of the medical services in the city. as apparent from table 12 44(13.92%), 201(63.61%), 68(21.52%), 3(0.95%) of the respondents said that the medical service provision in the study area was poor, good, very good, and excellent respectively. as apparent from the table, majority of the households’ evaluation in the case of extent of medical services provision disclosed that city medical services provision was in good condition. table-12. status of debre markos city health centers service provision. household poverty status city health centers service provision total poor good v.good excellent poor households (n=148) 22 (14.86%) 88 (59.46%) 37 (25%) 1 (0.67%) 148 non -poor households( n=168 22 (13.09%) 113 (67.26%) 31 (18.45%) 2 (1.19%) 168 grand total 44 201 117 3 316 as table 13 reveals, regarding the degree of city health service intervention to solve health related problems households were asked about their evaluations. accordingly, 19(6.01%), 97(30.69%), 168(53.15%), 32(10.12%) of the households said no attention given, little attention, some attention, and a lot attention respectively. table-13. health centers intervention/attention to solve health related problems. household poverty status city health centers attention to solve problems total no attention little attention some attention a lot attention poor households (n=148) 9(6.08%) 54 (36.48%) 77 (52.03%) 8 (5.41%) 148 non poor households(n=168) 10 (5.95%) 43(25.59%) 91(54.17%) 24(14.28%) 168 grand total 19 97 168 32 316 economy, 2019, 6(2): 65-75 72 © 2019 by the authors; licensee asian online journal publishing group 4.2.7 electricity and poverty in this study, to assess household’s access to electricity a question was posed to the households to check whether they have their own metered electricity or not. as can present in table 14 the majority 274(86.71%) of the households in the study area have their own metered electricity. specifically, from the poor category 125(84.46%) said yes and the remaining 23(15.54%) of the poor households said that they have no their own metered electricity. whereas, from the non-poor category, 149(488.69%) of the households responded that they have their own metered electricity and the remaining 19(11.31%) said that they have no their own metered electricity. the incidence of poverty was also highest for those households who have their own metered electricity with incidence level of 39.5% while for those households who have no their own metered electricity they have a 7.2% of poverty incidence implying that access to electricity has no any meaningful impact to escape from poverty in the study area. table-14. poverty incidence by access to electricity. household have metered electricity? household poverty status total headcount p0 poor households(n=148) non poor households(n=168) frequency percent frequency percent yes 125 84.46 149 88.69 274 0.395 no 23 15.54 19 11.31 42 0.072 grand total 148 100 168 100 316 0.468 4.2.8 water supply and poverty from theoretical underpinnings and as many literatures proved, water and sanitation contributes to poverty alleviation and to improvements in the standard of living in several ways. in this study to assess household’s access to water and their main sources a question was posed to households to check whether they have access or not. as table 15 reveals, majority of the households have their own pipeline in their compounds. from the total survey 209(66.14%) of the households have their own pipeline, 48(15.19%) of the households used public pipelines as their main source of water, 50(15.82%) of the households used private pipelines and the remaining 9(2.85%) used their own dug-well as a main source of water for the household. specifically, 81(25.63%) and 128(40.51%) of the poor and nonpoor households have their own pipelines in their compounds as a main source of water, 29(9.17%) and 19(6.01%) of the poor and non-poor households used public pipelines as their main source of water, 35(11.07%) and 15(4.75%) of the poor and non-poor households used private water sources, and the remaining 3(0.95%) and 6(1.89%) of the poor and non-poor households used their own dug-well as a main source of water. as apparent from the table, the highest incidence of poverty 25.6 % was observed in those households who have their own pipelines followed by households who used private water sources and public water as their main sources of water with incidence level of 11% and 9% respectively. table-15. households main source of water supply. household main source of water supply household poverty status total headcount p0 poor households(n=148) non-poor households(n=168) frequency percent frequency percent own pipeline 81 54.73 128 76.19 209 0.256 public pipe line 29 19.59 19 11.31 48 0.0917 private pipeline 35 23.65 15 8.93 50 0.111 own dug-well 3 2.03 6 3.57 9 0.009 grand total 148 100 168 100 316 0.468 regarding water service provision, to assess the status of city water service provisions in terms of quality and reliability households were asked about their evaluations. as can be presented in table 16 majority of the surveyed households 170(53.79%) responded that the provision was in poor condition indicating that water service provision in the city was not in line with demand of the society. 108(34.17%) said satisfactory, 36(11.39%) said good and the remaining 2(0.63%) of the households said that city water service provision was in a very good position. table-16. city water service provision status in terms of quality and reliability. household poverty status city water service provision quality and reliability total v. good good satisfactory poor poor households (n=148) 0 17 (11.48%) 50 (33.78%) 89 (60.14%) 148 non poor households( n=168) 2 (1.19%) 19 (11.31%) 58 (34.52%) 81 (42.21%) 168 grand total 2 36 108 170 316 in this study to assess the extent of water supply service problem in debre markos city households were asked about their evaluations. as apparent from table 17 almost half of the surveyed households 151(47.78%) said that there was a serious shortage of water in the city and the supply of water was not equipped with the demand of the society. while 106(33.54%) said less serious, 58(18.35%) said too serious, and the remaining 1(0.31%) said that there was no problem regarding water supply. economy, 2019, 6(2): 65-75 73 © 2019 by the authors; licensee asian online journal publishing group table-17. extent of debre markos city water service provision problem . household poverty status extent of city water service provision problem total too serious serious less serious no problem poor households (n=148) 27(18.24%) 66 (44.59%) 54 (36.48%) 1 (0.67%) 148 non poor households( n=168) 31(18.45%) 85(5.59%) 52(30.95%) 0 168 grand total 58 151 106 1 316 4.3 econometric analysis and model evaluation results heteroscedasticity test: a situation in which the variance of the dependent variable varies across the data. many methods in regression analysis are based on the assumption of homoscedasticity or equal (homo) spread (scedasticity), that is, equal variance (gujarati, 2004). in logit analysis there is no equal variance or homogeneity of variance assumptions and the variance of the error terms is not constant. in this analysis, cook weisberg test for heteroscedasticity (hettest) using fitted values of poverty is carried out in stata software. the result showed that the value of chi-square x2(1) = 1.55, and prob>value = 0.21. thus, the dependent variable varies across the data. table-18. logistic regression result. variable coefficient odd ratio z std. err dy/dx age -0.359 0.97 -0.92 0.28 -0.0065 sex -0.887 0.9236 -0.14 0.49 -0.0184 ms -0.39 0.8112 -0.85 0.19 -0.0511 educ** -0.01 0.7023 -2.41 0.10 -0.0863 occup -0.31 0.9263 -1.01 0.07 -0.0187 fs*** 0.00 5.37 5.13 1.75 0.4109 income*** -0.00 0.9989 -5.60 0.0001 -0.0002 depen -0.53 0.8196 -0.62 0.262 -0.0486 unemploym* 0.08 1.947 1.74 0.746 0.1629 homown* 0.09 2.243 1.69 1.07 0.1974 nwk -0.40 0.9156 -0.83 0.097 -0.0215 season 0.75 1.183 0.31 0.64 0.0410 credit 0.17 1.771 1.35 0.75 0.1397 hhhs*** -0.00 0.2092 -3.47 0.094 -0.3822 water 0.17 1.420 1.36 0.36 0.0858 elt 0.25 1.989 1.13 1.20 0.168 tel -0.57 0.5214 -0.56 0.610 -0.1591 cons -0.75 0.4326 -0.32 1.14 source: own survey data, 2017***, **, * significant at 1%, 5%, and 10% respectively. the variable that are negatively correlated with the probability of being poor are age, sex, marital status, education, occupation, income, dependency, number of working hours, household health status. positively correlated with the probability of being poor were family size, house ownership, unemployment, seasonality of work, access to credit, water source, and electricity. in the table 18 of 17 independent variables, six of the variables family size, education, income, unemployment, house ownership and household health status have a significance level at 1%, 5%, and 10%. the negative values of explanatory variables indicates that when the unit change in independent variable lead to decrease in probability of being poor. the better educational achievements diminish the probability of a household being poor and it is found statistically significant at 5% significance level. the coefficient of education in the regression results showed that a level increase in education (a one year increase on the number of years of schooling) will result in 8.6% decreases in the probability of a household becoming poor. family size was found statistically significant at 1% significance level and have positive impact on the probability of a household becoming poor. as can be seen from table 33, an addition of one extra member to the household will result a 41% probability of a household becoming poor. this is not peculiar only in debre markos but most developing countries. babatunde et al. (2008); apata et al. (2010) they argued that, poverty increases with increasing in family or household size because large family size tends to reduce the per capita income available to the household. the income of household has statistically significant at 1% significance level and negative impact on the probability of a household being poor in the study area. as a one birr increase in per adult equivalent income of the household decreases the probability of a household falling in to poverty by 0.025%. however, its effect was not as big as expected since urban poverty is mostly determined by income earning capacity especially cash money. as expected, unemployment (having larger unemployed family members) in a household was found statistically significant at 10% significance level and has positive impact on the probability of being poor. that means, a household having one extra unemployed family member result in 16.3% increase in the probability of becoming poor in the study area. the regression result showed that home ownership (households who had no a residential house) was found statistically significant at 10% significance level and it is a positive correlate to poverty. that means, as a household had no his/her own house, the probability of a household becoming poor increases by 19.7%. this is in line with the view that, as a household own a house the cost that were to be paid as a rent will be saved and the house itself can be used as a productive asset. the household health status has found statistically significant at 1% significance level and negative impact on the probability of being poor. as apparent from table 18 households with better health status or those households whose family member is not frequently suffered from disease decreases the probability of a household becoming poor by 38.2%. economy, 2019, 6(2): 65-75 74 © 2019 by the authors; licensee asian online journal publishing group 5. conclusions and policy implications  to reduce urban poverty and to promote urban livelihood, a useful place to start is with poverty reduction arrangements based on poverty analysis aimed at identifying the contributing factors of urban poverty. based on the empirical findings of the study, the researcher portrays the following policy implications to mitigate poverty at a household level.  the findings of the study showed that, in the study area the proportion of the poor people is estimated to be 46.8% indicating that almost half of the people were unable to meet the monthly per adult consumption expenditure of 315 etb. moreover, the national hices survey result shows that the poor urban households require only 7.3% at national level and 8% in the region. however, in the study area it was found that there is a requirement of 34.4% to escape from the poverty group. the poverty severity index was 37.4% in the study area while, it was 2.9% at national level and 3.2% in the region. therefore, one of the policy implications of the present study is that the ongoing national and regional governments’ policy intervention should target 37.4% of the poorest of the poor that needs an immediate and a joint policy intervention by the government and other stakeholders.  urban poverty alleviation is impossible unless the existing economy should generate opportunities for investment thereby job creation and sustainable livelihoods. in the study area households’ evaluation of the level of investment and its job creation is almost negative indicating that investment has no significant impact on poverty reduction efforts and in the process of improving residents’ life standard. therefore, there is a need for policies and strategies that create an enabling environment to attract new investments and promoting the existing ones.  though the cost of housing/rent is one of the main contributing factors to urban poverty, the study showed that in the study area majority of the residents, about 68% have no their own house rather they were lived in private/rental houses. therefore, the prices that were paid as a rent just increases the residents cost of living. the policy implication of this study is that, there is a need that governments of developing countries like ethiopia should expand their housing program to support ‘non-conventional’ incremental social housing, that is, the production of good quality public housing that includes socially controlled rental accommodation that is affordable to those households in the lowest income groups. given that most of the management and administration of urban housing in most developing countries are handled by the central governments, there should be devolution of authority in the housing sector to the regional and local levels so that the increasing needs of the public can be met in short waiting time. as a general remark, public authorities or concerned bodies need to establish policies and strategies that address the problem of housing especially mechanisms(which are accessible by the poor) to address the poor through the provision of land for construction purpose, construction of condominium houses at affordable prices and other options.  urban poverty reduction efforts should be made at the grass root level through the provision of basic social services. inability to afford essential public services of adequate quality and quantity like water can cause unhygienic living conditions and ill health. in the present study the analysis showed that, there is a serious shortage of water and the service provision was in poor conditions. households’ evaluations of educational provision in terms of quality and quantity were also negative and the provision is not equipped with the needs of the society. therefore, public authorities, city water service, and other stakeholders should try to address these social service problems and devise mechanisms to provide adequate and quality water and educational services to the society.  the findings of the study showed that, poverty and family size were found significant positive correlates in the study area. therefore, the policy implication of this study on such an issue is that so as to reduce the impact of larger family size on poverty, city health service and other stake holders should take a remedial action through extension services awareness creation about the impact of larger family size on poverty and family planning especially targeting on the poor.  generally, efforts should be made to raise the real income of households through well-paying and steady job creation by the setup of micro and small scale enterprises, with the increased provision of economic and social infrastructure of houses, education, and better water sanitation services for poverty reduction. references apata, t.g., o.m. apata, o.a. igbalajobi and s.m.o. awoniyi, 2010. determinants of rural poverty in nigeria: evidence from small holder farmers in south-western, nigeria. journal of science and technology education research, 1(4): 85 – 91. aredo, d., 2005. migrant remittances, shocks and poverty in urban ethiopia: an analysis of micro-level panel data. addis ababa university, addis ababa, ethiopia. babatunde, r., e. olorunsanya and a. adejola, 2008. assessment of rural household poverty: evidence from south-western nigeria. american-eurasian journal agriculture and environmental. science, 3(6): 900-905. bigsten, a., b. kebede, a. shimeles and m. taddesse, 2003. growth and poverty reduction in ethiopia: evidence from household panel surveys. world development, 31(1): 87-106.available at: https://doi.org/10.1016/s0305-750x(02)00175-4. csa, 2010. fdre general country data. csa, 2013. population projection of ethiopia for all regions at wereda csa (central statistical agency), 2007. population and housing census 2007. addis ababa: federal democratic republic of ethiopia. debre, m., 2016. debre markos municipality annual report (amharic version). dercon, s. and k. pramila, 2003. poverty in rural ethiopia 1989–95: evidence from household panel data in selected villages. in the new poverty strategies. london: palgrave macmillan. pp: 179-202. dercon, s. and m. taddesse, 1997. a comparison of poverty in rural and urban ethiopia. mimeo, centre for the study of african economies and department and addis ababa university. disney, r., a. kedir and a. mckay, 2003. price deflators and food poverty in urban ethiopia. mimeo, university of nottingham. esubalew, 2006. determinants of urban poverty: the case of debre marekos. ethiopian economics association proceeding of the fifth international conference on the ethiopian economy, addis ababa, ethiopia, 2: 37 -60. gujarati, 2004. basic econometrics. 4th edn., new york: mc graw-hill, inc. kedir, a.m. and a. mckay, 2003. chronic poverty in urban ethiopia: panel data evidence. international planning studies, 10(1).available at: https://doi.org/10.1080/13563470500159246. economy, 2019, 6(2): 65-75 75 © 2019 by the authors; licensee asian online journal publishing group lanjouw, p. and r. martin, 1995. poverty and household size. the economic journal, 105(433): 1415-1434. ministry of finance and economic development (mofed), 2013. development and poverty in ethiopia 1995/96-2010/11.ministry of finance and economic development, addis ababa, ethiopia. ophdi, o.p.a.h.d.i., 2013. ethiopia country briefing. multidimensional poverty index data bank. ophi, university of oxford. available from www.ophi.org.uk/multidimensional-poverty-index/mpi-country-briefings/. sharma, p., s. dwivedi and d. singh, 2016. global poverty, hunger, and malnutrition: a situational analysis. in biofortification of food crops. new delhi: springer. pp: 19-30. sumner, a. and t. meera, 2015. global poverty reduction to 2015 and beyond: what has been the impact of the mdgs and what are the options for a post-2015 global framework?. ids working papers 2010.348 (2010): 01-31. united nations development programme, 2014. human development report 2014. new york: sustaining human progress: reducing vulnerability and building resilience. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. 12 © 2025 by the authors; licensee asian online journal publishing group economy vol. 12, no. 2, 12-17, 2025 issn(e) 2313-8181: / issn(p) 2518-0118: doi: 10.20448/economy.v12i2.6776 © 2025 by the authors; licensee asian online journal publishing group assessing the effect of use of computerized accounting systems on organizational performance: a focus on selected (ngos) on the copperbelt of zambia chalenga laskey mwila1 danny leza2 1,2the university of zambia, lusaka, zambia. ( corresponding author) email: laskeymwila2015@gmail.com email: laskeymwila2015@gmail.com abstract the purpose of this study is to assess the effect of the use of computerized accounting systems on organizational performance and the effect it has on the performance of non-governmental organization on the copperbelt province of zambia. the study uses a simple random sampling technique and employed a mixed method approach, quantitative and qualitative research design methodologies. this study employed a correlation analysis and a combination of data collection methods such as interviews, direct observation and questionnaires to gather the needed data to ascertain the relationship between variables. the findings showed 80% adoption rate; also confirmed that the use of computerized accounting systems in ngos contributed positively to financial reporting practices that are required by funders. the results from correlation tests indicated that; there is a highly significant positive relationship between computerized accounting system (x) and performance (y) in ngo’s with (r = 0.730, p = 0.022). it was concluded that, the use of computerized accounting system in these non-governmental organizations simplified a lot of tiresome work, such as invoicing and inventory management. if the adoption rate would move to a rate of 100%, there would be efficiency, transparency and appropriateness in the financial reporting structures in ngo’s. keywords: computerization, financial reporting practices, performance in non-government organizations. citation | mwila, c. l., & leza, d. (2025). assessing the effect of use of computerized accounting systems on organizational performance: a focus on selected (ngos) on the copperbelt of zambia. economy, 12(2), 12-17. 10.20448/economy.v12i2.6776 history: received: 7 march 2025 revised: 10 april 2025 accepted: 12 june 2025 published: 16 june 2025 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this research is supported by the university of zambia grant number: 0005376). institutional review board statement: the ethical committee of the the university of zambia has granted approval for this study on 5th july, 2024 ref. no.hssrec-2024-jun-005. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. this study followed all ethical practices during writing. data availability statement: the corresponding author may provide study data upon reasonable request competing interests: the authors declare that they have no competing interests. authors’ contributions: both authors contributed equally to the conception and design of the study. both authors have read and agreed to the published version of the manuscript. contents 1. introduction ...................................................................................................................................................................................... 13 2. literature ........................................................................................................................................................................................... 13 3. methodology of the study ............................................................................................................................................................. 14 4. findings of the study ...................................................................................................................................................................... 14 5. discussions of findings .................................................................................................................................................................. 15 6. conclusions and recommendations ............................................................................................................................................. 16 references .............................................................................................................................................................................................. 16 https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v12i2.6776 https://orcid.org/0009-0003-9844-5592 https://orcid.org/0000-0002-8573-1392 economy, 2025, 12(2): 12-17 13 © 2025 by the authors; licensee asian online journal publishing group contribution of this paper to the literature all of the previous studies evaluated were conducted in foreign contexts (such as nigeria, indonesia, iran, jordan, saudi arabia [uae], sri lanka, and so on), not in zambia, and not in multinational enterprises, with ngos serving as the primary implementation. as a result, their findings cannot be extrapolated or applied to zambian non-governmental organizations. 1. introduction computerized accounting plays a very big function in many organizations in improving working conditions. (wickramasinghe, cooray, dissanayake, & pemarathna, 2017). in order to improve efficiency and productivity, many companies adopt the use of computers to perform critical functions, including accounting functions; development of payroll systems, control of inventory, budgeting, cost and profit analysis. the development and availability of computerized accounting system tools help in the elimination of errors and enhance performance (sherman & young, 2016). financial reporting activities typically include details provided in statements of operations, position statements, cash flow statements, funding sources, and disclosure statements. according to kingi (2013) it is a computerized system in which financial transactions are collected or entered into a computer and analyzed in order to generate necessary documents and thus journalize the financial records to provide the required accounting journals. according to the ifrs foundation (2015) primary goal of a computerized accounting system is to produce reliable and accurate information or statements on a timely basis. this makes the reports to be relevant, intelligible, verifiable, and comparative to others. many public and private businesses are making the transition to computerized accounting systems owing to the drawbacks that come with non-computerization. 1.1. problem statement technological advancements have led to increased computerization in various sectors, including ngos. however, the adoption rate of computerized accounting systems in zambia remains uncertain. ngos are expected to maintain accurate and transparent financial records, but many do not. researchers are interested in understanding the accounting systems used by zambian ngos to increase productivity and efficiency. it is believed that inadequate record keeping in non-governmental organizations has led to insufficient financial responsibility on the whole, a symptom of both a deficiency in internal controls and accounting systems. nongovernmental organizations must be investigated, it is a significant source of concern for commercial and government institutions to establish the credibility of their reporting system. this issue has resulted in the most significant financial scandal to influence organizational trust. therefore, the researcher sought to assess the adoption and use of computerized accounting systems in non-governmental organizations on the copperbelt and its effect on performance. 1.2. purpose of the study the study sought to assess the effect of use of computerized accounting systems on organizational performance and the effect it has on the performance of non-organizations on the copperbelt province of zambia. 1.3. objectives of the study the objectives of the study were to examine the rate of adoption of computerized accounting systems in ngos in the copperbelt province of zambia and establish the strength of the relationship between computerized accounting systems and organizational performance in ngos in the copperbelt province of zambia. 1.4. research questions the research question to be answered was. 1. what is the adoption rate of computerized accounting systems in ngos on the copperbelt province? 2. what is the strength of the relationship between the computerized accounting system and the organizational performance of ngos on the copperbelt? 2.2 critique of literature review several writers examined the connection between an organization's performance and its computerized accounting system. • akande (2016) concur that computerized systems improve production performance. • rehab (2018) found that the use of computerized accounting information systems improves the financial standing of most businesses. • in contrast to ahmed (2017) analysis, which found no significant correlation between computerized accounting systems and organizational performance, none of the aforementioned writers examined the relationship between computerized accounting systems and the operations of non-governmental organizations. 1.5. significance of the study this study's findings may contribute to the current body of knowledge and provide a better understanding of the computerized accounting system in non-governmental organizations in terms of organizational performance. the conclusions from this study may also be relevant to the stakeholders working in non-governmental organizations. 2. literature technological advancements have led to increased computerization in various sectors, including ngos. however, the adoption rate of computerized accounting systems in zambia remains uncertain. ngos are expected to maintain accurate and transparent financial records, but many do not. researchers are interested in understanding the accounting systems used by zambian ngos to increase productivity and efficiency. numerous economy, 2025, 12(2): 12-17 14 © 2025 by the authors; licensee asian online journal publishing group research projects have been carried out to investigate the connection between local and global organizational performance and computerized accounting systems. according to studies by adelisa (2017); akesinro and adetoso (2016) and akande (2016) computerized accounting systems can enhance factory performance. therefore, improved performance is a result of using computerized accounting systems in conjunction with transparency and employee training. in a similar study, abubakar (2013) presented financial performance possibilities for cas installations that could improve the financial performance of depository institutions via computerized accounting. as a result, rehab (2018); agbim (2013) and khan (2017) discovered that implementing computerized accounting improved the financial reporting system. studies by ali, omar, and bakar (2016); ayman and barjoyai (2019) and asep, acip, and hamidah (2014) have shown that computerized accounting systems have a considerable impact on the organization's continuous performance. 3. methodology of the study 3.1. research study area the study focused on four towns in the copperbelt province of zambia: kitwe, mufulira, chingola, and ndola. of these, 100 sample size were chosen, with 40, 20, 20 and 20 respondents chosen in each of the towns. 3.2. study design this study used a mixed method approach, quantitative and qualitative research design methodologies. 3.3. research instruments this study used three basic data collection methods. • one to one interview. • observations. • physical and online questionnaires. 3.4. sample size a sample size of 100 respondents, including departmental heads, cashiers, accountants, senior officers, and departmental managers was chosen specifically to demonstrate the degree of validity of the instruments. the researcher used a simple random technique to choose respondents from 5 ngos, focusing on employees and staff working in finance & accounting, human resources (hr), management, and donor staff. 3.5. data processing data processing was done by the researcher to validate the information gathered. this was done to guarantee that the data collected is uniform and complete. the researcher edited the data, making sure it was accurate and valid and that there were no potential gaps, omissions, or mistakes. 3.6. data analysis quantitative data were analysed graphically, this was further entered onto a computer and encoded using the statistical product and service solutions (spss). qualitative data were analysed using the constant comparative method. this involved making reading through the data carefully and noting how the data collected is related to the research questions (strauss & corbin, 1990). 4. findings of the study the question to be answered was. 1. what is the adoption rate of computerized accounting systems in ngos on the copperbelt province? the study revealed that of the five ngos that were visited, four had adopted computerized accounting systems in place, representing an 80% adoption rate, and only one was using a manual accounting system, representing a 20% non-adoption rate in chingola town on the copperbelt province of zambia, as depicted in the table below: 4.0 findings of the study the question to be answered was. 2. what is the strength of the relationship between the computerized accounting system and the organizational performance of ngos on the copperbelt? the test findings showed that the performance of non-governmental organizations and their computerized accounting system had a highly significant positive relationship (r = 0.730, p = 0.022). following the pearson correlation criteria on degrees of correlation in the data analysis section, which specify that when r is (-1 to +1) shows a high score implies high association, while a score near zero indicates no correlation, the researcher came to this result. table 1. presents adoption of computerized system. towns kitwe mufulira chingola ndola total % adoption 2 1 0 1 4 80% non-adoption 0 0 1 0 1 20% no. of ngo's selected 2 1 1 1 5 100% during the investigation, it was also observed that four of the organizations had computerized accounting systems, two ngos adopted the system 2-3 years ago, one ngo implemented the system 6-7 years ago, and one ngo adopted the system 7 or more years ago. according to the responses, sage pastel is utilized in three of the four non-governmental organizations (ngos) on the copperbelt, accounting for 75% of the software's usage. quickbooks was identified at one ngo, accounting for 25% of the product's use on the copperbelt. the initial cost economy, 2025, 12(2): 12-17 15 © 2025 by the authors; licensee asian online journal publishing group of installation, user-friendliness, and maintenance cost were identified as the primary variables driving management's acceptance and implementation of accounting software in non-governmental organizations. cost benefits and other considerations like training, worker adaptation, maintenance costs, and after-sales services have less impact on adoption decisions. table 2 presents test findings computerization and performance. table 2. test findings computerization and performance. correlation of computerized accounting system and performance performance computerization pearson correlation (r) 0.730 sig. (2-tailed) 0.022 n 100 the results of the research showed an advantageous connection between the performance of non-governmental organizations in the copperbelt and computerized accounting systems. the respondents went so far as to say that an organization's performance can be affected by the design and upkeep of its accounting system. computerized accounting systems encourage employees to work hard, which improves performance over time. it was also discovered that the positive impacts of a computerized accounting system were not only focused on punctuality, productivity, and understandability, but also increased transparency, resulting in (openness, honesty, and reliability) in the organization. this is in line with the findings of needles and powers (1999) who emphasized in their book that an effective accounting system achieves the organization's main goals. they also mentioned that trustworthy accounting records are produced by effective accounting systems. as a result, effective computerized accounting systems may help the company accomplish its goals. another benefit of the computerized accounting system that the researcher discovered during the investigation was proper accountability. 5. discussions of findings 5.1. adoption it can be seen in table 1 that 80% represents adoption rate and 20% non-adoption rate. according to the responses, the adoption of a computerized accounting system achieves the organization's overall objectives. it was noted, however, that a number of factors influence the computerization of accounting systems, including the size of the business, the number of highly qualified employees, the availability of funds for the system's purchase and maintenance, and the availability of legitimate software for these companies to use. this agrees with needles and powers (1999) who stressed in their book that a good computerized accounting system accomplishes the broad objectives of the organization. further, this is supported by adelisa (2017) who concluded that a computerized accounting system gathers, organizes, analyzes, interprets, and presents data to users for the decision-making process. "an organization can run smoothly, and produce good reports even without computerization, even in the olden days organizations were still operating effectively" this was one of the statements made by a human resources department representative. this implies that there are still those who are at ease with manual accounting and yet hold the belief that computers should not be used. a few people in the copperbelt province have not recognized the disadvantages of a manual accounting system. according to the study's findings, most non-governmental organizations are transitioning to computerization, nevertheless at a slow rate compared to how technology is evolving. the book "fundamental accounting principles" by larson and jensen (2015) emphasizes that an accounting information system is made up of different parts that collect and process raw financial data to provide timely, accurate, cost-effective, and relevant information for users inside and outside the company. what the researcher discovered was consistent with hamidah (2014) quote that "computerized accounting systems have a considerable impact on the organization's continuous performance" and the researcher strongly believes that the cost of software installation influenced computerized accounting adoption. most software with a high installation cost is not widely adopted. the factors driving adoption, according to respondents, also included maintenance costs and user usability. the majority of non-governmental organizations (ngos) don't use accounting systems that are hard to use or comprehend and require high maintenance costs. additionally, it was found that the benefits of computerization have increased the relevance, comprehensibility, reliability, and comparability of the financial information these ngos provide to funders, as well as the speed, timeliness, correctness, and quality of reports. the effects are evident in the ongoing support that local nongovernmental organizations (ngos) receive, particularly when contrasting the money received by those who utilize computerized accounting systems with that of those who do not. 5.2. computerization and performance according to qatanani and hezabr (2015) and fardinal (2013) computerized accounting systems benefit from built-in internal control features. these features allow the system to implement and execute various administrative and internal accounting controls at various stages of the accounting process, such as financial statement preparation, reconciliations, and budgeting. ahmed (2017) and onaolapo and odetayo (2012) on the other hand, found a favorable but not significant relationship between computerized accounting systems and organizational performance in smes in kenya. additionally, oladipupo and ajape (2013) and bawa, mustapha, and ahmed (2018) discovered a significant impact on accounts receivable management utilizing computerized accounting system (cas) among nigerian small and medium enterprises (smes) using the anova analytic methodology. according to ayman and barjoyai (2019) there is a strong and positive correlation between cas and the performance of the banking sector. the results from this study showed that the performance of non-governmental organizations (ngos) and their computerized accounting system had a highly significant positive relationship. this is also supported by one respondent from the accounts department who remarked that "when the accounting system is poor, so is the reporting structure and quality of output reports" the findings of this study demonstrated a considerable positive relationship between performance in non-governmental organizations economy, 2025, 12(2): 12-17 16 © 2025 by the authors; licensee asian online journal publishing group (ngos) and computerization. although computerization requires large expenditures, the benefits far surpass the expenses. it was also established that transparency in reporting, error-free reports, and meaningful reports promote smart decision-making and help to ensure the continuous flow of funding from contributors. 6. conclusions and recommendations according to the study, most local non-governmental organizations in the copperbelt are able to consistently secure funding because they have maintained appropriate computerized accounting systems that have improved the relevance and value of their financial reporting system. the study suggests the adoption and computerization of the financial reporting and accounting procedures of non-governmental organizations. this enhances staff members' technological proficiency and benefits the company as a whole, bringing value to the workforce. technology is moving at an advanced pace and it is the main reason why many ngos are migrating to computerized accounting systems because computerization comes with more benefits ranging from accuracy in reporting, transparency enhancement, and quick decision-making processes. this has brought about strong financial reporting procedures in many business sectors of the economy and many donors are now demanding that non-governmental organizations computerize their accounting systems. 6.1. recommendations the study recommends management training and personnel development in order to be up to date with technological advancements and professional career development. it also suggests a higher adoption rate from 80% to 100%. funders expect accurate and transparent reporting from ngos, so all organizations must join forces to improve transparency and reporting through computerized accounting systems. organizations should hire competent staff who can quickly adapt to new system changes and use computers. vendors of accounting software should host webinars to promote their products. the study also emphasizes the importance of computerized accounting systems in organizations for accountability, asset protection, and proper record-keeping. references abubakar, m. 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(2017). the role of computerized accounting systems in improving organizational efficiency. journal of accounting technology, 34(2), 123-135. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. 90 © 2025 by the authors; licensee asian online journal publishing group economy vol. 12, no. 2, 90-99, 2025 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/economy.v12i2.6849 © 2025 by the authors; licensee asian online journal publishing group cultural diplomacy and soft power of china: theory, strategy and application in south east asia nguyen minh trang1 wu tuan dat2 ( corresponding author) 1diplomatic academy of vietnam. email: trangdav@gmail.com 2the dewey schools hai phong, vietnam. email: thomaswu0902@gmail.com abstract this paper examines the expansion of china's influence beyond economics into culture and ideology, focusing on its state-led cultural diplomacy in southeast asia, a region of critical strategic importance. adopting a qualitative approach that utilizes case studies and empirical data, the research analyzes the mechanisms and motivations behind china's soft power strategy. the findings reveal that these initiatives are distinctly statecentric and frequently aligned with immediate economic or political goals. while this strategy has successfully established a notable cultural presence for china in the region, it is simultaneously hampered by significant challenges in building genuine trust and persuasive appeal. the paper concludes that the effectiveness of china's soft power is ultimately constrained by these issues, casting doubt on the long-term sustainability of its approach. these findings offer crucial insights for policymakers, suggesting that a more organic, trust-based approach is necessary for long-term success and informing how regional nations can formulate effective engagement strategies. keywords: china, cultural diplomacy, soft power, strategy, application, south-east asia. citation | trang, n. m. & dat, w. t. (2025). cultural diplomacy and soft power of china: theory, strategy and application in south east asia. economy, 12(2), 90–99. 10.20448/economy.v12i2.6849 history: received: 19 may 2025 revised: 20 june 2025 accepted: 23 june 2025 published: 2 july 2025 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. institutional review board statement: not applicable. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. this study followed all ethical practices during writing. competing interests: the authors declare that they have no competing interests. authors’ contributions: both authors contributed equally to the conception and design of the study. both authors have read and approved the final version of the manuscript. contents 1. introduction ...................................................................................................................................................................................... 91 2. methods ............................................................................................................................................................................................. 93 3. results ................................................................................................................................................................................................ 93 4. discussion .......................................................................................................................................................................................... 96 5. conclusion ......................................................................................................................................................................................... 98 references .............................................................................................................................................................................................. 98 mailto:trangdav@gmail.com mailto:thomaswu0902@gmail.com https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v12i2.6849 https://orcid.org/0009-0002-0041-6105 economy, 2025, 12(2): 90-99 91 © 2025 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this paper offers a comprehensive analysis of china's cultural diplomacy and soft power specifically within southeast asia. it uniquely combines theoretical frameworks with strategic implementation and practical application, illuminating how beijing leverages cultural assets to enhance its influence, manage its image, and foster diplomatic relations in this critical region. 1. introduction 1.1. the concept of soft power soft power, which is a term introduced by nye (1990) has been featured prominently in international relations literature. nye (1990) first used the term "soft power" in his book bound to lead, where he described how some states can influence others not solely through coercive force or economic power, but also through attraction. soft power is defined as "the ability to get what you want through attraction rather than coercion or payment." about globalization, and not all states wishing to act through coercive means that may lead or generate backlash, soft power has become increasingly useful for states seeking to generate their images, change values, and create sustainable influence. nye (2004) refined this argument further in soft power: the means to success in world politics, where he indicated three sources of soft power: culture, political values, and foreign policy, particularly when it is seen as legitimate and having moral authority. when a country is able to produce attraction in these three areas, it is also able to influence decisions that would not normally be possible through coercive means. soft power also differs from hard power, which is largely coercive or economic. subsequent work has appraised and expanded on nye, for example, wilson iii (2008) stressed the practical need for narrative framing and communicative effort in implementing soft power where attraction cannot happen by accident, attraction must be generated from a strategic approach; melissen (2005) expanded the meaning of soft power with the concept of public diplomacy in which non-state elements (e.g., media, ngos, education, etc.) contribute to a nation’s brand abroad. critics of nye's framework have identified weaknesses in its conceptual clarity and imposition of a western construct. for example, lukes (2005) and user of soft power to bring about change of preference had the innocuous tone of being multi-democratic, while still indirectly wielding power to coerce attraction and although not aggressive, attracted or preferred outcomes can be considered manipulative. furthermore, hayden (2012) raised issues regarding the understanding and measuring of soft power, noting that it can be difficult to locate attraction as an authentic preference and not as an influence produced by strategic means. the concept has also been analyzed in non-western settings. kurlantzick (2007) was among the first authors to conduct a systematic study on china's soft power strategy, and he noted that china utilizes a myriad of statebased more traditional instruments of soft power such as foreign aid, scholarships (this includes international students who study at chinese universities, and cultural exchange students who go to the university of utah or other us universities), and confucius institutes. kurlantzick characterized chinese soft power as "conditional" because it is rarely applicable simply as a result of admiration. in some cases, chinese soft power also carries with an economic or financial motivation from beijing's side. similarly, gill and huang (2006) studied the structural and strategic underpinning of china's soft power with an emphasis on the actions of the chinese government, and a consideration of the cultural narratives and style of diplomacy emanating from the state. these authors showed that there is an obvious danger in confusing a predictively and practices-based model of soft power based on information and narratives suggested by an authoritarian regime with a normative model of soft power based on persuading the public as its foundations, as nye described. also, smart power, a hybrid method of achieving definitions or objectives with the combined elements of hard and soft power has increasingly assumed an integral role in foreign policy analyses. nye (2009) asserts that the best strategies to move global politics forward are not limited to either attraction or coercion, but rather a combination of the two, sensitive to context; this perspective is also represented by other later researchers considering global power arrangements in an increasingly multipolar reality. with respect to practice, this combination of soft and hard power has been reflected more in the actions of great powers including the united states, china, japan, and south korea. while we observe differing new formats and at times, some ambiguity in terminology, the body of literature consistently affirms the roles of legitimacy, perception, role models, and communication in exerting international influence. without question, soft power has represented a unique way of understanding how states are seeking to shape global norms and behavior when they form consensus without engaging violence or financial incentive. 1.2. cultural diplomacy cultural diplomacy has emerged as a critical instrument of soft power in international relations, serving as a means for states to project influence and shape perceptions through cultural exchange, heritage promotion, and people-to-people engagement. although often associated with public diplomacy, cultural diplomacy distinguishes itself by focusing specifically on the use of cultural assets language, arts, education, and shared values to promote mutual understanding and foster international goodwill. the tools of cultural diplomacy include academic and artistic exchanges, scholarship programs, international cultural institutes (such as germany’s goethe-institutes, france’s alliance française, and china’s confucius institutes), cultural events, exhibitions, cinema, music, cuisine, and language promotion. these forms help build a nation’s image (nation branding) and increase goodwill among foreign publics. cultural diplomacy has played a significant role in the post-cold war era, as countries compete to win the “hearts and minds” of global audiences. the success in cultural diplomacy does not come from "promoting politics through culture" but from creating genuine spaces for cultural interaction (leonard, 2002). cultural diplomacy is an important subset of soft power, which is achieved through cultural exchange activities that promote understanding, develop trust, and ultimately produce global influence. cultural diplomacy is regarded as one of the most powerful instruments in the deployment of soft power. when a state is able to diffuse its culture outwards and generate attraction, it has the opportunity to positively affect the behaviors and attitudes of populations in other countries without resorting to the practice of coercion. bound, briggs, holden, and jones (2007) "cultural relations are the daily manifestation of soft power." while soft power is an abstract strategy, economy, 2025, 12(2): 90-99 92 © 2025 by the authors; licensee asian online journal publishing group cultural diplomacy is the concrete means for implementing this strategy. the two concepts should be thought of as complementary: cultural diplomacy is used as a tool of soft power, but cultural diplomacy is also a visible means by which soft power is expressed. while cultural diplomacy can be used in both informal and formal settings, its capacity to be effective, in terms of expressing soft power, is contingent on the way in which cultural diplomacy is practiced. it is quite possible to practice cultural diplomacy in a propagandist or tightly-controlled institutional manner where the legitimacy of the efforts can be called into question. if projects and events demonstrate a sense of manipulation or lack of authenticity, the foundations of soft power can be weakened. on the other hand, if a state offers opportunities for reciprocal exchange that encourage genuine two-way cultural conversations, it can begin to construct a positive image and expand its soft power in a sustainable manner. the contemporary idea of cultural diplomacy began to appear after world war ii when countries were working to refashion the broken diplomatic relations that allowed for global warfare. cummings (2003) explains that cultural diplomacy “is the exchange of ideas, information, art and other aspects of culture among nations and their peoples in order to foster mutual understanding,” which can stem from either formal or informal diplomacy. cummings' definition closely resembles nye (2004) description of soft power, where public diplomatic reliance on culture, political values and foreign policy creates a “trust” factor with foreign and domestic audiences relative to coercive hard powers. often, scholars have examined the historical paths of cultural diplomacy, as mark (2008) notes "it has become particularly dominant since the end of the cold war, but cultural diplomacy was utilized before the cold war, especially as it applies to international relations and the united states versus the soviet union." cultural diplomacy during the cold war included an arsenal of educational exchange programs (fulbright program), international transmission programs (e.g., voice of america), and cultural engagements (artistic performances) stripped of the public ideological contestation identified over historical resources transferred through diplomats. in the post-cold war period, an increasing number of emergent powers have engaged in cultural diplomacy to improve their image abroad. nye (2008) contends that cultural diplomacy is a component of "smart power," the judicious use of hard and soft power to achieve goals of foreign policy. within this paradigm, countries including china, turkey, and south korea have increased their cultural diplomacy through either state-sponsored or quasistate media content, cultural centers or agencies. ang, isar, and mar (2015) particularly acknowledge a shift away from state-centric cultural diplomacy toward more inclusive, multi-actor endeavors. they suggest that the effectiveness of cultural diplomacy increasingly relies upon collaboration between governments and civil society, including previous non-state actors as part of the cultural industries. melissen (2005) also argues that the credibility of cultural diplomacy and its authenticity is enhanced when the participation of non-state actors in the cultural sphere, including artists, educators, and non-governmental organizations (ngos) can influence cultural messaging. nevertheless, there are concerns from scholars who are skeptical of the effectiveness and authenticity of cultural diplomacy when it is understood as a political tool. for example, arndt (2005) expresses that purposeful cultural diplomacy tends to undermine legitimacy if audiences suspect it is propaganda rather than genuine exchange. cull (2009) reinforces this view, and indicates that the relationship-building aspects of sustainable cultural diplomacy should take precedence over directing one-way messaging. in the asian way, cultural diplomacy is often operationalized through state-led programs, such as china's confucius institutes or japan's cool japan campaign, that have gained some degree of visibility. kaneva (2011) asserts that although these institutional programs have important bases for visibility, they must scale the structural issues of censorship, lack of civil society actors, and geopolitical mistrust, to have long-term effect. cultural diplomacy is still a powerful tactic for international influence, especially when pursued transparently, mutually, and inclusively. cultural diplomacy is most effective when competing national interests can be balanced with meaningful intercultural dialogue, it is nonpartisan, and stakeholders from both sending and receiving countries are affected. 1.3. china’s soft power and cultural diplomacy in recent decades, china has increased its endeavor to build and utilize soft power as an aspect of its foreign policy, with the aim of enhancing its status and improving its public diplomacy image. recognizing the limits of hard power, particularly in the competitive globalized setting, china has determined to promote soft power tools, with cultural diplomacy being one of the principal functions. while china has great potential for soft power with its ancient civilization, its rapid economic growth and increasingly expansive global connections to establish a soft power base, for it to be effective, the base cannot be one-sided state-driven propaganda (nye, 2005). the term "soft power" was granted its official recognition in chinese political discourse in 2007 at the 17th national congress of the communist party when president hu jintao called for "enhancing the soft power" of chinese culture. under president xi, soft power is structured into the “china dream” strategy, a grand strategy for national rejuvenation in terms of economics, culture and the world (callahan, 2015). the 2011 white paper on china's peaceful development states that "developing soft power" is a major aspect of demonstrating a "responsible, cooperative and peaceful" nation. a central tenet of china's soft power strategy has been expanding cultural diplomacy through programs like confucius institutes (cis). cis are funded and managed by hanban (which is now called the center for language education and cooperation) and are specifically aimed at promoting the international teaching of chinese language and culture. hartig (2015) argues that the sheer number of cis especially throughout africa and southeast asia indicate china's intention to shape how the world perceives china in a manner that will support its geopolitical and economic interests. however, several authors indicate that the cis have raised alarm over academic autonomy as well as the politicization of cultural interchange (brady, 2015; paradise, 2009). since 2004 china has opened hundreds of confucius institutes and classrooms around the world to teach chinese language and promote traditional culture. while the primary function of the cis will always be to promote a positive image, there have been moments of controversy as a result of academic interference and politicized education. china also mobilizes educational scholarships and exchange programs as soft power tools. for example, according to yang (2010) the chinese government has substantially increased scholarships for foreign students, economy, 2025, 12(2): 90-99 93 © 2025 by the authors; licensee asian online journal publishing group particularly those from the global south, alongside other soft power engagements in active diplomacy. these programs increase china's attractiveness in some respects, particularly related to the educated elites of developing countries; however, their long-term effect is debated. kurlantzick (2007) highlighted that china's soft power is conditional—domestically driven, often linked to economic assistance or infrastructure investments, rather than based on spontaneous cultural appeal (opposed to a hard power base). china also operates in the area of international media and digital portals as part of cultural diplomacy. organizations like cgtn and xinhua have been charged with "telling china's story well," to audiences abroad (shambaugh, 2015). china has improved its media level as a result of these efforts; however, it makes little impact short of credibility in liberal democracies, and state-run stories are considered fulfilled with suspicion. rather, rawnsley (2009) outlined that the truth is also essential for effective media diplomacy and china is continuing to wrestle with this credibility. although china is working intensively to strengthen its cultural diplomacy, the effects of its soft power will continue to be limited by its domestic political environment. nye (2013) believes china's ability to export soft power is adversely impacted by censorship, authoritarianism, and the lack of a civil society that may help enhance its credibility outside of china. d’hooghe (2015) also says china's centralized and objective driven production of soft power content not only lacks authenticity, but also plurality needed for more genuine engagement. in the context of regions such as southeast asia, the reception of china's soft power has been uneven. chitty and ji (2021) comment that even with an increase in chinese dramas watched and uptake in learning chinese language, the masked opportunity for chinese values due to the deep political distrust related to the south china sea is an obstacle for broader acceptance. these conclusions support zhao (2013) ripe opinion that for china to successfully modify this soft power strategy, it needs to similarly take into account the immediate political and socio-cultural circumstances of the places it aims to penetrate. as previously asserted, china's cultural diplomacy is not a wholly bottom-up people-based effort, but an extension of its foreign policy that is calculated and linked to its broader foreign policy objectives. in effect, while china's cultural diplomacy can be examined in terms of visibility and fully participating in cultural outreach, its levels of success are often limited by issues of credibility, political context and a lack of participation by non-state actors. belt and road initiative (bri): its primarily economic nature notwithstanding, the bri represents cultural cooperation as well, including the construction of schools, academic exchanges, support for local culture, and a world view that marries economic and cultural diplomacy to complement china’s soft power (nye, 2008). the belt and road initiative (bri), launched in 2013, is frequently characterized as an economic and infrastructure development strategy, but it is also an important aspect of china's efforts to project its soft power through means of cultural diplomacy. while the primary focus of the initiative is connectivity and trade in asia, africa, and europe, it also allows for china to project its cultural and educational reach. within the bri framework, soft power resources (such as confucius institutes, scholarships for international students, and cultural exchange programs) are integrated into the overall chinese geopolitical plan (d’hooghe, 2015). this relationship is evident in partner bri country partners where china is building roads, ports, and railways while directly investing in language centers, media collaborations, and educational partnerships (particularly in southeast asia and africa). the bri connects development aid and cultural diplomacy as part of the same initiative which provides china with a foothold to influence perceptions and implement an understanding of what it means to be a modern actor, specifically a modern good actor. while it is widely acknowledged that china's process of diplomatic engagement through bri can a be a beneficial resource, scholars have noted that it increasingly blurs the line between soft power, approaches to diplomacy, and deliberate influence, leading to discussions about how voluntary or engaged cultural diplomatic commitments can be (kurlantzick, 2007; nye, 2013). as many authors predominantly recognize, soft power is also highly conditional on recipient country investment strategies that are dependent on some of china’s interests and potential sources of their influence. additionally, critiques of china's bri-linked cultural diplomacy outline the state-centric model of plan-based engagement which lacks coherence, credible transparency, and a pluralist approach to diplomacy, creating barriers for converging soft power strategies in places like liberal democratic societies, or regions where geopolitical pressures are high (zhao, 2013). overall, while bri holds out promise in terms of establishing legitimacy for china’s global engagement and developing cultural export, we aren’t yet ready to call it soft power and define its potential for credible engagement, particularly in places where local political contexts raise suspicions about the intentions of china. 2. methods this study employs a qualitative document analysis approach, combined with empirical data from reports by iseas – yusof ishak institute (2023) and pew research center (2023) as well as policy documents and statistics from hanban (2023) and the chinese ministry of education. several representative cases such as thailand, vietnam, and the philippines are analyzed to compare the reception and effectiveness of china’s soft power in southeast asian countries with different political and social contexts. document and data analysis: review of chinese government white papers, official speeches, and policy documents (e.g., the “go global” strategy, cultural components of the belt and road initiative) to evaluate diplomatic strategy and soft power of china. case studies: confucius institutes in asia, africa, europe, and north america; expansion of chinese media: cgtn, xinhua news agency; some major cultural events such as: beijing olympics, silk road cultural festivals. 3. results 3.1. confucius institutes (cis) research shows that china has implemented soft power through a range of cultural and educational diplomacy tools over the past two decades, particularly in southeast asia. the confucius institutes (cis) were first launched by the state council of the chinese government in 2004, in collaboration with the hanban (which has now changed their name to the center for language education and cooperation). the goal was to create a global library of designated language and cultural centers similar to germany's goethe-institut and france's alliance française. southeast asia quickly emerged as a prime area for economy, 2025, 12(2): 90-99 94 © 2025 by the authors; licensee asian online journal publishing group expansion possibilities due to geographic proximity, cultural ties, and growing economic connectivity with china. in 2023, there are now 530 confucius institutes and 1,171 confucius classrooms in 162 countries and territories. in northeast asia, there are more than 60 institutes at large universities in thailand (16), indonesia (8), malaysia (6), vietnam (6), the philippines (4), etc. (hanban, 2023). these institutes represent language learning, cultural events, scholarships for local students, and strengthen china's cultural influence within the region. the development of confucius institutes in southeast asia is a conscious hybrid of culture and geopolitics. while they operate under the auspices of promoting mutual cultural understanding and the learning of mandarin language, the implicit function is part of china's goal to promote influence as a soft power mechanism in regions where cultural resonance and economic dependence exist. the confucius institutes have an educational role, but they also fulfill a diplomatic and horizontal international engagement role; an important part of global positioning. confucius institutes have undoubtedly extended china's cultural presence in southeast asia and advanced a limited language-learning objective and people-to-people ties, particularly in places that have an historically favorable relationship like malaysia. however, their role as a soft power instrument is ambiguous, limited by local distrust, international resentment created through foreign and geopolitical tension, and an absence of cooperation and engagement with local citizens and institutions. if china's cultural diplomacy is to move from an emphasis on visibility to credibility, it will require political dis-engagement, action on the part of non-state actors, and recognition of the host country’s socio-political sensitivities. education has long been a critical element of china's soft power strategy, and especially so since president xi jinping's on-going vision of a global china took shape with the belt and road initiative (bri). education and scholarship serve both a diplomatic and ideological function: they can portray china in a positive, attractive light, create long-term relationships with future elites, and expand china's cultural and political influence. unlike forms of hard power, education operates on a normative and value-based level and presents the possibility for developing change from the experiences of individuals. nye (2004) notes that soft power is most effective when it comes from a place and desire for legitimate attraction, and education represents an opportunity for attraction if it is not over politicized or implemented through coercion. thailand holds the highest counts in the region with 16 confucius institutes in total. in 2022 approximately 30,000 students in thailand were studying chinese along with being the highest study-abroad destination at over 8000 students studying in china. overall, the response has been positive, especially in the northern and northeastern provinces in thailand. while interest in korean and japanese has grown, the number of students learning chinese in vietnam has somewhat decreased (about 12% less than in 2019– 2022) despite widespread cultural interaction. confucius institute operations are still ongoing, but they are being closely examined because of the geopolitical environment and worries about ideological influence. 3.2. educational scholarships and exchange programs in addition to being a focus of china's educational diplomacy, southeast asia also benefits from a number of other characteristics, such as its close proximity, high young population, and need for affordable foreign education. the ministry of education of the people's republic of china indicates that between 2013 to 2023, more than 300,000 asd from members of asean studied in china on a full or partial scholarship, which is an increase of more than 80% compared to the last nine years of 2003-2012 (ministry of education of the people’s republic of china, 2023). according to vietnam will rank in the top five students to study in china along with the four other southeast asia members under their scholarships program. in 2022, china issued over 60,000 scholarships to students from the belt and road initiative (bri) member states, an increase of almost 20% from 2018 (ministry of education of the people’s republic of china, 2023). the highest number of recipients were students from thailand, laos, cambodia, and myanmar. education is also a kind of elite socialization. students who study abroad in china come back with networks, language skills, and the social knowledge of chinese society which may help create more beneficial foreign policy orientations in the future. china's education diplomacy presents an alternative to the western-dominated academic discourse, frequently framing academic cooperation in south-south academic cooperation, mutual development, and non-interference in internal affairs. through scholarships and research grants, china is able to frame its image as a benevolent partner especially to states which find western funding criteria or worldview a barrier to cooperation. education also provides the human capital development that is needed for bri infrastructure projects. the many students who receive scholarships to study in china may also be trained in fields directly related to bri development such as engineering, shipping and logistics, medicine and public administration thus creating not only soft power messages, but also functional dependence, as regions become reliant on chinese-trained professionals to operate chinese built and operated infrastructure development. while china's educational diplomacy has significant scale and financial backing, it has limitations. unlike japan or korea's cultural diplomacy, the education-based diplomacies being developed in southeast asia are perceived as being state-directed by china and have the potential to carry the suspicion of ideological indoctrination with a strategic motive. mandarin remains a difficult language to learn, and some asean students may also be hindered by cultural adjustments to china. in many countries, such as vietnam and the philippines, scholarship initiatives might lead people to suspect the potential for strategic designs in light of bri investments or territorial disputes. china's education and scholarship is a strategic, multidimensional use of soft power. these initiatives succeed at enhancing china's cultural and political power. however, these initiatives' long-term impact is questionable in its credibility and local reception, or whether china can present itself as an earnest partner, not merely as a strategic power. for southeast asia, the challenge was finding a pragmatic balance between benefitting from access to chinese education, and respecting the appeal of national autonomy and pluralistic exchange. today, many graduates of chinese universities elevate sectors in public and private leadership capacities in asean, who collectively constitute a potential soft diplomatic constituency. 3.3. international media and digital platforms china's efforts to expand its global media and export cultural products are intended to change narratives, mitigate negative stereotypes, and assuage concerns regarding china by developing and presenting it as a more economy, 2025, 12(2): 90-99 95 © 2025 by the authors; licensee asian online journal publishing group positive and confident character. as part of china's broader soft power approach, the government of china determined that having control over discourse was the only way for it to counter its reputational deficit and expand its legitimacy and influence internationally. the government and chinese enterprises are heavily invested in global media and the export of cultural products. culture products and media platforms like tiktok (owned by bytedance) and chinese television dramas continue to gain popularity in thailand, malaysia, and singapore. at the same time, the chinese government is amping up the number of films made encouraging nationalism and the "chinese dream" narrative to enhance the country’s image as a rising global power (chitty & ji, 2021). in 2023, china's ministry of culture and tourism held 500 or more international cultural events, including the "china arts festival abroad," "happy chinese new year," and the "tea and silk exhibition." in vietnam, "chinese film week" has been held annually in hanoi and ho chi minh city since 2016, mostly averaging over 10,000 annual guests (chinese embassy in hanoi, 2023). cgtn is 24/7 in 6 languages (english, spanish, french, arabic, russian, and chinese) and cgtn operates over 70 overseas bureaus. in southeast asia, cgtn and china daily distribute in thai, bahasa, khmer, and vietnamese. cgtn's english-language youtube channel has 3.2 million subscribers (bbc monitoring, 2023). the use of overseas media and the export of cultural products is an important component of china's soft power agenda. the strategy to influence global perceptions of china, counter unfavorable narratives about china and present china as a rising, responsible global power, is intended to resonate worldwide. unfortunately, the complexity of its investments in internationalizing all three-state media (cgtn, xinhua news agency, and china daily), the country's aim is to secularize (i.e. push a narrative beyond linguistic and regional boundaries) the narrative of china particularly across the region of southeast asia. the chinese outlets produced multilingual content (english, french, etc.) for targeted audiences, mainly emphasizing china's development achievements, peaceful nature, and its contributions to the world. in southeast asia, local broadcasters can obtain chinese public media through content partnerships or media cooperation agreements, allowing distributions of what is, ostensibly, paid content (often at lower prices or subsidization). those partnerships act to amplify pro-china views while embedding beijing's strategic narratives into local media systems. also, cultural products such as television dramas, variety shows, and digital entertainment have been increasingly exported, as streaming platforms like iqiyi and tencent video have emerged in regional markets and for millennial audiences in thailand, malaysia, indonesia and vietnam. these platforms offer a way to increasingly export chinese popular culture. thus, chinese dramas, historical epics and other aesthetic forms, will also expand china's cultural familiarity. although there is a reception of chinese cultural products by larger audiences, this reception frequently operates at the entertainment level, and the audience can have a positive engagement with chinese popular culture while at the same time engaging with, or remaining indifferent to, china's political system or model of governance. in this context this limitation of china's cultural diplomacy important: the attraction of chinese cultural products does not translate into an ideological alignment or endorsement of chinese political values. furthermore, while china’s digital diplomacy, including the active social media engagement of its embassies and diplomats, broadens its communication capabilities, it has received criticism for its confrontational tone and opacity. beyond china’s domestic borders and especially in relatively more democratic southeast asian countries, such as vietnam and the philippines, many of its international media operations are considered propagandistic because of the degree to which they are state-controlled without any editorial independence. this perception considerably diminishes the credibility and effectiveness of china’s messaging. additionally, when cultural content is closely linked to directed geopolitical objectives, people often suspect that there are other agendas at play when it comes to soft power campaigns where china’s political or territorial interests stretch independent of contested overlapping geographical claims. in the end, while it improves its visibility and cultural stature through media expansion and cultural exports, china’s ability to leverage this as soft power is limited by issues of authenticity, trust and political environment. while south korean or japanese cultural exports organically achieved marketplace success and depth of emotional or ideological legitimacy, china’s state-sponsored model stumbles. future success of this strategy is likely contingent on beijing granting greater creative autonomy for recipients, fostering more reciprocal cultural dialogues and creatively engaging the complex socio-political landscapes of recipient countries. 3.4. belt and road initiative (bri) the bri's effectiveness as an instrument of china's soft power and cultural diplomacy is complex and disputed. on one hand, the bri has succeeded in extending china's economic and cultural footprint in more than 140 countries, creating new opportunities for engagement through infrastructure, academic exchanges, and cultural partnerships (hurley, morris, & portelance, 2018). southeast asia is one area where, commonly, new bri-related investments were accompanied by confucius institutes, bilateral education treaties among educational institutions, and scholarships promoting the language, culture and values of china (d’hooghe, 2015). china has increased its visibility, and in turn has created opportunities for inter-cultural dialogue, especially among youth. in addition, other cultural programming tied to the bri, such as joint exhibitions, art festivals, and language programs solidified china's narrative of being a peaceful partner in development (zhao, 2013). the state-centric and strategic nature of bri, therefore, has also generated skepticism and opposition from countries in their engagement to bri, likely shaped by concerns of sovereignty, indebtedness, and/or geopolitical manipulation (nye, 2013; rolland, 2017). bri opponents argue that the softer, more benign elements of bri can benefit countries but are ultimately conditional, with civil society practice and mutual respect being of subordinate consideration. also, bri's supposed chinese cultural diplomacy's legitimacy has been undermined by limited transparency, some lack of local stakeholders' input to cultural projects and the perception that chinese official institutions have surreptitious influence. while it is possible that bri may advance chinese soft power influence, long-term success depends on an ability to keep genuine people-to-people connections strong, being more institutionally transparent, and avoiding coercive perceptions. although some significant successes have been accomplished, china's soft power has faced a series of obstacles with regard to authenticity, credibility and sustainability. china is many times seen to be practicing the economy, 2025, 12(2): 90-99 96 © 2025 by the authors; licensee asian online journal publishing group "instrumentalization of soft power" without transparencyespecially associated with geo-political consequences, limitations of information and ongoing abuses against human rights (kurlantzick, 2007). a considerable number of western countries have closed confucius institutes citing fears arising around political influence and academic liberty. cultural diplomacy can only work when both countries are expressing full mutual dialogue rather than a unilaterally imposed partial message (cull, 2009). despite spending millions in soft power projects, china's credibility lingers low in southeast asia. iseas – yusof ishak institute (2023) survey demonstrated that only approximately 27.4% of respondents regarded china as a “trustworthy partner” and only 23.5% of respondents expect china to act responsibly on the world stage. by comparison, both japan, and the us, score very high levels of trust. in vietnam, pew research center (2023) reported that 75% of respondents had an "unfavorable view" of china after extensive cultural exchanges, demonstrating that cultural presence doesn't equate to social consensus or a sense of increased public goodwill. according to surveys conducted by pew research center (2023) and iseas–yusof ishak institute (singapore), international public responses to china’s soft power are mixed with 23% of respondents viewing china to be “the most positively influential cultural power” in the region (529%japan is at 29%). however, 38% of respondents in vietnam and the philippines believe that china’s cultural activities are “propaganda-driven,” and 62% expressed concerns regarding “cultural-educational expansionism.” in the united states, the reports note that 76% of respondents had a negative view of china’s global influence and 62% opposed the presence of confucius institutes in american institutions of higher learning. table 1. evaluation of soft power practice. soft power actual effectiveness real-world evidence culture (films, language, traditions) medium – high viewership on chinese film platforms (youku, iqiyi) in southeast asia rose by 40% (2022–2023); however, the appeal is mostly entertainmentbased. political values (development model) low most students studying in china do not agree with the country’s information control model (iseas – yusof ishak institute, 2023). foreign policy (belt and road initiative – bri) medium despite the increase in scholarships, there are ongoing suspicions about china's strategic motives. table 1 presents the actual effectiveness of different components of soft power, using real-world evidence. culture (films, language, traditions) is rated medium-high in effectiveness. the evidence shows a significant increase, a 40% rise between 2022 and 2023, in viewership of chinese film platforms like youku and iqiyi in southeast asia. this indicates a growing reach and appeal of chinese cultural products. however, the effectiveness is noted to be primarily entertainment-based, suggesting that while it successfully engages audiences, it might not translate directly into deeper political influence or alignment. political values (development model) are rated as low. the provided evidence indicates that even students who choose to study in china, and are therefore exposed to its political system, largely do not agree with the country's information control model. this suggests that efforts to promote its political values or development model have limited success in gaining genuine ideological acceptance. foreign policy (belt and road initiative – bri) is rated as medium. while there has been an increase in associated scholarships, which might be intended to build goodwill and influence, the evidence points to ongoing suspicions about china's strategic motives. this implies that despite the economic engagement and opportunities offered by the bri, there is still a significant level of distrust or apprehension regarding china's underlying intentions, thus limiting its full soft power potential. 4. discussion 4.1. rethinking soft power through the chinese lens the research shows that china is developing soft power based not only on traditional sources of soft power such as culture and language, but because it is creating a connected web of foreign policies and investment connecting culture, education, and the economy that is oriented around the bri. however, while nye (2004) original definition of soft power focused on the ability to “get others to want what you want, through attraction rather than coercion,” much of china’s utilization of soft power is framed with a somewhat state-centered approach and without natural or civil-society inspired appeal. in essence, china’s soft power is “conditional” and often relies on aid, scholarships, or bilateral agreements, instead of established voluntary consensus as described in the original theory (kurlantzick, 2007). figure 1. most economic and political and strategic influence in southeast asia. source: the state of southeast asia 2023 – 2024 surveys. economy, 2025, 12(2): 90-99 97 © 2025 by the authors; licensee asian online journal publishing group figure 1 illustrates that china remains the most significant political-strategic power in southeast asia in 2024. in 2024, china still leads the way with 43.9%, increasing from 41.5% in 2023. china represents the largest area of political-strategic influence, but not much increased. nevertheless, china's political-statecraft influence is very limited, its position represents advantages in economic leverage, strategic requirements, and geopolitics, and in 2024 those positions exist, but with minor improvement; and, greater influence for the united states and asean. china's major growth and still significant influence of the united states and asean would also lead to an impression, even identity, that does not resemble any 'soft power' appeal. china has made significant investments in cultural diplomacy tools such as external media, confucius institutes, and cultural exchange and artistic exploration, among others. this has helped develop cultural brand awareness, while simultaneously allowing for an increased level of global public engagement with china, particularly that of youth in developing societies. china's soft power capacity tends to be effective on a functional level (entertainment, studies, scholarships, etc.), while it has not translated into a sense of broader acceptance of its values (politics, ideology, development model) (iseas – yusof ishak institute, 2023; pew research center, 2023). in many cases, soft power tends to become conflated with economic power, leading to skepticism about its validity. also, china's credibility is diminished by hidden ties, content controlled by the state, and geopolitical strategies, particularly in democratic countries and disputed areas (south china sea). southeast asia is a region that is culturally & inherently open to china, especially when there is a long history of cultural and trade connections (e.g. thailand, laos, cambodia). there were indications that such open receptivity is not uniform. china had created a positive image in thailand through education, scholarships, and media. thai youth consumed chinese culture primarily through entertainment (tv shows, language apps), and this resulted in the development of a more institutionalized soft image for china (chitty & ji, 2021). in vietnam and the philippines, although china is engaged in a lot of cultural exchange with these countries, the geopolitical tensions and regionally politicized suspicions of china's soft power resulted in limited perceptions of china's soft power. these two examples demonstrate that soft power is to a large degree dependent upon the political and social nature of the receiving country and isn't only a numbers game based on size of investment and the number of events, per se. 4.2. soft power cannot be separated from hard power in the asian context though the assumptions of “soft” referring to non-coercive power can be flawed, initiatives that assert “soft power” by china often incorporate aspects of economic aid, investment, or diplomatic contingencies, and as such should be expended as a concept pragmatically—especially because non-western powers (e.g. china, russia, turkey) are subverting norms in both policy and practice to establish the avenues and pathways for influence. in the asian geopolitical milieu, soft power cannot be disentangled from hard power without significant negotiation. in a way that soft power is often described in liberal democratic states in the west as some self-contained form of influence based upon civil society, cultural industries, or attractive political values, the soft power approaches employed in asia especially emerging powers such as china are much more instrumental and hard wired in to state actors, spheres of economic influence or leveraged diplomatic mechanisms. the analysis of soft power is deferentially a more pragmatic approach, such that many engagements, exchanges, extensions and expansions across cultural, educational, media, etc. have the help of an economic incentive, infrastructural investment or some political conditionality. for instance, while the confucius institute and chinese scholarship programs may seem to be something of cultural or educational endeavor, they are more often within an umbrella as either bilateral cooperation or collaboration through the belt and road initiative (bri) framework. these arrangements frequently include an implied or explicit expectation of political alignment, or at minimum, political goodwill, demonstrating the ways in which soft and hard power come together as adjunct forms of influence. furthermore, the projection of soft power in the asian context is often framed by recipient states under a lens of realism. in this case we see cultural diplomacy framed not only on its aesthetic or educational value but also its strategic value. this becomes particularly clear in southeast asia where cultural intentions are bound up with historical memories, territorial disputes, and concerns of sovereignty. even innocuous acts such as mandarin and cultural festivals can be perceived as influences aligned to geostrategic interests. as a result, soft power is influenced by the regional security environment and stakeholder perceptions about the influencing state's intentions. in asia, the implication of soft and hard power aligns with the "charm offensive" agenda, where softpower tools are employed as part of the economic and political toolkits, and not as a separate form of attraction (kurlantzick, 2007). the indistinction between forms of attraction and persuasion on the one hand and coercion and inducement on the other hand demonstrates a hybridized power model such as such a structure envisioned some of the purity presented by nye (2004). for china, soft power is not merely to create admiration for chinese tradition or values; it can also act to reinforce a political narrative internally, legitimize a development model, and front a reasonable international basis for framing its international strategic interests. so, in the asian case, any assessment of soft power must be contextualized within the broader web of economic, political, and security relations. it is important to recognize this complexity, not only to appreciate the constraints and opportunities of china’s soft power, but also to reconsider theoretical frames which may insufficiently understand the state-centric and strategic nature of influence in non-western international relations. the role of non-state actors is critical in order for cultural diplomacy to work. the study indicates that it is this lack of independent civil society organizations, artists or scholars within china's cultural diplomacy network that accounted for the perceived weakness of its soft power. compared to japan or south korea where popular culture evolves independently of the state, china appears to still depend on state institutions to engage in media and cultural promotion. cultural diplomacy cannot be effective if it does not involve non-state actors who provide much more authentic, varied, and people-to-people engagement that is not state directed. governments can provide direction and financing, but cultural diplomacy is much more nuanced and believable by the involvement of artists and scholars, educational institutions, ngos, and private cultural industry entities that allow actors to operate independently. such a distinction is valuable in pluralistic societies whereby culture cannot be monolithic and where cultural translation includes the presence of multiple voices and narratives. economy, 2025, 12(2): 90-99 98 © 2025 by the authors; licensee asian online journal publishing group non-state actors bring spontaneity, creativity, and legitimacy to international cultural exchange that statedriven approaches often lack. in contrast to formal diplomatic channels, these actors can engage in nuanced, grassroots-level dialogues that resonate more effectively with foreign audiences. for instance, independent filmmakers, musicians, academic researchers, and cultural entrepreneurs often serve as organic ambassadors of a nation's culture, generating interest and goodwill through their work without being seen as instruments of government propaganda. this distinction is vital because the perceived authenticity of cultural output directly influences its soft power value. when cultural products are viewed as state-sponsored or ideologically driven, especially in politically sensitive environments, they may elicit skepticism or resistance rather than attraction. similarly, the presence of non-state actors presents more opportunities for flexible responsiveness to constantly evolving preferences of global audiences. as the world continues to change swiftly and with the rapidity of digital networks and transnational communication cultural influence increasingly encompasses adaptability, creativity, and openness; qualities that tend to be endemic in civil society instead of the rigidity of bureaucratic institutions. for instance, japan and south korea's global popularity is being propelled by its popular culture anime, k-pop, cinema through market defined, non-governmental processes increasing enthusiastic global fandoms, and constructing their national identity with very little state intervention in foreign affairs. in contrast, state defined cultural diplomacy as filtered through media as in the case of china and confucius institutes often struggles to resonate or trust. as a result, the absence of an independent cultural agency in the public diplomacy architecture of china increases perception of top-down messaging, that is strategy-based calculation, which diminishes perceptions of soft power. without a self-directed civil society as a layer of diversity and spontaneity, cultural exchange loses many of its dimensions and cultural diplomacy renders itself as a mechanism to political communication rather than sympathy and mutual understanding. therefore, in order for cultural diplomacy to be credible, engaging and ultimately effective, it must be framed by a dynamic ecology of prevalent non-state actors and entities that are able to act with some level of autonomy from government objectives. non-state actors help create authentic, or at least less superficial, effects of cultural exchange whilst making cultural diplomacy multi-faceted, infinitely adaptable and reliable in creating enduring intercultural relationships. however, the absence of non-state actors and entities risks cultural diplomacy as a surface projection of nation states as part of a single narrative, rather than as a layered and diverse presence or framing for the purposes of soft power or international reputation. 5. conclusion china's cultural diplomacy is a core aspect of china's larger strategy of soft power, and it hopes to create a legitimacy of influence without coercion on the world stage. the confucius institute, cultural exchanges and media outreach programs have reached some level of prominence, most notably in spaces of the global south, however they are controlled by the state to such an extent that many recipients doubt their authenticity and motivations. the state-directed model of china’s cultural diplomacy is one that has diminished perceived credibility, and affected degrees of influence in many nations, especially those with diverse & polarized political or pluralistic contexts. in the future the success of the soft power of china will depend on its ability to develop reciprocal and depoliticized forms of cultural exchange. addressing and better resolving between government-led and genuine people-topeople engagement could create the mutual trust that forms the basis of sustainable soft power. future studies could also begin to focus on examination from the perspectives of the recipient countries, and develop longitudinal studies that explore not only immediate reception but long-term effectiveness of chinese cultural diplomacy in 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(2010). soft power and higher education: an examination of china’s confucius institutes. globalisation, societies and education, 8(2), 235-245. https://doi.org/10.1080/14767721003779746 zhao, s. (2013). china’s soft power: challenges of strategy and execution. the journal of contemporary china, 22(83), 634–653. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. https://www.wsj.com/?mod=wsj_navhat&mod=wsj_navhat https://www.pewresearch.org/ https://doi.org/10.1080/14767721003779746 120 © 2025 by the authors; licensee asian online journal publishing group economy vol. 12, no. 2, 120-129, 2025 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/economy.v12i2.7421 © 2025 by the authors; licensee asian online journal publishing group evaluating vietnam-germany trade in the context of the evfta: a trade indicator approach nguyen minh trang1 nguyen thi thu ha2 (corresponding author) 1,2diplomatic academy of vietnam. 1email: trangdav@gmail.com 2email: thuhanguyenthi.work@gmail.com abstract this study evaluates the impact of the eu-vietnam free trade agreement (evfta) on bilateral trade between vietnam and germany, addressing a gap in empirical research despite germany’s role as vietnam’s largest eu trading partner. the research adopts a trade indicator approach, applying the bilateral revealed comparative advantage (brca), trade intensity index (tii), and trade complementarity index (tci) to analyze structural changes in trade between 2015 and 2023. the findings show that vietnamese export sectors with established competitiveness, including footwear, leather, and wood products, have achieved notable gains under the evfta framework. however, sectors such as processed foods and high-tech machinery demonstrate limited improvement due to production constraints, compliance challenges, and value chain integration issues. moreover, the results highlight a declining trend in both trade complementarity and intensity, indicating that the positive effects of the evfta have not been sustained in the long term. these findings underscore the need for vietnam to enhance domestic production capacity, improve regulatory alignment with eu standards, and adopt a more proactive export strategy to fully capitalize on the agreement. strengthening these dimensions will not only sustain existing advantages but also foster diversification and resilience in vietnam-germany trade relations under the evolving evfta landscape. keywords: bilateral trade, brca, evfta, germany, tci, tii, vietnam. citation | trang, n. m., & ha, n. t. t. (2025). evaluating vietnamgermany trade in the context of the evfta: a trade indicator approach. economy, 12(2), 120–129. 10.20448/economy.v12i2.7421 history: received: 5 august 2025 revised: 25 august 2025 accepted: 1 september 2025 published: 16 september 2025 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. institutional review board statement: not applicable. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. this study followed all ethical practices during writing. data availability statement: the corresponding author may provide study data upon reasonable request. competing interests: the authors declare that they have no competing interests. authors’ contributions: both authors contributed equally to the conception and design of the study. both authors have read and agreed to the published version of the manuscript. contents 1. introduction .................................................................................................................................................................................... 121 2. literature review .......................................................................................................................................................................... 121 3. methodology ................................................................................................................................................................................... 122 4. results and discussion ................................................................................................................................................................. 123 5. policy implications ........................................................................................................................................................................ 127 6. conclusion ....................................................................................................................................................................................... 128 references ............................................................................................................................................................................................ 128 mailto:trangdav@gmail.com mailto:thuhanguyenthi.work@gmail.com https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v12i2.7421 https://orcid.org/0009-0002-0041-6105 economy, 2025, 12(2): 120-129 121 © 2025 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study contributes to the existing literature by being the first to apply comprehensive trade indicators (brca, tii, tci) to analyze vietnam-germany bilateral trade under the evfta. the paper's primary contribution is documenting macro-level structural shifts beyond sectoral studies, offering a fuller understanding of this strategic partnership. 1. introduction the eu-vietnam free trade agreement (evfta) represents a significant step in vietnam’s international economic integration strategy, aiming to broaden market access and promote institutional reforms in accordance with the european union’s (eu) rigorous standards (wto center, 2023). within this framework, germany— europe’s largest economy and a pivotal member of the eu occupies a central role in vietnam’s trade landscape. it functions as both a major bilateral trading partner and a vital entry point for vietnamese exports into the wider european market (wto center vcci, 2022). despite germany's strategic importance, bilateral trade between vietnam and germany has received limited attention in academic research, particularly with regard to empirical and quantitative analysis. furthermore, qualitative evaluations of the evfta’s impact on vietnam-germany trade remain scarce, even though the agreement has been in force since august 2020. this study aims to bridge this gap by assessing changes in trade structure, trade balance, and two-way trade flows between the two countries. to support the qualitative findings, key trade indicators, including the bilateral revealed comparative advantage (brca), trade intensity index (tii), and trade complementarity index (tci), are employed. the results reveal significant sectoral disparities in the ability to benefit from the evfta, with certain industries showing strong performance while others remain underdeveloped due to structural and regulatory constraints. the evfta, signed in june 2019 and ratified in august 2020, is considered one of vietnam’s most comprehensive trade agreements, alongside the comprehensive and progressive agreement for trans-pacific partnership (cptpp). in contrast to the former generalized system of preferences (gsp), the evfta offers broader and more sustainable trade advantages. under the agreement, germany committed to eliminating 99.2% of tariffs on vietnamese goods within seven years, while vietnam pledged to remove 98.3% of tariffs on german goods over ten years. additionally, the evfta strengthens cooperation in customs procedures, e-commerce, public procurement, and protection of geographical indications, contributing to greater transparency and efficiency (wto center, 2023). initial outcomes from the evfta are promising. vietnam’s key export sectors, such as footwear, textiles, seafood, plastics, and fruits, have experienced considerable growth in the german market. conversely, german exports of automobiles, machinery, and industrial inputs have gained broader access to vietnam (finance magazine, 2023). between 2012 and 2022, vietnam’s exports to the eu increased by an average of 10.5% annually, and imports rose by 6.4%. the agreement is estimated to have raised vietnam’s gdp by 2-2.5% and boosted exports to the eu by 75%, while also stimulating institutional reform and enhancing the country’s investment environment (wto center, 2023). vietnam and germany established diplomatic relations in 1975, later upgrading to a strategic partnership in 2011. today, germany stands as vietnam’s largest eu trading partner, accounting for nearly 20% of vietnam’s total exports to the eu. it is also a leading provider of official development assistance (oda), with over usd 2 billion committed since 1990 through agencies such as kfw and giz (wto center, 2023). from 2001 to 2018, bilateral trade grew at an average annual rate of 14%, with a notable acceleration in trade volumes following the evfta’s entry into force. against this backdrop, the present study offers a comprehensive assessment of vietnam-germany trade under the evfta and presents targeted policy recommendations aimed at strengthening economic cooperation between the two countries in the medium and long term. 2. literature review the eu-vietnam free trade agreement (evfta) has been the subject of growing academic interest, particularly regarding its macroeconomic implications and sectoral impacts on vietnam's trade relations with the european union (eu). however, most studies have centered on vietnam-eu trade as a whole or focused on specific sectors such as textiles, seafood, or agriculture. in contrast, vietnam-germany trade relations under the evfta, especially through the lens of trade indicators, remain significantly underexplored. grumiller, raza, staritz, grohs, and plank (2020) using the öfse global trade model, assess the broader economic and social effects of the evfta on vietnam. their findings highlight both export expansion potential and structural weaknesses, calling for institutional reforms to maximize the agreement’s benefits. similarly, khoat and cismas (2019) focus on the policy dimension, analyzing the evfta’s negotiation process and anticipated socio-economic impacts. both studies underline the importance of regulatory alignment, supply chain readiness, and policy coordination in realizing longterm trade benefits. quantitative studies have employed trade models to evaluate the evfta's impact. hoan (2021) uses trade indicators to show vietnam’s revealed comparative advantage in several export sectors to the eu, although bilateral trade volume with individual eu members like germany remains modest in scale. huong and phuong (2016) utilize sectoral trade indicators to reveal intra-industry trade characteristics, especially in machinery and electronics, emphasizing the need for deeper integration into eu supply chains. gravity model-based studies offer mixed results. ha (2024) finds limited short-term effects of the evfta on vietnam’s exports, while diep, thao, and thu (2018) identify significant export drivers, including gdp, population, and institutional quality, alongside negative impacts from geographical distance and technological gaps. these studies, while valuable, treat the eu as a homogenous block and overlook bilateral variations, particularly with high-potential partners like germany. sector-specific literature offers further nuance. for instance, chung et al. (2024) and hoang and tan (2020) assess the evfta’s impact on seafood exports to the eu, revealing that while market access has improved, technical and quality-related barriers remain significant. although informative, such studies focus narrowly on industry economy, 2025, 12(2): 120-129 122 © 2025 by the authors; licensee asian online journal publishing group specific outcomes and do not account for broader bilateral trade dynamics. studies directly examining vietnamgermany trade are comparatively limited. tinh (2017) provides a general overview of bilateral economic relations and highlights the need for policy support to leverage german market opportunities. thong et al. (2020) analyze price transmission in the pangasius value chain between vietnam and germany, uncovering inefficiencies and asymmetries in value distribution. kiem, nguyen, le, and tran (2025) apply the smart model to vietnam’s garment exports to germany, showing competitive gains under the evfta but emphasizing the importance of rules of origin and certification compliance. however, a critical gap persists in the existing literature: there is a lack of comprehensive, indicator-based studies that assess the structure, intensity, and complementarity of vietnam-germany trade within the evfta framework. while germany is vietnam’s largest trading partner in the eu, accounting for nearly 20% of its exports to the bloc (wto center, 2023), most empirical research either generalizes eu-wide impacts or isolates sectoral case studies. little attention has been given to how vietnam's trade with germany has evolved in terms of competitiveness, structural change, and long-term sustainability since the evfta’s entry into force. this study seeks to address that gap by employing a trade indicator approach focusing on the bilateral revealed comparative advantage (brca), trade intensity index (tii), and trade complementarity index (tci) to evaluate vietnam-germany trade between 2015 and 2023. by doing so, it contributes both a methodological and empirical advancement to the literature, providing a nuanced understanding of bilateral trade dynamics in the context of a new-generation free trade agreement. 3. methodology this study adopts a mixed-method approach, primarily based on the collection and synthesis of secondary data from official reports, legal documents, statistical sources, and academic literature both domestic and international. the research integrates qualitative analysis with a review of existing studies to ensure a comprehensive and objective assessment of the evfta’s impact on vietnam-germany trade relations, while also formulating appropriate policy recommendations. to support the qualitative analysis, a set of international trade indicators is employed to assess the current status, intensity, potential, and complementarity of bilateral trade between vietnam and the federal republic of germany during the 2015–2023 period (or the most recent year with complete data). the key trade indicators used include: bilateral revealed comparative advantage (brca): the brca index measures vietnam’s revealed comparative advantage in specific product categories within the bilateral trade framework with germany. it reflects vietnam’s relative export competitiveness in a given commodity group. ● x(ij,k): export value of product k from country i (vietnam) to country j (germany). ● x(ij): total exports from country i (vietnam) to country j (germany). ● x(wj,k): world export value of product k to country j (germany). ● x(wj): total world exports to country j (germany). if brca > 1, vietnam has a comparative advantage in exporting that product to germany. trade intensity index (tii): the tii measures the degree of trade concentration between vietnam and germany, indicating whether germany is a relatively more important trading partner for vietnam (and vice versa) compared to the global average. formula: ● x(ij): exports from country i (vietnam) to country j (germany). ● x(iw): total exports from vietnam to the world. ● x(wj): world exports to country j (germany). ● x(w): total world exports. a tii > 1 indicates a relatively strong bilateral trade intensity. trade complementarity index (tci): the tci evaluates the degree of alignment between vietnam’s export structure and germany’s import structure, serving as a proxy for the potential to develop mutually beneficial trade based on product complementarity. formula: tci (ij) = 100 (1/2) × σ|x(ik) m(jk)| ● x(ik): share of product k in vietnam’s total exports. ● m(jk): share of product k in germany’s total imports. a tci value closer to 100 indicates a higher degree of trade complementarity between the two countries. data sources: the data used in this study are drawn from the general department of vietnam customs; un comtrade; international trade centre (itc); eurostat… table 1 presents the harmonized commodity description and coding system (hs), as issued by the world customs organization, to classify traded goods. the 99 chapters in the hs system are restructured into 19 broader commodity categories, based on the naming conventions and detailed descriptions of each chapter and group. this classification process aligns with the research objectives and follows the categorization methodologies of the general department of vietnam customs and the european commission. economy, 2025, 12(2): 120-129 123 © 2025 by the authors; licensee asian online journal publishing group table 1. classification of commodity groups. group no. hs code range commodity group description group 1 hs01 hs05 live animals and animal products group 2 hs06 hs14 vegetable products group 3 hs15 hs24 processed food, beverages, and tobacco group 4 hs25 hs27 mineral products and petroleum group 5 hs28 hs38 chemical products group 6 hs39 hs40 plastic and rubber products group 7 hs41 hs43 leather products group 8 hs44 hs46 wood and wood products group 9 hs47 hs49 paper and pulp products group 10 hs50 hs56 textile raw materials group 11 hs57 hs63 textile and garment products group 12 hs64 hs67 footwear, headgear, and related accessories group 13 hs68 hs70 articles of stone, plaster, cement, ceramics, and glass group 14 hs71 pearls and precious metals group 15 hs72 hs83 basic metal products group 16 hs84 hs85 machinery, mechanical and electronic equipment group 17 hs86 hs89 vehicles and transport equipment group 18 hs90 hs92 optical instruments, clocks, musical and medical equipment group 19 hs93 hs99 miscellaneous goods 4. results and discussion 4.1. overview of vietnam-germany trade relations between 2015 and 2023, merchandise trade between vietnam and germany exhibited a generally upward trend, despite fluctuations driven by global economic disruptions. bilateral trade began at usd 8.91 billion in 2015 and increased steadily to usd 10.69 billion by 2018, reflecting an average annual growth rate of approximately 6.26%. the year 2018 marked a particularly strong expansion, with trade volume rising by over usd 1 billion compared to the previous year. figure 1 illustrates the total bilateral trade between vietnam and germany from 2015 to 2023. the figure illustrates both the overall trade value and the annual growth rate, providing an overview of trade dynamics and fluctuations during the observed period. figure 1. vietnam-germany merchandise trade value and growth rates, 2015-2024. source: author’s calculations based on itc trade map data. however, this momentum was temporarily interrupted during 2019–2020. trade volume fell by usd 426 million in 2019 and continued to decline to usd 9.99 billion in 2020, a cumulative drop of nearly usd 690 million from the 2018 peak. this contraction was likely driven by global supply chain disruptions and demand shocks associated with the covid-19 pandemic. a robust recovery followed in 2021 and 2022. trade rebounded to usd 11.22 billion in 2021, an increase of 12.3% year-on-year, and further climbed to usd 12.58 billion in 2022, marking the highest level during the period. however, 2023 saw another decline, with bilateral trade falling to usd 11.08 billion, a decrease of 11.9% from the previous year. this downturn may be attributed to inflationary pressures, increased logistics costs, and weakening demand across the european market. over the full 2015-2023 period, total bilateral trade grew by 24.4%, from usd 8.91 billion to usd 11.08 billion. while periods of stagnation and decline occurred, particularly in 2018-2020 and again in 2023, the overall trend remains positive. notably, the entry into force of the evfta in 2020 played a crucial role in accelerating trade, particularly between 2020 and 2022. the most significant annual growth spikes occurred in 2017-2018 (+11.8%), 2020-2021 (+12.3%), and 2021-2022 (+12.1%), while contractions were observed in 2018-2019 (-4.0%), 2019-2020 economy, 2025, 12(2): 120-129 124 © 2025 by the authors; licensee asian online journal publishing group (-2.6%), and 2022-2023 (-11.9%). these shifts underscore the cyclical and externally sensitive nature of bilateral trade dynamics. in terms of trade composition, vietnam’s exports to germany primarily consist of machinery, transport equipment, steel, and seafood, all of which have shown solid growth. on the import side, vietnamese firms benefit from increased access to german high-tech equipment, industrial inputs, and consumer products facilitated by tariff reductions under the evfta. the trade relationship is characterized by high structural complementarity: vietnam holds comparative advantages in agricultural products, light industry, and consumer goods, while germany specializes in capital goods, heavy industries, chemicals, and pharmaceuticals. this complementarity has laid the foundation for sustained trade growth and deeper integration. furthermore, german fdi in vietnam has expanded significantly, with over 530 active projects and a total registered capital of usd 3.6 billion as of 2024. prominent german firms such as ziehl-abegg, kärcher, and pearl polyurethane systems have increased their investment in vietnam, underscoring strong investor confidence in the country’s economic potential and its emerging role in global supply chains (vietnamplus, 2024). 4.2. assessment of vietnam-germany bilateral trade using the bilateral revealed comparative advantage (brca) index using the bilateral revealed comparative advantage (brca) index as the primary analytical tool, this section evaluates the performance of vietnam’s major export sectors to germany during the 2015–2023 period, thereby offering insights into the dynamics of trade competitiveness in the context of the european union-vietnam free trade agreement (evfta). table 2 presents the brca index by product group for vietnam’s exports to germany during the period 20152023. the table reorganizes the 99 hs chapters into 19 broader commodity categories, allowing the identification of sectors where vietnam shows comparative advantages. table 2. brca index by product group for vietnam’s exports to germany. product group (hs code & description) 2015 2016 2017 2018 2019 2020 2021 2022 2023 hs01-hs05 (live animals and animal products) 1.01 0.81 0.76 0.83 0.95 0.82 0.13 0.99 0.79 hs06-hs14 (vegetable products) 2.78 2.93 3.13 3.00 2.77 2.29 2.77 2.38 2.27 hs15-hs24 (processed food, beverages, and tobacco) 0.58 0.60 0.71 0.77 0.35 0.65 0.63 0.47 0.58 hs25-hs27 (mineral products and petroleum) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.01 0.00 hs28-hs38 (chemical products) 0.13 0.13 0.11 0.10 0.06 0.05 0.05 0.04 0.04 hs39-hs40 (plastic and rubber products) 5.71 0.73 0.81 0.76 0.83 0.84 0.95 0.83 0.87 hs41-hs43 (leather products) 5.10 4.47 5.20 5.35 6.34 6.29 5.35 5.84 6.61 hs44-hs46 (wood and wood products) 1.18 1.05 0.99 1.00 1.17 1.23 1.06 0.95 0.96 hs47-hs49 (paper and pulp products) 0.02 0.02 0.04 0.05 0.05 0.05 0.04 0.00 0.05 hs50-hs56 (textile raw materials) 0.19 0.13 0.13 0.22 0.29 0.49 0.75 0.57 0.81 hs57-hs63 (textile and garment products) 3.37 2.45 3.22 2.26 3.54 2.36 2.96 3.43 3.68 hs64-hs67 (footwear, headgear, and related accessories) 11.33 1.25 14.17 12.64 13.20 11.60 11.60 13.40 13.20 hs68-hs70 (stone, cement, ceramic, and glass products) 0.39 0.32 0.20 0.17 0.21 0.53 0.52 0.46 0.42 hs71 (pearls and precious metals) 0.09 0.12 0.12 0.09 0.10 0.07 0.06 0.12 0.14 hs72-hs83 (basic metal products) 0.31 0.28 0.26 0.30 0.34 0.16 0.36 0.41 0.49 hs84-hs85 (machinery and electronic equipment) 1.73 1.37 1.56 1.70 1.55 1.51 1.39 1.46 1.39 hs86-hs89 (vehicles and transport equipment) 0.14 0.12 0.11 0.12 0.16 0.17 0.17 0.17 0.17 hs90-hs92 (optical instruments, clocks, musical & medical equipment) 0.26 0.26 0.26 0.24 0.27 0.45 0.45 0.45 0.49 hs93-hs99 (miscellaneous goods) 0.94 0.82 0.72 0.88 0.98 1.12 1.48 1.21 1.21 source: author’s calculations based on itc trade map and un tradecom data. the product group classified under hs64-hs67 (footwear, headgear, and related accessories) exhibited the highest and most consistent brca values throughout the analysis period. starting at 11.34 in 2015 and reaching a peak of 14.17 in 2017, the sector experienced a temporary decline to 1.25 in 2016. this deviation may be attributed to external disruptions, including brexit-induced uncertainty, temporary shifts in procurement, and subdued investment flows. notwithstanding this anomaly, the sector demonstrated rapid recovery, subsequently maintaining brca levels well above the threshold of 1.0, underscoring vietnam’s enduring comparative advantage and structural competitiveness in this product group within the german market. similarly, the hs41-hs43 (leather and leather products) group consistently recorded brca values exceeding 4, culminating at 6.61 in 2023. this performance indicates stable competitiveness and suggests long-term export potential, particularly in light of eu demand for high-quality leather goods. the persistence of this comparative advantage highlights the strategic relevance of continued investment in quality control, branding, and market diversification. hs44-hs46 (wood and wood products) has shown a notable upward trend in comparative advantage, with brca values rising from 0.99 in 2017 to 1.30 in 2023. the consistent progression above the threshold of 1.0 from 2019 onward suggests that vietnam is gaining market share in germany’s wood product segment. this improvement is likely the result of increased processing capacity, compliance with eu sustainability standards, and effective implementation of national forestry certification policies. a similar trajectory is observed in hs93-hs99 (miscellaneous manufactured articles). initially characterized by sub-threshold brca values (e.g., 0.95 in 2015 and 0.82 in 2016), the group witnessed a marked increase, achieving a brca of 1.22 in 2020 and peaking at 1.48 in 2022. although this category encompasses a broad range of items, its economy, 2025, 12(2): 120-129 125 © 2025 by the authors; licensee asian online journal publishing group improved competitiveness may be attributed to niche exports such as sports equipment, non-lethal defense items, and handicrafts sectors that benefit from cultural appeal and artisanal value. these findings suggest considerable room for export diversification and targeted industrial support. the hs57-hs63 (textiles and garments) category, traditionally a core export strength for vietnam, revealed a consistent decline in brca values over the period. from a high of 3.37 in 2015, the index fell to 2.45 in 2016 and further declined to 1.81 by 2023. although still indicative of a comparative advantage, the downward trend reflects intensifying competition from regional exporters such as bangladesh and cambodia, as well as increasing sustainability and traceability requirements in the eu apparel market. similarly, hs06-hs14 (vegetable products) declined from a brca of 2.93 in 2016 to 2.27 in 2023. this weakening may be linked to structural barriers, including limited value addition, seasonal supply volatility, and the tightening of eu sanitary and phytosanitary (sps) regulations. despite retaining competitiveness, the trend indicates a need for strategic intervention to sustain market access and enhance product quality. figure 2 illustrates the brca index of vietnamese export product groups to germany during 2015-2023, highlighting only those groups with a comparative advantage (brca > 1). figure 2. brca index of vietnamese export product groups with brca > 1 (2015-2023). source: author’s calculations based on itc trade map and un tradecom data several product groups consistently recorded brca values below 1, suggesting a lack of comparative advantage and limited export potential in the short to medium term. ● hs25-hs27 (mineral products and petroleum) demonstrated minimal contribution to bilateral trade, with brca scores close to zero. germany’s transition away from fossil fuels and its strict environmental standards likely constrain vietnam’s competitiveness in this domain. ● hs28-hs38 (chemical products) similarly exhibited low brca values, reflecting vietnam’s limited capacity in producing and exporting high-value-added or refined chemical goods. ● hs50-hs56 (raw textile materials) remained below the threshold, underscoring vietnam’s position primarily as a garment assembler rather than a producer of upstream textile inputs. this reflects continued dependence on imported fabrics and materials, particularly from china and south korea. ● hs84-hs85 (machinery and electrical equipment) displayed volatility in brca values, with no sustained competitive edge. while vietnam is increasingly engaged in electronics assembly, the lack of technological depth and insufficient integration into advanced segments of global value chains remain critical impediments. table 3 presents the trade intensity index (tii) between vietnam and germany from 2015 to 2023, highlighting the relative importance of each country as a trading partner compared to their global trade. table 3. trade intensity between vietnam and germany. year vietnam’s exports to germany germany’s exports to vietnam 2015 3.56 0.24 2016 3.04 0.19 2017 2.41 0.18 2018 2.23 0.20 2019 1.75 0.18 2020 1.46 0.16 2021 1.43 0.16 2022 1.61 0.15 2023 1.40 0.16 source: author’s calculations based on itc trade map and un tradecom data. economy, 2025, 12(2): 120-129 126 © 2025 by the authors; licensee asian online journal publishing group 4.3. assessment of vietnam-germany bilateral trade using the trade intensity index the trade intensity data between vietnam and germany from 2015 to 2023 reveal a volatile yet strategically significant picture of bilateral commerce. vietnam’s export intensity to germany experienced a notable decline from 3.57 in 2015 to 1.40 in 2023. notably, the sharpest decrease occurred during 2015-2019 (from 3.57 to 1.76), potentially reflecting vietnam’s diversification of export destinations and a reduced reliance on the german market, as other major economies such as the united states, china, and japan became increasingly attractive. additionally, intense competition in vietnam’s key export sectors (e.g., textiles and footwear) from other asean countries, along with the eu’s stringent technical standards, contributed to this declining trade intensity. nevertheless, a slight rebound in 2022 when the index rose to 1.61 may indicate an initial positive response to the eu-vietnam free trade agreement (evfta), which came into force in 2020. conversely, germany’s export intensity to vietnam remained consistently low throughout the period, fluctuating narrowly between 0.15 and 0.24. this suggests that, despite the high quality of german goods, they accounted for only a small share of vietnam’s total imports. the dominance of alternative suppliers such as china, south korea, and japan with their geographic proximity and competitive pricing likely contributed to this trend. overall, the bilateral trade intensity index reflects vietnam’s persistent trade surplus with germany, with export intensity values often 7 to 20 times higher than those for imports. germany continues to be a high-potential market for vietnamese products, especially in sectors such as footwear, textiles, furniture, and electronic components. however, the low import intensity from germany signals an underexploited dimension of the partnership, underscoring the strategic need to rebalance trade or deepen supply chain linkages with high-tech partners like germany. table 4 presents the trade complementarity index (tci) between vietnam and germany from 2015 to 2023, reflecting the degree of compatibility between vietnam’s export structure and germany’s import demand. table 4. trade complementarity index (tci) between vietnam and germany (2015-2023). year tci (%) 2015 46.32 2016 45.34 2017 45.83 2018 46.62 2019 46.30 2020 44.42 2021 44.56 2022 44.11 2023 43.92 source: author’s calculations based on itc trade map and un tradecom data. 4.3.1. assessment of vietnam-germany bilateral trade using the trade complementarity index (tci) the trade complementarity index (tci) between vietnam and germany during the period 2015-2023 fluctuated within the range of 44-47, indicating a moderate level of complementarity in the trade structures of the two countries. the years 2018 and 2019 recorded the highest tci values, at 46.62 and 46.30 respectively, suggesting a strong alignment between vietnamese export profiles and german import demand. this period reflects an optimal match in trade composition, implying that vietnam effectively supplied product categories corresponding to germany’s import needs particularly in sectors such as textiles, electronic components, and mechanical equipment. however, since 2020, the tci has exhibited a slight downward trend, declining from 45.45 to 43.92 in 2023, the lowest level in nearly a decade. this pattern implies a weakening alignment between vietnam’s export structure and germany’s evolving import demand. possible explanations include post-covid-19 global supply chain realignments, germany’s shifting sourcing strategies toward more competitive markets, or structural changes in vietnam’s major export sectors. the declining tci trend signals a potential loss of trade synergy, which, if sustained, could undermine vietnam’s ability to fully leverage trade advantages and optimize bilateral trade relations with germany. 4.4. qualitative impacts of the evfta first, under the influence of the evfta, many of vietnam’s traditional export sectors have not only sustained but also strengthened their comparative advantages in the german market, suggesting that the agreement has had a positive effect on bilateral trade. sectors with pre-existing advantages, such as leather products (hs41-hs43), maintained a high rca above 5, largely due to preferential tariff treatment. similarly, footwear and headgear (hs64hs67) experienced a notable increase in rca, from 11.65 in 2020 to 13.21 in 2023, reinforcing their competitive position. the textile and garment sector (hs57-hs63) also witnessed a strong recovery after a period of decline, attributed to the favorable conditions created by the evfta. meanwhile, the wood and wood products group (hs44hs46), which previously had an rca below 1, recorded an increase above 1, indicating a positive structural shift. these findings confirm that the evfta has played a significant role in enhancing the competitiveness of vietnamese exports in the german market particularly in traditional sectors such as textiles, leather, footwear, and wood products thereby laying a stronger foundation for vietnam to expand and exploit the european market more effectively. in addition to these clearly benefiting sectors, a number of product groups have not shown any noticeable improvement in comparative advantage, highlighting the selective nature of the agreement's impact. several industries maintained rca values below 1 both before and after the evfta took effect, indicating that the agreement’s support was not sufficient to trigger structural change. notably, sectors such as processed food, beverages, and tobacco (hs15-hs24), and high-tech machinery, transport equipment, and optical instruments (hs84-hs92), have yet economy, 2025, 12(2): 120-129 127 © 2025 by the authors; licensee asian online journal publishing group to capitalize on the opportunities offered by the evfta, primarily due to technological limitations and low added value. the mineral and petroleum group (hs25-hs27), in particular, consistently lacked comparative advantage throughout 2015-2023—largely due to limited preferential treatment under the agreement and vietnam’s weak export capacity in this domain. this reality suggests that the evfta has primarily accelerated growth in sectors with an existing foundation and the capacity to meet eu standards, while its effects remain muted in structurally weaker industries. to more effectively leverage the evfta, vietnam must invest in strengthening its production capacity, improving compliance with technical standards, and developing targeted industrial strategies aligned with long-term trade goals. third, while the evfta was initially anticipated to deliver a substantial boost to vietnam-germany trade relations, its actual impact appears to be transient and lacking in long-term sustainability. the early momentum in export growth quickly plateaued due to a confluence of external pressures, including intensified regional competition, the covid-19 pandemic, and geopolitical disruptions across europe. trade indices such as the trade complementarity index (tci) and trade intensity index (tii) have either declined or fluctuated, suggesting that the evfta has not yet induced a structural transformation in bilateral trade patterns. this limited impact can largely be attributed to vietnam’s internal constraints particularly weak production capacity, underdeveloped logistics infrastructure, and insufficient alignment with the eu’s stringent technical, environmental, and regulatory standards. in this context, the evfta has primarily served as a legal and institutional framework to facilitate trade rather than acting as a transformative catalyst for vietnam-germany trade relations. to fully harness the benefits of the agreement, vietnam must focus on improving its competitive capacity, enhancing supply chain resilience, and increasing market accessibility by complying more comprehensively with eu norms. developing a long-term export strategy tailored to the evolving global trade landscape is also imperative. several structural factors contribute to the muted impact of the evfta on bilateral trade. germany’s import demand has increasingly shifted toward hightech, green, and sustainable product sectors in which vietnam still faces significant gaps. moreover, the country’s export structure remains concentrated in traditional, labor-intensive goods with limited innovation. the growing competition from both intra-eu and asian suppliers further erodes vietnam’s market share in germany. without timely structural adjustments, quality upgrading, and responsiveness to sustainable consumption trends, vietnam risks underutilizing the strategic advantages offered by the evfta. therefore, the long-term success of the agreement requires more proactive engagement from both enterprises and policymakers in vietnam. 5. policy implications before presenting policy recommendations and strategic solutions, this study provides a synthesized swot analysis, highlighting vietnam’s strengths, weaknesses, opportunities, and threats in order to establish a solid foundation for more appropriate and effective directions in the trade relationship with germany. strengths: vietnam demonstrates several strengths in its trade engagement with germany. the country possesses key export sectors that align well with german consumer preferences, such as wood products, textiles and garments, footwear, coffee, and tropical fruits. the quality of vietnamese goods has significantly improved over the years, gradually gaining acceptance in demanding markets like the eu, particularly germany. many vietnamese enterprises have also made long-term, methodical investments to develop high-standard products that meet strict quality and design requirements. additionally, vietnam is actively promoting investment in high-tech industries, especially in underdeveloped areas such as fruit and seafood processing, with the aim of enhancing both product quality and export value. weaknesses: despite its export potential, vietnam faces several weaknesses that hinder its trade performance with germany. product quality and technical standards remain inconsistent, making it challenging to meet the stringent requirements of the german and broader eu markets. outdated processing technologies persist, resulting in exports that are often raw or semi-processed, thus limiting value addition. moreover, significant limitations exist in traceability and international certification, particularly among small and medium-sized enterprises (smes). high logistics costs and inadequate infrastructure further reduce vietnam’s price competitiveness and delivery efficiency. finally, weaknesses in branding and market access, along with a lack of effective marketing strategies and limited understanding of german consumer preferences, continue to constrain vietnam’s ability to expand its market presence. opportunities: the implementation of the evfta has opened up a range of promising opportunities for vietnam–germany trade relations. since the entry into force of the evfta, there has been a noticeable increase in german investment flows to vietnam, with growing interest in sectors such as manufacturing, technical services, ict, banking, and insurance. the expanding vietnamese and broader asian communities in germany also provide a stable consumer base that favors culturally distinctive products such as food, household goods, and apparel (wto center). moreover, as the largest economy in the eu and a major logistics hub, germany serves as a strategic gateway for vietnamese goods to penetrate deeper into the european market, expand their scale, and diversify distribution channels (wto center, 2023). threats: vietnam-germany trade faces several significant threats that could hinder further development. vietnamese export products such as wood, textiles, and footwear are required to meet strict standards regarding chemical safety, ce certification, labor regulations, environmental protection, and corporate social responsibility. many vietnamese companies still face difficulties in complying with these demanding criteria. moreover, to receive tariff preferences under the evfta, products must satisfy the eu’s rules of origin. this requires transparent supply chains and a high percentage of locally sourced content, which remains a major challenge for numerous industries (finance magazine, 2023). in addition, the long geographical distance between vietnam and germany results in high transportation, storage, and logistics costs, limiting vietnam’s ability to compete with countries located closer to the european market, such as those in latin america or north africa. furthermore, external factors such as geopolitical tensions, energy instability, disruptions in maritime transport, and changes in eu trade policies may also negatively influence the dynamics of trade between the two countries. economy, 2025, 12(2): 120-129 128 © 2025 by the authors; licensee asian online journal publishing group 5.1. policy recommendations for the government and relevant ministries the government and relevant ministries should formulate a comprehensive international trade and investment development strategy with clearly defined general and specific objectives. particular emphasis should be placed on attracting technological investment from germany and promoting the production and export of goods in which vietnam has a comparative advantage in the german market. second, the ministry of industry and trade should play a central coordinating role in intensifying the dissemination and communication of the evfta’s content to the business community, thereby enabling firms to better understand and effectively leverage the benefits provided by the agreement. additionally, it is crucial to boost trade promotion activities, business matchmaking, and economic cooperation initiatives between the two countries. furthermore, the government should implement practical support mechanisms to assist enterprises in accessing market information, understanding legal frameworks, identifying reliable partners, and adapting to the business culture of germany. these measures would enhance firms’ capacity to meet import market standards and improve their overall competitiveness. finally, strengthening diplomatic and economic cooperation will help position vietnam as a strategic gateway linking germany with asean, while also enabling germany to serve as a central node connecting vietnam to the broader european market. in particular, bilateral dialogues should be promoted on a sectoral basis, focusing on innovation and high-tech transfer two critical pillars for fostering sustainable export expansion to germany in the coming years. 5.2. recommendations and solutions for the business sector small and medium-sized enterprises (smes) need to enhance their competitiveness as a key component in the strategy to expand into the german market. enterprises must invest systematically in production technology, quality management, and improve their capacity to meet the technical standards and strict rules of origin required by the european market (vu, 2024). second, improving logistics systems, reforming customs procedures, and reducing transportation costs will help enhance supply chain efficiency, ensuring that goods arrive in germany on time and with assured quality. third, strengthening public-private coordination mechanisms, especially in market linkage and investment promotion activities, will create favorable conditions for businesses to effectively utilize government support. fourth, enterprises should actively participate in trade fairs and international investment promotion conferences to meet partners, expand networks, and seek export opportunities. fifth, thoroughly researching german legal systems, culture, and consumer habits will help businesses develop appropriate strategies and avoid non-tariff barriers. finally, companies should maintain regular contact with the vietnam trade office and embassy in germany for timely consultation, support, and updates on useful information to facilitate transactions and commercial cooperation with german partners. to enhance the effectiveness of vietnam-germany cooperation at the regional level, particularly in the context of the asean-eu comprehensive strategic partnership, several specific policy orientations should be implemented. vietnam can leverage its role as a bridge between asean and the eu, with germany as a key partner, to promote interregional initiatives on digital transformation, green development, and sustainable trade. this not only strengthens vietnam's position in asean but also increases germany's influence in the asia-pacific region. trilateral cooperation programs among vietnam, germany, and another asean or eu country should be encouraged, especially in areas such as vocational training, technology transfer, and sustainable agriculture. this cooperation model will provide a foundation to expand bilateral influence to the regional level. vietnam and germany should collaborate to promote the harmonization of technical and trade standards between asean and the eu, supporting businesses in both regions to access partner markets more effectively through the standardization of export procedures, quality standards, and traceability systems. both countries should actively participate in regional initiatives such as the global gateway or the eu’s indo-pacific strategy to attract investment, technology, and financial resources for sustainable infrastructure development, thereby contributing to deeper regional integration between asean and the eu. 6. conclusion this study has evaluated the impact of the evfta on bilateral trade relations between vietnam and germany through a qualitative lens, supplemented by key trade indicators such as brca, tii, and tci. the findings reveal that the agreement has generated positive shifts in several of vietnam’s core export sectors, including footwear, leather goods, wood products, and textiles by enhancing their comparative advantage and expanding market share in the german market. nonetheless, the effects of the evfta remain selective and insufficiently sustainable, as numerous industries have yet to effectively capitalize on the preferential benefits due to constraints in technology, compliance with technical standards, and production capacity. the recent downward trends in trade complementarity and trade intensity indices suggest that the bilateral trade structure has not undergone a substantial transformation, contrary to initial expectations. by integrating qualitative assessments with trade metrics, this study contributes an additional perspective to the relatively underexplored field of vietnam-germany trade relations. however, the research is limited by its reliance on secondary data and the absence of robust quantitative tools such as gravity models or firm-level surveys. future research should address these limitations by adopting mixed-method approaches, combining econometric modeling with empirical case studies or enterprise-level data. such enhancements will not only deepen academic understanding but also offer practical insights for policymakers in optimizing the strategic implementation of trade agreements between vietnam and germany. references chung, h. w., hou, l., longpre, s., zoph, b., tay, y., fedus, w., & wei, j. 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(2022). vietnam-germany economic relations in the context of evfta implementation. retrieved from https://trungtamwto.vn/tin-tuc/21498-quan-he-kinh-te-viet-nam--chlb-duc-trong-boi-canh-trien-khai-evfta asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. https://doi.org/10.26459/hueunijed.v130i5c.6420 https://doi.org/10.59394/jsm.61 https://doi.org/10.1016/j.aqrep.2019.100266 https://trungtamwto.vn/tin-tuc/21498-quan-he-kinh-te-viet-nam--chlb-duc-trong-boi-canh-trien-khai-evfta 19 © 2023 by the authors; licensee asian online journal publishing group economy vol. 10, no. 1, 19-28, 2023 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/economy.v10i1.4983 © 2023 by the authors; licensee asian online journal publishing group the structural transformation of territories and the climate governance of an urban area: the mediating role of human capital in adaptation processes ahmed ait bari1 mustapha amzil2 abdeljalil mazzaourou3 jamal agouram4 ( corresponding author) 1,2,3faculty of legal, economic and social sciences agadir, university ibn zohr, morocco. 1email: a.aitbari@uiz.ac.ma 2email: mustapha.amzil@edu.uiz.ac.ma 3email: mazzaourou@gmail.com 4faculty of economics and management guelmim, university ibn zohr, morocco. 4email: jamal.agouram@edu.uiz.ac.ma abstract this article forms a crucial part of an economic essay exploring the dynamics of territorial climate governance and its potential impact on the structural transformation of agadir, a vibrant city. in this context, the role of human capital is also examined while considering the theoretical nuances and empirical analysis tools. the central question drives this study: "to what extent can territorial climate governance contribute to the structural transformation of agadir, and how does human capital mediate this process?". to tackle this question, we adopted an abductive reasoning approach and aligned our methodology with a post-positivist paradigm. by meticulously aligning theory with observed reality, we formulated a hypothetical model that interconnects the trio of climate governance, structural transformation, and human capital in the context of agadir. this model was put to the test with data collected from 416 stakeholders involved in the management of territorial affairs in the city. the findings reveal compelling evidence of significant contributions and correlations among the concepts studied. however, our results also highlight the necessity of recognizing and involving new actors to strengthen agadir's climate governance mechanisms. in conclusion, our research sheds light on the crucial role of territorial climate governance and human capital in driving the structural transformation of agadir. by providing a novel perspective on this topic, our study underscores the need for inclusive and proactive engagement of various stakeholders to bolster climate governance measures in the city, paving the way for sustainable development and growth. keywords: city of agadir, climate governance, human capital, structural transformation, territory. jel classification: c13; o00; p00; q58; q59. citation | bari, a. a., amzil, m., mazzaourou, a., & agouram, j. (2023). the structural transformation of territories and the climate governance of an urban area: the mediating role of human capital in adaptation processes. economy, 10(1), 19–28. 10.20448/economy.v10i1.4983 history: received: 28 june 2023 revised: 11 august 2023 accepted: 18 august 2023 published: 31 august 2023 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. institutional review board statement: not applicable. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. this study followed all ethical practices during writing. data availability statement: the corresponding author may provide study data upon reasonable request. competing interests: the authors declare that they have no competing interests. authors’ contributions: all authors contributed equally to the conception and design of the study. all authors have read and agreed to the published version of the manuscript. contents 1. introduction ...................................................................................................................................................................................... 20 2. materials and methods ................................................................................................................................................................... 24 3. data analysis results and discussion ......................................................................................................................................... 25 4. conclusion ......................................................................................................................................................................................... 27 references .............................................................................................................................................................................................. 28 mailto:a.aitbari@uiz.ac.ma mailto:mustapha.amzil@edu.uiz.ac.ma mailto:mazzaourou@gmail.com mailto:jamal.agouram@edu.uiz.ac.ma https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v10i1.4983 https://orcid.org/0009-0007-9875-1775 https://orcid.org/0009-0007-9875-1775 https://orcid.org/0009-0006-9538-3818 https://orcid.org/0000-0002-1574-1464 economy, 2023, 10(1): 19-28 20 © 2023 by the authors; licensee asian online journal publishing group contribution of this paper to the literature it exists in the mobilization of the key concepts of our work, namely, structural transformation, climate governance, and territorial human capital. thus, to the empirical contributions. 1. introduction this research endeavour seeks to advance our understanding of the contribution of climate governance mechanisms to the structural transformation of territories, specifically within the context of morocco. despite the significant attention the concept has garnered in recent years, the current theoretical framework remains predominantly descriptive, needing more explanatory and predictive capabilities. this gap in knowledge of objective and subjective measures of governance processes is particularly evident in the context of research on climate governance in morocco, which forms the geographic scope of our study. furthermore, while the concept of governance has been widely explored in various disciplines, there needs to be more consensus on its construct and empirical studies remain limited. this theoretical gap can be attributed to the diverse disciplinary perspectives and purposes that employ the concept of governance. in addition to its academic significance, this research also holds economic relevance, as the absence of widely accepted indicators hinders our understanding of the impact of governance on the potential for structural change in a juxtaposed space, such as a territory. notwithstanding the geographical limitation of our study, our theoretical and conceptual framing sheds light on this under-theorized phenomenon and contributes to the existing knowledge on the topic. we hope this research will pave the way for further investigations and discussions on the role of climate governance in driving structural transformation in morocco and other contexts, ultimately informing policies and practices aimed at promoting sustainable development and growth. this study addresses the question: "can territorial climate governance contribute to the structural transformation of agadir city? and to what extent can human capital play a mediating role?" to achieve this, we have adopted a methodological approach that draws inspiration from post-positivism and utilizes an abductive reasoning mode. this involves formulating hypotheses and deriving predictions to assess their validity. to answer the research question, we have undertaken a comprehensive analysis that includes a theoretical and conceptual framework, selection of study variables, and empirical verification using the structural equations model (sem) approach. the paper is organized into three main axes. the first axis delves into the conceptual and theoretical foundations of critical concepts. the second axis outlines the methodology employed and details the research field. the third axis focuses on the analysis and discussion of the obtained results. overall, the findings of this study have allowed us to address the research question and provide insights into the spatial mechanisms of climate governance in the context of the structural transformation of the territory. through our research, we have contributed to understanding the role of territorial climate governance and human capital in driving transformative processes in agadir city. 1.1. climate governance and structural transformation at the crossroads of different territorial conceptions structural transformation and climate governance of territories are two central notions for understanding current environmental challenges. however, it is essential to emphasize that these issues are closely linked to the question of human capital, i.e. the sum of knowledge, skills, experiences and values held by individuals and mobilized in the transformation and governance processes. indeed, human capital plays a crucial role in the capacity of territorial actors to understand environmental issues and propose appropriate solutions. it also helps strengthen citizen participation and democratic governance by involving local communities in decision-making. however, considering human capital is essential to promote a sustainable structural transformation and effective climate governance of territories. in this axis, we will outline the theoretical concepts related to the territorial transition of climate governance and aspects of structural transformation to identify causal relationships and draw up the research model. 1.2. the territorial inclusion of climate governance "governance" is a multifaceted notion encompassing a broad range of literature and diverse jargon. this resurgence of interest in governance is closely tied to the evolving dynamics of the global production system and the growing complexity of institutional requirements, which necessitate developing and utilizing various tools to articulate and assess the scope of different visions and policies. however, debates on governance are not homogenous, as the concept remains multidisciplinary, and its meaning can vary depending on the field of analysis, discipline, and even the object of study. climate governance is how actors discover, transmit and coordinate their actions to solve climate problems. this awareness occurs at different levels, individual, team and organizational levels, notwithstanding that climate governance at the individual level is crucial for a community or network of actors. at the territorial level, climate governance of territories is an issue that is receiving increasing attention from local and national governments, especially in the context of the current environmental crisis. to achieve environmental and social objectives, it is crucial to implement public policies that consider the requirements of environmental protection and sustainable development. as highlighted by rifkin, long, and perry (2018) this implies reorienting public policies and integrating environmental concerns into all policies. in order to implement these public policies, continuous monitoring of environmental quality and data collection are fundamental elements of territorial climate governance. collecting environmental data is essential for political decision-making, particularly regarding biodiversity conservation (daily, 1997). devices for measuring air quality, water quality, biodiversity and greenhouse gas emissions must be put in place. the data collected are then used for decision-making, environmental policy development and dissemination of information to stakeholders. economy, 2023, 10(1): 19-28 21 © 2023 by the authors; licensee asian online journal publishing group moreover, the debate on public policies for environmental protection and sustainable development is crucial to climate governance in the territories. in particular, the active involvement of territorial actors in the decisionmaking process is essential for implementing effective environmental policies. to this end, it is crucial to allow stakeholders' active participation and establish mechanisms for citizen participation, such as dialogue forums and public consultations. in this regard, climate governance of territories is a significant challenge for achieving environmental and social objectives. fundamental mechanisms include : • the compliance of public policies. • the continuous monitoring of environmental quality. • the collection and exploitation of data. • the debate on public policies for environmental protection and sustainable development. these elements require active collaboration between political, economic, and social actors, as well as increased transparency and accountability on the part of policymakers (daily, 1997). one of the most significant challenges posed to the scientific community is to better align the concept of territorial climate governance. to this end, we will bridge the gap between leading theoretical works and on-theground observations by regarding climate governance as an organic extension of territorial governance in climate affairs management. (cf. figure 1). figure 1. rapprochement of the concept of territorial climate governance. in conjunction with the discussions surrounding territorial climate governance, novel interpretations have emerged that focus on the concept of structural transformation of a territory, exploring how a territory can change to organize and innovate its spatial dynamics effectively. 1.3. the structural transformation of the territory the structural transformation of territories can be understood from various perspectives, particularly considering this change as a transition from an agricultural territory to an industrial or service territory. this transformation depends on the capacity of a territory to accommodate the surplus labor force of the primary sector and to allow the migration of the population to other sectors. this transition requires judicious management of human resources to ensure a smooth transition without economic and social disruption. however, the structural transformation of territories is more expansive than this economic dimension. it also involves all the processes that enable decision-makers to master better the terrain in which they operate, using the available data to make informed strategic decisions. it thus assumes that decision-makers can understand territorial dynamics and use the appropriate tools to optimize their effects. several authors have addressed the issue of the structural transformation of territories. among them is (chamard & schlenker, 2017) who considers that this transformation is linked to the evolution of production modes and the globalization of the economy. for him, the territories must adapt to the new economic realities by developing specific skills and implementing ambitious territorial strategies. for their part, khan, taraporevala, and zérah (2018) look at how territories are transformed according to population flows, investments, infrastructures and public policies. he emphasizes the importance of coordination between different territorial actors to ensure a harmonious and sustainable transformation. similarly, lacquement and quéva (2016) highlight the importance of innovation and entrepreneurship in transforming territories. according to them, the most prosperous regions have developed a culture of innovation and collaboration between businesses, universities and public actors. the structural transformation of territories is a complex process, integrating various economic, social and territorial dimensions. to succeed in this transformation, decision-makers must be able to understand territorial dynamics and rely on reliable data to make informed strategic decisions. based on the arguments put forward by the researchers concerning the structural transformation of the territories, we can summarize them through the figure 2. economy, 2023, 10(1): 19-28 22 © 2023 by the authors; licensee asian online journal publishing group figure 2. rapprochement of the concept of structural transformation of territory. nevertheless, it is crucial to recognize that territorial climate governance alone is insufficient. the mechanisms of human capital within a territory are necessary to facilitate a more effective structural transformation. as such, the multifaceted territorial actors can serve as catalysts to ensure a more meaningful integration of climate governance within the spatial dynamics of the territory. 1.4. territorial human capital the concept of territorial human capital has its roots in the economic theory of human capital, developed in particular by becker (1962) and mincer (1958) who consider that the education, professional training and experience acquired by individuals are investments that can increase their future productivity and income. this theory was subsequently enriched by many authors, including schultz (1961) who introduced the notion of human capital in the context of economic development. territorial human capital can be defined as the skills, knowledge and abilities of individuals who live and work in a given territory and their capacity to collaborate and exchange information with other local actors. this notion has been developed by the french economists grossetti (2001) and boutinet (2005) who stress the importance of social capital and the relational dimension in constructing territorial human capital. territorial human capital can positively affect a territory's economic and social development. moreover, according to a study conducted by boutinet (2005) on creative cities, territories with significant human capital, particularly in art, culture and new technologies, tend to be more innovative and more competitive economically. however, the construction of territorial human capital can be hindered by various factors, such as geographic isolation, lack of educational and cultural infrastructure, or social and ethnic discrimination. similarly, regions that have experienced significant spatial segregation tend to have less developed human capital and lower economic growth. in conclusion, territorial human capital is a complex social and economic process that involves mobilizing the skills and abilities of individuals living and working in a given territory and their ability to collaborate and exchange information with other territorial actors. this concept can positively affect a territory's economic and social development, but various structural and social factors can also hinder it. ultimately, bringing the concept of territorial human capital together leads to the same territorial dimensions of social capital developed by many researchers. this is how we will present them in the figure 3. figure 3. rapprochement of the concept of territorial human capital. the comprehensive review of relevant literature in this axis has facilitated the development of an analytical framework that delineates the three pivotal concepts and their hypothesized interconnections from diverse theoretical perspectives. this framework serves as a robust foundation for constructing and validating measurement scales. the resultant research model, which emerged from a rigorous integration of theory and empirical observations, is visually depicted in the figure 4. economy, 2023, 10(1): 19-28 23 © 2023 by the authors; licensee asian online journal publishing group figure 4. research model. the next crucial phase involves operationalizing our research model by leveraging the core concepts and subconcepts. to this end, we have employed twenty measurement items that capture the critical dimensions of climate governance, structural transformation, and territorial human capital. these measurement items will be coded using the established procedures of the five-point likert scale. the table 1 presents the items operationalizing the latent concepts under investigation. table 1. operationalization of the concepts. concepts scales of measurement codes territorial climate governance the collective mobilization of actors allows for the design of public policies that enable sustainable development ppcs_1 climate governance refers to the movement of all actors in the preparation and implementation of environmental public policies ppcs_2 visibility and integrity allow for better monitoring of the environmental situation mes_1 access to environmental information strengthens actors involvement mes_2 transparency and accountability lead to better climate governance cooa_1 collaboration among territorial actors represents a potent approach to climate governance cooa_2 the spirit of initiative of the territorial actors can solve the climate problems cooa_3 structural transformation of territory inter-sector labor mobility reinforces structural transformation woro_1 transparency and availability of information helps to guide the workforce woro_2 the integration of innovation implies the dumping of productive sectors iinov_1 the management of innovation activities leads to structural change in the territory iinov_2 the collective engagement of actors contributes to their active participation and involvement ia_1 the collaborative engagement of actors is an effective form of territorial participation ia_2 territorial human capital having a common culture, shared values, and similar lifestyles cogc_1 having a shared philosophy and similar approaches to business relationships cogc_2 aligning on a shared vision with compatible goals and objectives cogc_3 regular and close personal interaction, and intensive engagement relc_1 respectful and trusting relationship relc_2 efficient dissemination and exchange of information within business networks strc_1 interaction across various territorial levels and through diverse means strc_2 economy, 2023, 10(1): 19-28 24 © 2023 by the authors; licensee asian online journal publishing group now, it is imperative to provide a thorough justification of our methodological choices and a comprehensive description of our research field to uphold our study's ethical rigor. 2. materials and methods our choice of methodology is heavily influenced by the abductive approach, which falls under the post-positivist paradigm. this method involves a "back and forth" process between abstract theory and the observed reality in the field. the researcher formulates research questions based on pre-existing theoretical constructs without testing causal relationships beforehand. hypotheses are then generated to either confirm or disprove these constructs. to address our research problem, we consulted various works that provided an overview of conceptual frameworks and theoretical and empirical literature related to our keywords. this allowed us to develop a suitable analytical framework. following the logic of the post-positivist paradigm, we then modelled the facts to understand better the issues surrounding climate governance and structural transformation. it is also essential to justify our methodological choices and provide transparency in our research to uphold ethical standards. to justify our methodological approach, we selected agadir as our research field due to its diverse range of institutional, economic, and civil actors involved in the city’s affairs. agadir holds a significant position in morocco’s economic and administrative landscape, making it an ideal location to study the intersection of climate governance and structural transformation. the city also provides a rich array of territorial actors who play a role in its management. given that structural transformation is a complex and long-term process requiring the involvement of numerous actors, conducting a sufficient number of surveys with a representative sample of stakeholders was necessary to gain a comprehensive understanding of the process. we also took into account the sampling lists and strata when extracting samples. the table below provides a clear overview of the information underlying our sample collection process. as per statistical criteria, we had to select a sample for our survey, as choosing a target population would have been impractical for our study, given the numerous territorial actors operating in the city of agadir, which forms a known and finite population. therefore, a pilot study was conducted with randomly selected actors to identify the parameters characterizing the respondents. the pilot study allowed us to validate the questionnaire and calculate central tendency and dispersion characteristics for the variable of interest, “annual frequency of participation in territorial projects during the last ten years.” specifically, 52 actors provided information on the number of territorial projects they had participated in over the past decade, allowing us to calculate the annual frequency of participation (number of participations/10 years). the next step is to test the normality of the distribution of training frequencies in order to determine the appropriate method for calculating the sample size. if the distribution is normally distributed, we will use the recommended formula for sample size calculation. otherwise, we will utilize the developments of the designed for populations with an unknown distribution of the variable of interest. at first glance, we can see that the mean, median and mode of the variable of interest are equal, which implies that the distribution is normal. however, we performed the kolmogorov-smirnov and shapiro-wilk normality tests to refine our statistical thinking. it turned out that the null hypothesis, which assumes the normality of the distribution, is verified in both cases since the p-value is higher than the significance level of 5%. hence, the distribution of the variable of interest is gaussian. in the same wavelength, to calculate the size of the sample in the case of a finite population normally distributed, it is necessary to apply the formula of calculation recommended by the statisticians in this sense and which is stated as follows: 𝒏 = 𝒁𝟐𝟏−𝜶 𝟐 𝑽𝒂𝒓(𝒙)𝑵 𝜺𝟐𝑵+ 𝒁𝟐𝟏−𝜶 𝟐 𝑽𝒂𝒓(𝒙) • 𝑥: interest variable. • 𝜀: precision. • 𝑛 : sample size. • 𝑁: population size. • z : value of the reduced and centered variable for a probability of 1 − 𝜶 𝟐 . • 𝛼 : signification level. it is necessary to proceed with extracting the sample, considering the parameters and the calculation formula developed above. the table 2 gives a clear overview of the information underlying the sample selection and the calculation procedures used to deduce the number of territorial actors to be interviewed. table 2. sample size calculation. parameters symbols/formulas values variance of the interest variable var (x) 35.479% 95% probability threshold z 1𝛼 2 1.96 precision 𝜀 5% population n 1753 sample 𝑛 = 𝑍² 1− 𝛼 2 𝑉𝑎𝑟(𝑥)𝑁 𝜀²𝑁 + 𝑍²1−𝛼 2 𝑉𝑎𝑟(𝑥) 416 territorial actors economy, 2023, 10(1): 19-28 25 © 2023 by the authors; licensee asian online journal publishing group in the final phase of our study, we administered a questionnaire survey to 416 actors actively involved in managing territorial affairs in the city of agadir. the data collected from this survey were then extrapolated to test the specified model and provide insights into the contribution of climate governance to the structural transformation of agadir. this approach allowed us to gather empirical evidence and generate meaningful responses to the research questions. 3. data analysis results and discussion in order to test our structural equation modeling (sem) model, we employed the partial least squares (pls) approach, which is considered more suitable for our study due to its objectives and constraints. pls allows for testing of developing models, accommodating non-normally distributed data, and working with small sample sizes. accordingly, we will utilize the pls approach to conduct our analyses and discuss the results obtained from our study. 3.1. results after importing the data obtained from the survey, we proceeded to test our model using the latest developments in the pls algorithm. following the standard sem modelling process, we followed five key steps: model specification, model identification, model estimation, model goodness-of-fit evaluation, and model confirmatory analysis. model specification involved creating a graphical representation of the overall measurement scheme of our model. in this phase, we specified the various elements of the model, including the observed variables and their assumed relationships, as depicted in the figure 5. figure 5. global model. in our model, we have twenty observed variables that are supposed to measure three latent variables (factors). the second phase of our sem modelling approach is model identification. as schumacker and lomax (2004) recommended, we evaluated the order condition by checking if the number of degrees of freedom is greater than zero. our model's order condition is met, and the degree of freedom is positive (dof=373). the third phase of our approach involved estimating the model using the factorial algorithm of pls on all 416 statistical units, which are the territorial actors operating in the city of agadir. this resulted in the figure 6, which presents the estimated model. the estimation results of the model’s parameters confirmed that most of the measurement items used had loading factors greater than 0.7, indicating a solid contribution to the respective latent variables. however, one item, strc_2, which operationalizes the territorial human capital dimension, recorded a relatively low correlation coefficient. as per the condition of order and validity, a readjustment is necessary by deleting this item to capture the dimensions and underlying contribution links better. consequently, the new globally respecified model is as in figure 7. economy, 2023, 10(1): 19-28 26 © 2023 by the authors; licensee asian online journal publishing group figure 6. global model estimation. figure 7. estimation of respecified model. figure 7 shows the revised model estimate. to evaluate the goodness of fit of the respecified model, we need to examine its explanatory power and ensure the convergent validity and discriminant validity of the model. convergent validity involves calculating one or two measures, such as cronbach’s alpha and the internal consistency developed by fornell and larcker (1981). nunnally (1978) guideline can also be used for interpreting the obtained values. discriminant validity refers to using the average extracted variance shared between the construct and its economy, 2023, 10(1): 19-28 27 © 2023 by the authors; licensee asian online journal publishing group measurement indicators. it must be greater than the variance shared between the construct and other constructs in the model. additionally, chin (1998) recommends an average variance extracted (ave) greater than 0.5. therefore, we evaluate the global model based on the recommended tests and critical values. the table 3 presents the values of various indicators, including cronbach’s alpha, composite reliability, average extracted variance, r², and the gof (goodness of fit) index. table 3. evaluating the goodness of fit of the global model. latent variables cronbach’s alpha composite reliability ave r² gof index territorial climate governance 0.921 0.935 0.615 0.392 structural transformation of the territory 0.955 0.964 0.815 0.971 territorial human capital 0.956 0.965 0.819 0.077 based on the findings, our model exhibits an acceptable level of representational quality per the recommended data analysis standards. however, to further assess the robustness of the results, it is essential to conduct a bootstrapping analysis to determine the significance of the contribution relationships between climate governance, structural transformation, and human capital under different scenarios. the results of this analysis are summarized in the table 4 provided. table 4. estimation of the causal model by bootstrapping and hypothesis testing. hypotheses β (correlation coef.) t-student (bootstrap) p values decision h1. territorial climate governance => structural transformation of the territory 0.000 0.029 0.977 rejected h2. territorial climate governance => territorial human capital 0.277 2.323 0.020 supported h3. territorial human capital => structural transformation of the territory 0.985 117.506 0.000 supported to ensure reliable and robust answers to the research problem, we will thoroughly examine and discuss the main findings obtained from our analysis in light of the existing literature review. this will allow us to draw meaningful comparisons and establish connections between our results and relevant scholarly research. 3.2. discussion upon concluding this analysis, it becomes apparent that this work's contribution to research lies in its focus on both a theoretical approach and field application in addressing the issue of climate governance concerning the mechanisms of structural transformation within the urban territory of agadir. today, it is only possible to discuss climate governance by considering the evolution of participation, involvement, and coordination mechanisms among territorial actors, which underlie its current configuration and development. based on the research results, we can conclude that climate governance does not directly and significantly contribute (β = 0.000) to stimulating structural change in agadir. however, suppose we view climate governance as a mode of production and regulation within territorial management. in that case, that is, the negotiation of environmental operations between the urban government representatives and economic actors, we can assert, with little risk of error, that agadir's actors have long possessed a significant relational and cognitive potential, shaping their interventions in the promotion of public policies that support sustainable development. the study's findings suggest that the structural transformation of agadir is primarily based on collective mobilization and management of resources, as well as enhancing territorial resilience to tackle ecological, economic, and social challenges. on the downside, the study reveals that when viewed solely as an actor capacity-building approach, climate governance may pose a risk and even a threat to democracy and citizenship. the public interest could be reduced to just one of many categorical interests in the game of negotiated actions between actors. this could create permanent confusion between democracy and management and subject cities solely to ecological and economic logic. therefore, promoting a system of solidarity and coordination through networks and decentralized environmental services of administrations at the city level is crucial. such a system should be part of a policy that focuses on strengthening the network in a city like agadir, inspired mainly by sustainable development practices. this would help refocus actors' roles towards creating a more sustainable future for the city. however, it must be acknowledged that managing a city like agadir presents significant challenges, and the task of coordination, participation, and involvement among actors is complex. thus, any proposal for such a transition should be indicative rather than prescriptive. re-founding the territorial approach must be contextualized and undertaken considering the various contingencies of the specific application environment. 4. conclusion in this paper, which focuses on studying the contribution of territorial climate governance to the structural transformation of agadir city, we have developed a comprehensive framework of theoretical concepts, definitions, and analytical tools that interrelate these concepts and their underlying links. the article is organized into three main sections. the first section delves into key concepts' conceptual genesis and theoretical meanings. we provide a thorough overview of the conceptual and evolutionary dynamics that offer concrete definitions, followed by a discussion on the measures that can be identified. economy, 2023, 10(1): 19-28 28 © 2023 by the authors; licensee asian online journal publishing group the second section outlines the methodological choices and the research field. we conducted a survey using questionnaires with a sample of territorial actors operating in agadir city, resulting in 416 completed questionnaires, from which data were extrapolated for the subsequent analyses. the third section presents the results of the analyses using state-of-the-art structural equation modelling techniques under the smartpls procedure. these results lead to conclusions regarding climate governance's contribution to the territory's structural transformation. numerous indications exist that the relationship between coordination among actors and structural transformation in a territory has evolved into a mutually beneficial relationship where the strengthening of one does not come at the expense of the unity and integrity of the other. the transition of the urban environment and various mutations of social, institutional, and management nature, in which the city of agadir is immersed, are a testament to this fact. these elements demonstrate that diversifying actors and establishing new standards are crucial in enhancing the transition from a monocentric to a polycentric conception of the environment based on ecological enhancement. despite the significant contributions of this research, the conclusions drawn must be seen in the context of certain limitations. the survey instrument used has its limitations, particularly in terms of the difficulties involved in collecting data from stakeholders. the identification of these limitations leads us to propose new avenues of research to refine the study. to investigate the relationship between climate governance and structural transformation, we plan to conduct a study targeting the city of agadir and all the public and private players involved in the management of territorial affairs in the souss massa region. 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(1981). structural equation models with unobservable variables and measurement error: algebra and statistics. journal of marketing research, 18(3), 382-388. https://doi.org/10.1177/002224378101800313 grossetti, m. (2001). territorial competences. regional and urban economics review, 2001/5(5), 677-698. khan, s., taraporevala, p., & zérah, m.-h. (2018). indian smart cities: common challenges and diversification of trajectories. flux, 4, 86-99. lacquement, g., & quéva, c. (2016). introduction. social innovations and territorial development in the european countryside. norois. environnement, aménagement, société, 241, 7-13. mincer, j. (1958). investment in human capital and personal income distribution. journal of political economy, 66(4), 281-302. https://doi.org/10.1086/258055 nunnally, j. c. (1978). an overview of psychological measurement. in: wolman, b.b. (eds.), clinical diagnosis of mental disorders. boston, ma: springer. rifkin, d. i., long, m. w., & perry, m. j. 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(2004). a beginner's guide to structural equation modeling (2nd ed.). mahwah: lawrence erlbaum associates. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. https://doi.org/10.1086/258724 https://doi.org/10.1177/002224378101800313 https://doi.org/10.1086/258055 https://doi.org/10.1016/j.smrv.2018.07.007 139 © 2025 by the author; licensee asian online journal publishing group economy vol. 12, no. 2, 139-145, 2025 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/economy.v12i2.7458 © 2025 by the author; licensee asian online journal publishing group revisiting the growth–environment nexus in china: the role of institutions, energy use, and ecological stress büşra ağan çelik department of economics, osti̇m technical university, ankara, türkiye. email: busra.agancelik@ostimteknik.edu.tr abstract this study investigates the dynamic relationship between income level and key environmental and institutional drivers in china, focusing on energy use, ecological footprint, trade openness, and rule of law over the period 1990–2023. the purpose is to assess how these factors jointly influence china’s growth trajectory under increasing sustainability challenges. the analysis employs the autoregressive distributed lag (ardl) model, which captures both short-run adjustments and long-run equilibrium dynamics while accommodating variables with mixed integration orders. the empirical results show that ecological footprint, trade openness, and institutional quality exert statistically significant short-run effects on gdp, whereas energy use is not significant in the short run. the highly significant error correction term confirms rapid adjustment toward equilibrium, reflecting the economy’s sensitivity to shocks. in contrast, the long-run effects of energy, environmental, and institutional variables are statistically insignificant, suggesting that china’s growth path cannot rely on current structures to achieve sustainable outcomes. these findings contribute to the debate on the compatibility of economic expansion with environmental sustainability by providing new evidence from the chinese context. practical implications emphasize the need for structural reforms, including reducing coal dependence, accelerating the transition to renewable energy, embedding environmental standards into trade policy, and strengthening institutional enforcement mechanisms. the results also offer policy guidance aligned with china’s carbon neutrality objectives and sustainable development goals. keywords: ecological footprint, energy use, institutional quality, sdgs, ardl model, china. citation | çelik, b. a. (2025). revisiting the growth–environment nexus in china: the role of institutions, energy use, and ecological stress. economy, 12(2), 139–145. 10.20448/economy.v12i2.7458. history: received: 5 august 2025 revised: 8 september 2025 accepted: 15 september 2025 published: 26 september 2025 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. institutional review board statement: not applicable. transparency: the author confirms that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. this study followed all ethical practices during writing. competing interests: the author declares that there are no conflicts of interests regarding the publication of this paper. contents 1. introduction .................................................................................................................................................................................... 140 2. data and methodology ................................................................................................................................................................. 141 3. empirical findings ........................................................................................................................................................................ 142 4. discussion ........................................................................................................................................................................................ 143 5. conclusion ....................................................................................................................................................................................... 143 references ............................................................................................................................................................................................ 144 mailto:busra.agancelik@ostimteknik.edu.tr https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v12i2.7458 https://orcid.org/0000-0003-1485-9142 economy, 2025, 12(2): 139-145 140 © 2025 by the author; licensee asian online journal publishing group contribution of this paper to the literature this study contributes to the existing literature by integrating energy use, ecological footprint, trade openness, and the rule of law into a single ardl framework for china (1990–2023). the primary contribution of this research is the identification of significant short-term effects, while the long-term linkages appear to be weak. this study provides novel evidence on china's growth–environment– institution nexus, offering valuable insights for policymakers and researchers interested in sustainable development and institutional reforms. 1. introduction the escalating threat of climate change has prompted unprecedented global awareness and policy attention toward sustainable development. scientific research widely agrees that anthropogenic activities are the primary drivers of global warming and environmental degradation (furtuna & atis, 2024; idroes, rahman, uddin, hardi, & falcone, 2024; kirikkaleli & adebayo, 2021). as climate risks intensify, both developed and developing economies are pressed to adopt strategies that mitigate environmental harm while maintaining economic stability (adebayo, alola, ullah, & abbas, 2023). among the factors shaping this transition, energy consumption patterns, institutional quality, and trade policies have emerged as critical determinants in the debate on sustainable growth. environmental challenges stemming from industrial activities, such as air and water pollution, pose profound threats to human health, food security, and ecosystem integrity (eweade, uzuner, akadiri, & lasisi, 2024). these adverse effects are closely tied to the scale and composition of energy use. fossil fuels, while sustaining industrial output, emit substantial greenhouse gases and pollutants, creating long-term ecological strain. consequently, accelerating the transition to clean energy sources and strengthening environmental governance have become key priorities for major economies (udemba, tosun, & matasane, 2021). china offers a particularly relevant context for this inquiry. since economic liberalization in 1978, the country has achieved extraordinary growth, averaging over 9% annually, and has lifted more than 800 million people out of poverty (cai, 2023). however, this rapid expansion has been accompanied by extensive industrialization, surging energy demand, and significant environmental costs. although the chinese government has increased investments in renewable energy and enacted environmental legislation, fossil fuels, especially coal, continue to dominate the national energy mix (ivanovski, hailemariam, & smyth, 2021). the share of coal in china’s energy mix declined from 68.5% in 2000 to 60.6% in 2017, while oil consumption dropped slightly from 22.2% to 18.9%. despite these changes, coal still constitutes around two-thirds of total energy consumption, and co₂ emissions have been rising steadily since 2013. meanwhile, per capita gdp rose from rmb 7,912 in 2000 to rmb 59,855 in 2017 (china statistical yearbook (csy), 2018), intensifying pressure on natural systems and exposing the limits of china's environmental carrying capacity. accordingly, china has set forth a series of long-term sustainability goals. as reiterated in the 2019 “china–eu joint statement on climate change,” the country aims to attain carbon neutrality by 2060 (dong, sun, & dong, 2018). these objectives are incorporated into china's 14th five-year plan, which emphasizes increasing non-fossil energy sources and strengthening the enforcement of environmental regulations (organisation for economic cooperation and development (oecd), 2011). institutionally, china’s environmental governance has undergone significant evolution. although no unified legal code governs resource protection, a growing body of national and sub-national regulations now covers air, water, soil, waste, and ecosystem conservation (liu, 2023; zhao, taghizadeh-hesary, dong, & dong, 2023). the revised environmental protection law and sector-specific acts have contributed to building a more coherent legal framework for ecological sustainability. despite these reforms, several structural challenges persist. the tension between economic expansion and environmental conservation, coupled with fragmented enforcement capacity and uneven institutional development, raises important questions about the sustainability of china’s growth model (jiang, zhu, & wang, 2022). in particular, the interrelated effects of energy consumption, ecological pressure, trade liberalization, and institutional quality on economic growth remain underexplored. this study is grounded in the theoretical framework of the environmental kuznets curve (ekc), which suggests an inverted u-shaped relationship between income level and environmental degradation (grossman & krueger, 1991). the ekc has been extensively examined in the context of china, with studies providing mixed evidence depending on the pollutants, time periods, and policy regimes considered (wang, zhang, nathwani, yang, & shao, 2022). while some analyses confirm the presence of a turning point as income levels rise (kostakis, armaos, abeliotis, & theodoropoulou, 2023), others argue that the structural dominance of coal, industrial expansion, and delayed enforcement of environmental regulations have postponed or prevented the expected decline in environmental pressure (gu, shen, zhong, wu, & rahim, 2023). similarly, this study draws upon the institutional theory of development (north, 1990), which highlights the central role of institutional quality, particularly legal frameworks, regulatory effectiveness, and governance, in shaping sustainable economic outcomes. in the chinese context, institutional reforms have been found to influence both environmental policy enforcement and green technology adoption (jiang et al., 2022; zhao et al., 2023). empirical evidence suggests that stronger institutions enhance the effectiveness of environmental regulations, facilitate investment in renewable energy, and improve the alignment of income levels with environmental objectives (ozturk, farooq, majeed, & skare, 2024). this study contributes to the literature by employing the dynamic relationship between gdp and four structural factors: energy use, ecological footprint, trade openness, and the rule of law in china. while each of these variables has been individually explored in prior research, there is a lack of integrated frameworks that examine their combined influence within a single econometric model. by bringing these dimensions together, the study enhances understanding of how environmental and institutional forces jointly shape economic performance in a rapidly developing economy. by employing the autoregressive distributed lag (ardl) model using annual data from 1990 to 2023, this study bridges a critical gap in the literature. the ardl approach accommodates variables with different integration economy, 2025, 12(2): 139-145 141 © 2025 by the author; licensee asian online journal publishing group orders and distinguishes between short-run adjustments and long-run equilibrium dynamics. the expected policy relevance of this study lies in its potential to inform evidence-based strategies that align china’s economic growth objectives with environmental sustainability commitments, particularly under the sustainable development goals (sdgs) 7 (affordable and clean energy), 8 (decent work and economic growth), 12 (responsible consumption and production), and 13 (climate action). 2. data and methodology this study utilizes annual time-series data for china spanning the period 1990–2023 to investigate the relationship between income level and key environmental, institutional, and trade-related factors. the analysis adopts the ardl framework to capture both short-run dynamics and long-run equilibrium relationships. table 1 presents the variables used in this study, their abbreviations, detailed descriptions, and data sources. the dependent variable is real gdp at constant 2015 us dollars (lngdp), serving as a proxy for income level, obtained from the world bank’s world development indicators (wdi). energy consumption (lnec) is measured as total primary energy use in kilograms of oil equivalent, with data sourced from the international energy agency (iea). the ecological footprint (lnecf), retrieved from the global footprint network, provides an aggregate measure of environmental pressure. trade openness (lnto), expressed as the ratio of total trade to gdp, is obtained from the wdi. institutional quality is captured through the rule of law index (lnrl) from the world bank’s worldwide governance indicators (wgi), reflecting the effectiveness of legal enforcement and the strength of governance institutions in china. table 1. variables and descriptions. variable abbreviation description source gross domestic product per capita lngdp constant 2015 us$ wdi energy consumption lnec energy use (kg of oil equivalent per capita, log-transformed) wdi ecological footprint lnecf ecological footprint (global hectares per capita, log-transformed) global footprint network trade openness lnto trade as a percentage of gdp (logtransformed) wdi rule of law lnrl governance indicator (index, logtransformed)) worldwide governance indicators (wgi) the ardl approach, developed by pesaran, shin, and smith (2001), is particularly well-suited for time-series analysis when the regressors exhibit mixed integration orders, i.e., i(0) and i(1), but are not integrated of order two. before estimation, the order of integration of each variable is examined to confirm the suitability of the ardl framework. the ardl bounds testing procedure is then applied to assess the existence of a long-run cointegration relationship among the variables. when cointegration is established, long-run coefficients are obtained from the ardl model, and the associated short-run dynamics are evaluated through an error correction model (ecm). the ardl method offers several advantages that make it particularly suitable for this study. first, it provides flexibility with respect to integration orders, as it can accommodate regressors integrated at i(0), i(1), or a combination of both, without the need for pre-transforming all variables to the same order of integration. second, it performs efficiently with relatively small sample sizes, which is especially relevant for the annual dataset covering the period 1990–2023. third, the ardl framework enables the simultaneous estimation of short-run dynamics and long-run equilibrium relationships, allowing a comprehensive understanding of both immediate and persistent effects. finally, it supports robust model stability assessment and post-estimation diagnostic testing, ensuring the adequacy and reliability of the model specification. the baseline long-run relationship can be expressed as: 𝐿𝑁𝐺𝐷𝑃𝑡 = 𝛼 + 𝛽1𝐿𝑁𝐸𝐶𝑡 + 𝛽2𝐿𝑁𝐸𝐶𝐹𝑡 + 𝛽3𝐿𝑁𝑇𝑂𝑡 + 𝛽4𝐿𝑁𝑅𝐿𝑡 + 𝜀𝑡 (1) where lngdp denotes real gdp (income level), lnec represents energy consumption, lnecf indicates the ecological footprint, lnto measures trade openness, lnrl captures the rule of law, and 𝜀𝑡 is the error term. the form of the ardl (p, q₁, q₂, ..., qₖ) model is specified as follows: δln(gdpₜ) = α + ∑ βᵢ δln(gdpₜ₋ᵢ) p i=1 + ∑ γⱼ δln(x₁ₜ₋ⱼ) q1 j=0 + ... + ∑ φⱼ δln(xₖₜ₋ⱼ) qk j=0 + λ₁ ln(gdpₜ₋₁) + λ₂ ln(x₁ₜ₋₁) + ... + λₖ₊₁ ln(xₖₜ₋₁) + εₜ (2) where δ denotes the first-difference operator, xₖ are the independent variables (such as energy consumption, ecological footprint, trade openness, and rule of law), and εₜ is the white-noise error term. table 2. descriptive statistics and correlation matrix. variable obs. mean std. dev. min. max. skewness kurtosis lngdp 34 7.145 0.945 5.875 7.288 -1.543 4.645 lnec 34 2.245 0.368 2.865 4.455 -0.764 1.643 lnecf 34 1.863 0.786 0.346 2.765 -0.446 1.344 lnto 34 1.536 0.135 1.743 1.245 0.878 1.245 lnrl 34 1.045 0.468 0.57 2.342 -1.787 3.875 variable lngdp lnec lnecf lnto lnrl lngdp 1.000 lnec 0.341* 1.000 lnecf 0.432 0.833* 1.000 lnto 0.233 0.712* 0.422* 1.000 lnrl 0.032 0.788* 0.345* 0.234* 1.000 note: * denotes significance at 5% level. economy, 2025, 12(2): 139-145 142 © 2025 by the author; licensee asian online journal publishing group 3. empirical findings table 2 summarizes the descriptive statistics and correlation relationships among the variables. most variables show skewed distributions, with real gdp (lngdp) and rule of law (lnrl) notably left-skewed. the correlation matrix indicates that gdp is significantly and positively associated with both energy consumption and ecological footprint, suggesting that growth in china has been accompanied by environmental pressure. trade openness shows a positive correlation with gdp. the rule of law is significantly related to all other variables, highlighting its broad influence. table 3 summarizes the outcomes of the augmented dickey-fuller (adf) unit root tests applied to assess the stationarity of the variables. while lngdp, lnto, and lnrl are found to be stationary at level at the 10% or 5% significance levels, lnec and lnecf are non-stationary in level form. after first differencing, all variables become stationary at the 1% level, confirming they are integrated of order one, i(1). these findings justify the use of the ardl bounds testing approach, which is valid when the variables are a mix of i(0) and i(1), but none are i(2). table 3. unit root test. variables level first difference constant constant and trend constant constant and trend lngdp -2.399** -2.535** -4.066*** -4.289*** lnec -1.632 -1.309 -3.691*** -3.903*** lnecf -0.124 -1.474 -4.344 *** -5.628*** lnto -2.027** -1.397 -4.566*** -6.757*** lnrl -2.691* -2.142** -5.105*** -6.225*** note: stationarity at a significance level of *10%, **5%, and ***1%. table 4 displays the outcomes of the ardl bounds test used to determine the long-run cointegration between variables. the calculated f-statistic value of 11.26 exceeds the upper critical bounds at all significance levels. this strongly confirms a cointegration relation between gdp and its regressors: energy use, ecological footprint, trade openness, and rule of law. table 4. ardl bound test. model fstatistic lag bound test critical value base model* 11.26 3 1% 3.15 4.43 5% 2.55 3.68 10% 2.26 3.34 note: *lngdp=f (lnec, lnecf, lnto, lnrl). table 5 presents the short-run and long-run estimates from the ardl model. in the short run, changes in ecological footprint (d(lnecf)), trade openness (d(lnto)), and rule of law (d(lnrl)) are statistically significant at the 10% or 5% levels, whereas changes in energy consumption (d(lnec)) are not significant. the error correction term (ecm) is negative and highly significant, confirming the presence of a long-run equilibrium relationship, with approximately 70.3% of the short-run disequilibrium adjusted each period. in the long run, none of the explanatory variables are statistically significant at the 5% level, although the constant term is marginally significant at the 10% level. energy consumption (lnec), ecological footprint (lnecf), trade openness (lnto), and rule of law (lnrl) all show positive or negative coefficients, but their high p-values indicate that these effects are not statistically robust. this suggests that the long-run relationship between these variables and gdp is weak or unstable. the high r2 value indicates strong explanatory power of the model, while the adjusted r2 suggests a reasonably good fit after accounting for degrees of freedom. table 5. short and long-term coefficients. short-term estimation variable coeffi. std. error t-stat. prob. d (lnec) 1.238 1.032 0.193 0.848 d (lnecf) 4.422 2.587 1.702 0.099 d (lnto) 3.039 1.103 -2.229 0.033 d (lnrl) 2.027 0.054 2.092 0.021 ecm (-1) -0.703 0.079 -4.213 0.000 r2 0.912 mean dep. var 7.024 adjusted r2 0.669 s.d. dep. var 0.993 long-term estimation variable coeffi. std. error t-stat. prob. lnec 2.183 2.305 0.567 0.577 lnecf 1.280 1.026 0.921 0.364 lnto 2.902 1.366 0.120 0.905 lnrl 3.037 1.493 -1.393 0.174 c 14.55 13.32 1.902 0.0002 note: probability values are evaluated based on 1%, 5%, and 10% significance levels. the diagnostic tests confirm the adequacy of the ardl specification. the ramsey reset test indicates no functional form misspecification. the breusch–godfrey lm test and the breusch–pagan–godfrey heteroskedasticity test fail to reject the null hypotheses, suggesting the absence of serial correlation and heteroskedasticity. the jarque– bera statistic confirms normally distributed residuals. moreover, the vif value is well below the critical threshold, implying no multicollinearity concerns. overall, the model satisfies the key econometric assumptions, supporting the reliability of the estimated coefficients for inference. economy, 2025, 12(2): 139-145 143 © 2025 by the author; licensee asian online journal publishing group table 6. diagnostic tests. tests lm-test prob. chi-squaredtest prob. t-test / f-test prob. ramsey reset 0.1154 breusch-godfrey serial correlation lm 0.1882 breusch-pagan-godfrey heteroskedasticity 0.4421 jarque-bera normality 0.5282 variance inflation factor (vif) 3.22 the stability of the estimated ardl parameters is assessed using the cusum and cusum of squares (cusumsq) tests. as illustrated in figure 1, both test statistics remain well within the 5% significance bounds throughout the sample period (1990–2023). this indicates the absence of structural instabilities or parameter drift over time, thereby confirming the robustness of the model specification. the stability of the coefficients further supports the reliability of the long-run relationships and reinforces the suitability of the ardl framework for drawing policy-relevant conclusions in the context of china’s growth–environment–institution nexus. figure 1. cusum and cusumq test. 4. discussion the empirical findings of this study provide important insights into the interaction between environmental, institutional, and trade-related factors and income levels in china, and they align with several strands of the existing literature while also revealing notable divergences. in the short run, the significant effects of ecological footprint, trade openness, and rule of law on gdp are consistent with prior research emphasizing the immediate economic implications of environmental pressures and institutional interventions. for instance, dam, kaya, and bekun (2024) similarly found that changes in ecological footprint exert short-term impacts on growth, reflecting the sensitivity of production structures to environmental constraints. likewise, the positive short-run effect of trade openness mirrors the findings of kim and lin (2022), who reported that trade liberalization can boost economic performance in the short term, though its environmental effects remain mixed depending on the regulatory framework. the short-run significance of the rule of law aligns with mtiraoui, lazreg, and chemli (2024) and shah, raghoo, and surroop (2021), who argue that institutional enforcement capacity can produce rapid economic effects by improving policy credibility and investor confidence. however, this study’s results suggest that such effects do not persist in the long run, which resonates with udemba and yalçıntaş (2021), who noted that institutional quality alone is insufficient to sustain growth without complementary structural reforms. in the long run, the absence of significant relationships between energy consumption, ecological footprint, trade openness, rule of law, and income level diverges from several studies that reported persistent environmental effects on gdp. for instance, xia (2022) found a long-run link between fossil fuel consumption and growth, while wang, wang, and li (2024) highlighted the enduring influence of trade openness under china’s industrial upgrading. the divergence observed here may be attributable to the inclusion of multiple structural factors in a single model, which could dilute individual long-run effects, or to structural changes in china’s economy over the 1990–2023 period that altered the persistence of these relationships. the insignificance of the long-run institutional variable also contrasts with studies such as north (1990) and jiang et al. (2022) which emphasizes the foundational role of institutions in sustaining growth. one possible explanation is that the formal institutional framework in china has advanced more rapidly than its enforcement and implementation, resulting in weaker measurable long-term impacts on gdp. overall, these findings suggest that the short-run responsiveness of growth to environmental and institutional factors is consistent with the broader literature, while the lack of long-run significance underscores the need to examine threshold effects, sectoral differences, and the role of complementary policies. this study adds to the debate by providing evidence that short-term environmental and institutional changes can generate rapid economic effects in china, but sustained impacts may require deeper structural transformations. 5. conclusion this study examined the relationship between income level and key environmental and institutional variables in china, including energy use, ecological footprint, trade openness, and rule of law, over the period 1990–2023 using the ardl bounds testing approach. motivated by the ongoing debate on the compatibility of economic expansion with environmental constraints, the analysis considered both short-run dynamics and long-run equilibrium relationships. the short-run results indicate that changes in ecological footprint, trade openness, and rule of law exert statistically significant effects on gdp, while the effect of energy consumption is positive but not statistically significant. these findings suggest that environmental pressure and institutional dynamics have immediate economy, 2025, 12(2): 139-145 144 © 2025 by the author; licensee asian online journal publishing group implications for economic performance, with trade openness also playing a short-term role in shaping growth outcomes. the error correction term (–0.703) is negative and highly significant, confirming rapid adjustment toward the long-run equilibrium following short-run deviations. in the long run, none of the explanatory variables are statistically significant at conventional levels, implying that the sustained effects of energy consumption, ecological footprint, trade openness, and institutional quality on gdp are weak or unstable over the study period. this result highlights the possibility that china’s long-term growth path is influenced by factors beyond the environmental and institutional variables included in this model, or that their effects are conditional on structural and policy changes not captured in the current specification. the results carry several important policy implications. the significant short-term effect of the ecological footprint suggests that china should accelerate the adoption of clean production processes and enhance environmental efficiency in key industrial sectors. policies under sdg 12 (responsible consumption and production) and sdg 13 (climate action) could be operationalized through stricter ecological footprint reduction targets, technology subsidies for green manufacturing, and more rigorous environmental monitoring. the short-term influence of trade openness on growth highlights the need to integrate environmental standards into trade policy. china can leverage trade agreements to promote green technology transfer, establish environmental quality benchmarks for exports and imports, and avoid pollution haven dynamics. the short-term significance of the rule of law underscores the importance of timely governance interventions. enhancing enforcement mechanisms, increasing institutional transparency, and ensuring uniform application of environmental laws across provinces will be critical for achieving policy credibility. the long-term insignificance of environmental and institutional variables points to the necessity of sustained structural reforms. these include reducing coal dependency, expanding the share of renewables (sdg 7), promoting energy efficiency, and embedding environmental sustainability into industrial planning (sdg 8). a gradual shift toward a green growth model will require harmonized energy, industrial, and legal policies. moreover, the high speed of adjustment toward equilibrium highlights the economy’s sensitivity to shocks, supporting the adoption of agile, evidence-based policymaking that responds quickly to environmental and trade fluctuations to maintain macroeconomic stability. while this study contributes to understanding the growth–environment–institution nexus in china, several avenues remain for future research. incorporating additional institutional indicators, such as government effectiveness, regulatory quality, and environmental policy stringency, could provide a more nuanced picture of institutional capacity. expanding the environmental dimension to include renewable energy share, carbon pricing mechanisms, or sector-specific emissions may capture a broader scope of environmental pressures. future studies could also employ nonlinear or threshold models (e.g., threshold ardl, smooth transition models) to detect regime shifts that might explain the insignificance of long-run effects. finally, comparative studies between china and other emerging economies could offer valuable insights into the generalizability of these findings, particularly within the framework of the sustainable development goals. references adebayo, g., alola, a. a., ullah, s., & abbas, s. 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(2023). how green growth affects carbon emissions in china: the role of green finance. economic research, 36(1), 2090-2111. https://doi.org/10.1080/1331677x.2022.2095522 asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. https://doi.org/10.1016/j.gsf.2023.101588 https://doi.org/10.1002/jae.616 https://doi.org/10.3390/cli9060095 https://doi.org/10.1016/j.resourpol.2021.102168 https://doi.org/10.1002/sd.2720 https://doi.org/10.1016/j.techfore.2022.121471 https://doi.org/10.1108/jal-08-2022-0087 https://doi.org/10.1080/1331677x.2022.2095522 130 © 2025 by the authors; licensee asian online journal publishing group economy vol. 12, no. 2, 130-138, 2025 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/economy.v12i2.7422 © 2025 by the authors; licensee asian online journal publishing group moderating role of population growth rate on remittance-growth nexus in nigeria afamefuna angus eze1 stephen okechukwu anyamadu2 emmanuel chinanuife3 chiedozie esomnofu4 esther chioma anakwue5 ( corresponding author) 1,2department of economics, university of nigeria, nsukka, nigeria. 1email: angus.eze@unn.edu.ng 2email: stephenanya@gmail.com 3department of economics, topfaith university, mkpatak, akwa ibom. nigeria. 3email: chinanuifeemma@gmail.com 4department of economics, nwafor orizu college of education, anambra state, nigeria. 4email: esomnofuchiedozie@gmail.com 5airforce institute of technology, kaduna, nigeria. 5email: anakwuee@gmail.com abstract there has been debate about whether the population growth rate and remittance impacts are beneficial or detrimental to economic growth and whether population growth has any moderating role in the remittance-growth nexus. the purpose of this study is to empirically investigate the moderating role of population growth in the remittance-growth nexus, as well as to evaluate the direction of causality between these elements. the autoregressive distributed lag (ardl) model and the granger causality test were employed to analyze the study's objectives. the analysis used data from the world bank's world development indicators for the years 1990-2022. the findings of this study reveal that both population growth and remittances have a positive and significant impact on economic growth in the long run, whereas the population growth rate negatively and significantly moderates the impact of remittances on economic growth in the long run but is insignificant in the short run. the granger causality test demonstrates unidirectional causation flowing from population expansion to economic growth. it consequently proposes that the government and individuals who receive these remittances invest them in more productive sectors such as health, education, and training so that they have a positive impact on the country's economic progress. keywords: ardl technique, economic growth, population growth, remittances, ecm, granger causality. citation | eze, a. a., anyamadu, s. o., chinanuife, e., esomnofu, c., & anakwue, e. c. (2025). moderating role of population growth rate on remittance-growth nexus in nigeria. economy, 12(2), 130–138. 10.20448/economy.v12i2.7422 history: received: 8 august 2025 revised: 27 august 2025 accepted: 4 september 2025 published: 16 september 2025 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. institutional review board statement: not applicable. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. this study followed all ethical practices during writing. data availability statement: the corresponding author may provide study data upon reasonable request. competing interests: the authors declare that they have no competing interests. authors’ contributions: all authors contributed equally to the conception and design of the study. all authors have read and agreed to the published version of the manuscript. contents 1. introduction .................................................................................................................................................................................... 131 2. literature review .......................................................................................................................................................................... 132 3. methodology ................................................................................................................................................................................... 132 4. presentation of results and findings ........................................................................................................................................ 134 5. discussion of findings .................................................................................................................................................................. 135 6. conclusion and recommendation .............................................................................................................................................. 136 references ............................................................................................................................................................................................ 137 mailto:angus.eze@unn.edu.ng mailto:stephenanya@gmail.com mailto:chinanuifeemma@gmail.com mailto:esomnofuchiedozie@gmail.com mailto:anakwuee@gmail.com https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v12i2.7422 https://orcid.org/0000-0003-1163-372x economy, 2025, 12(2): 130-138 131 © 2025 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study contributes to the existing literature by examining the interaction between population growth and remittances on economic growth in nigeria. it aims to determine whether increasing population significantly moderates the impact of international remittances on nigeria's economic growth. 1. introduction economic growth and sustainability serve as key indicators of a nation’s overall development and prosperity. they involve the increase of gross product and the overall advancement of the standard of living of its citizens (hossain, 2019; korsah, 2022). economic sustainability, therefore, is one of the major objectives of any government, encompassing advancements in infrastructure, technology, education, and social well-being (odhiambo, 2019). its great importance causes the government to employ different strategies to boost its economy while ensuring sustainability in other sectors, such as reducing poverty, creating employment opportunities, and enhancing the quality of life. a major economic indicator used in measuring economic growth is the real gdp (rgdp). over the past decades, it has seen an accelerating increase from $12.55 billion in 1970 to $440.84 billion in 2021 (world bank, 2022). this sustained growth is likely associated with factors such as increased productivity, investments, population dynamics, and overall economic expansion (asiamah, ofori, & afful, 2019). the global population has seen a consistent increase attributed to growing populations in various countries; however, this population growth rate varies across regions and countries, with developing nations experiencing more significant increases compared to developed nations. nigeria, in particular, has witnessed a significant surge in population, initially having a population of just 45.2 million people as of 1960, tripling the figure to over 200 million nigerians within the last 56 years, with a projection of 262,580,426 in the year 2030, thereby positioning nigeria as the third most populous country globally (world bank, 2022). this divergence introduces a dimension of global inequality, with implications for international trade, migration patterns, remittances, and the distribution of resources. a larger population can contribute to increased labor supply and consumer demand, potentially fostering economic growth (peterson, 2017). however, rapid population growth can also cause limitations in resource allocation, infrastructure, and social services, potentially hindering economic progress (headey & hodge, 2009). the third school of thought holds that population increase is a neutral component in economic growth that is determined outside of typical growth models. thus, even with declining returns to the population in the production of consumer goods, zero population growth is not required for a long-term rise in per capita consumption. nigeria faces challenges in managing its population dynamics and harnessing the potential benefits of its demographic dividend. remittances, defined as the transfer of funds by migrant workers to their home countries, have been recognized as a significant contributor to economic growth, particularly in developing economies (abdulai, 2023; jackman, moore, & craigwell, 2011; ratha, 2003). remittances can stimulate domestic consumption, investment, and access to education and healthcare, thereby fostering economic development (fayissa & nsiah, 2010; ratha, mohapatra, & silwal, 2011). in nigeria, remittances have been a crucial source of external financing, with inflows reaching $19.2 billion in 2021, accounting for 3.8% of the country's gdp (world bank, 2022), which increased to $19.5 billion in 2023, making remittances the second-largest source of foreign exchange and international inflows (alechenu, 2021). remittances are garnering increased attention due to substantial outflows to developing nations, both in terms of volume and their impact on recipient economies. between 2010 and 2017, remittances to sub-saharan africa increased by 9.6%, reaching approximately us $33 billion, while overall growth in developing countries was 26.2%. according to the world bank's "migration and development brief 35" (see figure 1), the top ten remittance recipients in ssa in 2021 are nigeria, ghana, kenya, senegal, zimbabwe, democratic republic of the congo, uganda, mali, south africa, and the gambia, with the highest and lowest receiving us$19.2 billion and us$0.7 billion, respectively. ghana and mali had remittance inflows exceeding 5% of gdp, zimbabwe and senegal exceeded 10%, and the gambia surpassed 20% (world bank, 2022). figure 1. 10 top remittance receiving countries in sub-saharan africa. source: world bank (2022). the interplay between population growth, remittances, and economic growth has been the subject of ongoing research and debate. studies have explored the potential moderating effects of population growth on the remittanceeconomic growth relationship, with varying findings across different contexts. for instance, jayaraman, choong, economy, 2025, 12(2): 130-138 132 © 2025 by the authors; licensee asian online journal publishing group and chand (2016) found that population growth strengthened the positive impact of remittances on economic growth in pacific island countries, while azam (2015) reported a negative moderating effect in high-remittance countries. however, there has not been any study on the moderating role of population growth rate on remittances-growth nexus in nigeria. 2. literature review the theoretical framework of this study is hinged on the neo-classical theory view of the impact of population dynamics and foreign remittances on economic growth. it emphasizes market forces leading to an analysis of how households allocate remittances based on local market conditions and the availability of goods and services. furthermore, the theory suggests that remittances are used as investments in human capital, contributing to education, healthcare, and skill development, ultimately enhancing productivity and economic growth. neoclassical economics also highlights the role of savings in capital formation and long-term economic growth, prompting an examination of how remittances influence household savings behavior and contribute to capital within communities. additionally, the impact of remittances on labor market dynamics is explored, considering how increased resources may affect wage rates, employment patterns, and overall labor market structure, thereby influencing economic growth. 2.1. review on population growth, remittances and economic growth in nigeria there are several studies on either the impact of population growth on economic growth or the impact of remittances on economic growth, or both, but not on the moderating role of population growth on the remittancesgrowth nexus in nigeria. however, their findings are quite inconclusive. while some studies found positive and significant impacts of population growth and remittances on economic growth, others found negative and significant impacts, whereas some had mixed findings. this section will be partitioned in this manner for coherence purposes. first, studies that found a positive and significant correlation between population growth and economic growth, as well as remittances and economic growth, using different estimation techniques and variable proxies include (adeseye, 2021; efuntade & efuntade, 2020; kudaisi, ojeyinka, & osinubi, 2022; kuhe, 2019; muhammad, özdeşer, & adedeji, 2024; ogbaro, sanni, adeoye, akintaro, & eseyin, 2023; osei-gyebi, opoku, lipede, & kountchou, 2023; ribadu, 2023). second, studies that found a negative and significant correlation between population growth and economic growth and remittances and economic growth in nigeria are: okorie, nwabufoh, and oriaku (2022); ogbaro et al. (2023); raphael, peter, and kenneth (2024); adeleye, ologunwa, and ogunjobi (2021); oyegoke and ebele (2023), and effiong (2022). other studies had mixed findings of either a positive and significant impact of population growth on economic growth or remittances on economic growth in the short run or in the long run and vice versa. such studies include didia and tahir (2022), who found that remittances hurt economic growth in the short run while having no impact in the long run. similarly, studies by omoniyi and owoeye (2024) shows that remittance inflow has an insignificant negative impact on economic growth in the short run; however, in the long run, remittance inflows have a significant impact on the gdp growth rate. others include oyegoke and ebele (2023) and didia and tahir (2022). 2.2. review on population growth, remittance and economic growth outside nigeria similarly, research on the impact of remittances and population expansion on economic growth has produced conflicting results, depending on the methodology and scope used. several studies, including islam (2022), bucevska (2022), kajtazi and fetai (2022), depken, nikšić radić, and paleka (2021), sghaier (2021), mohamed aslam and alibuhtto (2023), gniniguè and ali (2021), dutta and saikia (2024), imran, wu, yu, zhong, and moon (2021), and ramanayake and wijetunga (2018), discovered a positive and significant impact of remittances on economic growth. however, several studies have revealed that remittances can have a negative and considerable impact on economic growth. these studies include nyasha and odhiambo (2022); siifa, teniola, and zayyad (2023); abdulai (2023), and qutb (2022). furthermore, other research showed contradictory findings, particularly when interacting with other macro factors. for example, ur rehman and hysa (2021) discovered that remittances and financial development had a good impact on economic growth in western balkan nations (wbc), but when remittances were combined with financial development, they had a large and negative effect on economic growth. some studies had mixed results when different approaches were used. golder, rumaly, hossain, and nigar (2023) employed both linear and nonlinear ardl models and concluded that remittances had a positive and negative impact on bangladesh's economic growth, respectively. similarly, odugbesan, sunday, and olowu (2021) discovered that both financial development and economic growth in mint countries stimulate economic growth positively when panel linear ardl was used, but that both positive and negative shocks in financial development increase economic growth, while a positive and negative shock in remittance increases economic growth in the long run when panel non ardl was used. furthermore, yadeta and hunegnaw (2022) discovered that remittances have a negative short-run influence on economic growth in ethiopia, but a positive long-run effect. the study also discovered unidirectional causality between remittances and economic growth. in contrast, studies by abdulai (2023) show that remittances have a longterm association with ghana's economic growth but have a negative impact when combined with unemployment. 3. methodology 3.1. theoretical framework the theoretical framework of this study is based on the neo-classical theory regarding the impact of population dynamics and foreign remittances on economic growth. it emphasizes market forces, leading to an analysis of how households allocate remittances based on local market conditions and the availability of goods and services. furthermore, the theory suggests that remittances are used as investments in human capital, contributing to education, healthcare, and skill development, ultimately enhancing productivity and economic growth. neoclassical economics also highlights the role of savings in capital formation and long-term economic growth, prompting an examination of how remittances influence household savings behavior and contribute to capital within communities. economy, 2025, 12(2): 130-138 133 © 2025 by the authors; licensee asian online journal publishing group 3.2. model specification the section covers the many statistical tools and packages used for data analysis. first, we performed a statistical descriptive analysis of the components. second, the study used the augmented dickey-fuller (adf) test to determine stationarity for all series. after determining that there were no unit roots, the bound cointegration test was employed to evaluate the series' cointegration. the bound f-statistic was used to compare the null hypothesis of no level cointegration to the alternative of level cointegration. if the computed f-statistic exceeds the upper bound's critical f-statistic, we reject the null hypothesis and accept the alternative that the series have long-term cointegration. once the long-term link between the series has been confirmed, we can estimate the conditional ardl long-run model. our empirical model takes the following functional form. 𝐿𝑅𝐺𝐷𝑃 = 𝐹 (𝑃𝑂𝑃𝑅, 𝑁𝑀, 𝐿𝐺𝐹𝐶𝐹, 𝐿𝑅𝐸𝑀, 𝐿(𝑅𝐸𝑀 ∗ 𝑃𝑂𝑃𝑅)) (1) where; lrgdp = log of real gross domestic product (proxy for economic growth). popr = population growth rate. nm = net migration. lgfcf = log of gross fixed capital formation. lrem = log of remittances. l(rem*popr) = log of the interactive term of remittances and population growth rate. the following is a linear form of equation 1, which can be expressed as: 𝐿𝑅𝐺𝐷𝑃𝑡 = 𝜃0 + 𝜃1𝑃𝑂𝑃𝑅𝑡 + 𝜃2𝑁𝑀𝑡 + 𝜃3𝐿𝐺𝐹𝐶𝐹𝑡 + 𝜃4𝐿𝑅𝐸𝑀𝑡 + 𝜃5 𝐿(𝑅𝐸𝑀 ∗ 𝑃𝑂𝑃𝑅)𝑡 + 𝜔𝑡 (2) because it can handle various levels of integration, the ardl model is used. it also appears to be more effective than traditional cointegration models, such as the phillips-ouliaris test, the johansen test, and the engle-granger method (engle & granger, 1987). this is because it can simultaneously estimate both the short-run and long-run estimates (işık, 2013). last but not least, adding lags to the model also solves the endogeneity issue (amin, shahbaz, & mahalik, 2020; menegaki, 2019; sam, nyongesa, & ouma, 2019). it also yields trustworthy results for small sample sizes (wang, ali, khan, tiwari, & bhat, 2021). the following describes the autoregressive distributed lag model that needs to be estimated: δlrgdp = α0 +∑ 𝜙𝑖𝛥lrgdp − 𝑖 𝑝 𝑖=1 + ∑ 𝛳𝑖𝛥𝑃𝑂𝑃𝑅𝑡 − 𝑖 𝑝 𝑖=0 + ∑ ϻ𝑖𝛥𝑁𝑀𝑡 − 𝑖 𝑝 𝑖=0 + +∑ ʘ𝑖𝛥𝐿𝐺𝐹𝐶𝐹𝑡 − 𝑖 𝑝 𝑖=0 + ∑ 𝛹 𝑝 𝑖=0 𝑖𝛥𝐿𝑅𝐸𝑀𝑡 − 𝑖 +∑ 𝛺 𝑝 𝑖=0 𝑖𝛥l(rem ∗ popr)𝑡 − 𝑖 +δ1poprt-1 + δ2nmt-1 + δ3lgfcft-1 + δ4remt-1 + δ5(rem ∗ popr)t-1 + ϖt (3) where; δ = first difference operator. the parameters α1 – α5 = short-run relationship parameters. the parameters β1 – β5= long-run relationship parameters. (t – i) = lagged term on respective variables. σ ϖi = summation operator and error term of the equation. where: l(rem*popr), popr, nm, lgfcf, lrem and t remains as defined in equation 3 above. ε𝑡 = the random, error, or stochastic term. θ0 = intercept term or constant parameter. θ1, θ2, θ3, θ4, and θ5 = the regression parameters and slopes of the respective explanatory variables. 3.3. justification of variables 3.3.1. real gross domestic product (rgdp) real gdp is a measure that looks at the rate at which all goods and services are produced in a country for a given year, accounting for inflation. according to economic theory, the expansion of the workforce, market size, and consumption habits are only a few of the ways that population growth can impact economic growth. 3.3.2. population growth rate (popr) the average annual rate of change in population size during a given time period is known as population growth. one of the main factors influencing economic growth is population expansion. according to orji, ogbuabor, iwuagwu, and anthony-orji (2020), a higher population growth rate may result in stronger demand for products and services, consumption, and labour force involvement, all of which could have a beneficial impact on economic growth. 3.3.3. remittances received (rem) personal remittances refer to the amount of money sent home by individuals abroad. they may serve different purposes, either in the form of financial support to family or as an investment, in which the remitter could fall back on. remittances play a crucial role in many developing economies, contributing to poverty alleviation, consumption, and investment, thereby stimulating economic growth. 3.3.4. net migration rate (nm) the difference between the number of immigrants (those entering a country) and emigrants (those departing) per 1,000 inhabitants is known as the net migration rate. economic development, labor markets, remittance patterns, and population dynamics can all be strongly impacted by migration trends. 3.3.5. gross fixed capital formation (gfcf) this is a stand-in for investment; it is the sum of changes in stocks (inventory) and fixed asset values. future profits are the reason for investing. over time, nigeria's gfcf as a percentage of rgdp has been erratic. economy, 2025, 12(2): 130-138 134 © 2025 by the authors; licensee asian online journal publishing group 4. presentation of results and findings 4.1. descriptive statistics of the variables the data set used for this study will be described in this section using two major approaches: the tabular statistical measures, which showcase the central tendency and dispersion of the variables through mean, median, mode, variance, and standard deviation; and the graphical approach, which displays the movement of trends over time. table 1. descriptive statistics of the variables. table 1 shows the statistical description of the data based on its face value information only without any manipulation or in-depth analysis. that is to say, the table displays the measures of cluster, dispersion, and variability of the variables under consideration. from the results above, the mean value of logged remittance and population growth rate the major dependent variables for this study are 21.38985 and 2.631667, respectively. the mean indicates the average values or anticipated observations of the variables in question over the course of the study in nigeria. in terms of their individual mean values, this interpretation is comparable to that of other variables. the range is the difference between the data set's maximum and minimum values. the table does not imply that there are any outliers in the data set, according to mathematical understanding. additionally, the standard deviations show that there are some variances in the variables and that around two of the variables in the data set are favorably skewed. figure 2. descriptive graph of the variables. source: author’s computation using e-views. figure 2 illustrates multiple line graphs displaying various data trends over this study time span. the log of gross domestic product and exchange rate shows a generally upward trend, while log of gross capital formation, remittance received, and inflation rate exhibit more volatile or fluctuating patterns. net migration and population growth rate also display sharp peaks or dips at certain points in time. 4.2. pre-estimation test results pre-estimation tests are usually prerequisites for any econometric analysis because they help to avoid the occurrence of spurious regression results. regarding this, the two major pre-estimation tests listed below were employed in this study: i. stationarity/unit root test. variables lrgdp lrem lgfcf lexchr l(rem*popr) inf nm popr mean 31.3 21.4 29.8 4.30 22.4 19.8 -0.28 2.63 median 31.3 22.5 29.7 4.85 23.5 12.9 -0.29 2.62 maximum 32.0 23.9 30.1 6.05 24.8 72.8 -0.17 2.80 minimum 30.5 14.7 29.4 1.39 15.7 5.39 -0.51 2.41 std. dev. 0.51 2.82 0.17 1.35 2.83 17.4 0.09 0.10 skewness 0.05 -0.97 -0.20 -0.71 -0.97 1.74 -0.42 -0.17 kurtosis 1.39 2.80 2.41 2.26 2.88 4.71 2.50 2.16 jarque-bera 3.91 5.71 0.75 3.82 5.70 22.5 1.44 1.22 probability 0.14 0.06 0.69 0.15 0.06 0.00 0.49 0.54 sum 1125 770 107 155 805 713 -10.1 94.7 sum sq. dev. 8.97 279 1.03 64.1 280 106 0.26 0.38 observations 36 36 36 36 36 36 36 36 economy, 2025, 12(2): 130-138 135 © 2025 by the authors; licensee asian online journal publishing group ii. cointegration test. table 2. unit root result. variables adf t-stat @ levels adf 5% critical @ levels adf t-stat @ 1st difference adf 5% critical @ 1st difference order of integration decision inf -3.48 -3.54 -6.01 -3.55 i (1) stationary l(rem*popr) -2.59 -2.95 -6.68 -2.95 i (1) stationary lexchr -2.11 -3.54 -5.79 -3.56 i (1) stationary lgfcf -5.95 -3.55 i (0) stationary lrem -2.57 -2.95 -6.70 -2.95 i (1) stationary lrgdp -2.93 -3.56 -3.74 -3.55 i (1) stationary nm 0.11 -3.55 -20.0 -3.55 i (1) stationary popr -1.15 -3.55 -4.02 -3.55 i (1) stationary source: author’s estimation using e-views. table 2 shows that the variables are stationary and lack a unit root, according to the adf's unit root test results. in particular, the other variables became stationary after the first difference, but lgfcf remains stable at level. this most likely suggests both co-integration and a dynamic interplay between the variables. pesaran, shin, and smith (2001) state that an admixture of orders of co-integration or stationarity is one of the fundamental requirements for the estimation of an ardl model. therefore, the above result's observation of the order of stationarity meets the need for conducting an ardl model in this study. table 3. bounds test for co-integration result. test statistic value signif. i(0) i(1) result f-statistic 5.50 10% 2.08 3 5% 2.39 3.38 co-integrated 2.5% 2.7 3.73 1% 3.06 4.15 source: author’s estimation using e-views. table 3 shows that at 5% level of significance, the f-statistic is greater than both the upper and lower bounds; therefore, we conclude that there is a long-run relationship among the variables. 4.3. empirical analysis table 4. long-run regression result. dependent variable: lrgdp variable coefficient std. error t-statistic prob. value popr 20.9 6.43 3.26 0.02 nm -0.36 2.02 -0.18 0.86 lrem 3.84 1.51 2.55 0.05 lgfcf 2.16 0.61 3.53 0.02 l(rem*popr) -0.83 0.24 -3.51 0.02 c -3.62 15.1 -0.24 0.82 r-squared 0.10 f-statistic 696. adjusted r-squared 1.00 prob (f-statistic) 0.0000 durbin-watson stat 2.08 table 5. short run and ecm regression result. variable coefficient std. error t-statistic prob. value d(popr) 4.77 2.55 1.87 0.12 d(nm) -0.45 2.23 -0.20 0.85 d(lrem) 0.56 0.31 1.82 0.13 d(lgfcf) -0.36 0.16 -2.25 0.07 d(l(rem*popr)) -0.22 0.12 -1.84 0.13 ecm(-1) -0.55 0.08 7.36 0.00 source: author’s estimation using e-views. 5. discussion of findings this study empirically explored the moderating function of population growth rate in remittances received and its impact on nigeria's economic growth. according to the long-run results in table 4, the coefficient of the log of the interacting term for population growth rate and remittances (lrem*popr) is -0.83, which is statistically significant at the 5% level. this indicates that, all other variables being equal, a 1% increase in the interaction term leads to approximately an 83% decrease in the country's economic growth, and this result is statistically significant. this demonstrates that an increase in the population growth rate has a negative moderating effect on remittances received, which in turn negatively influences the country's economy. the findings have two major implications: first, the remittances received may not be invested in productive sectors such as health, education, and training; second, the country's high population may be overwhelming the inflow of remittances due to the unproductive nature of the majority of the population. additionally, the study found that excessive consumption and investment in unproductive sectors of transferred money are negatively associated with economic progress. this finding is consistent with prior investigations by nyasha and odhiambo (2022) and chowdhury, dhar, and gazi (2023). other variables, such as population growth rate, remittances, and gross fixed capital formation, all had a positive and considerable long-term impact on economic growth. these findings conform to previous studies like obere, thuku, and gachanja (2013); economy, 2025, 12(2): 130-138 136 © 2025 by the authors; licensee asian online journal publishing group loiboo, luvanda, and osoro (2021); bucevska (2022) islam (2022); saha (2021); ur rehman and hysa (2021); abdulai (2023) and yadeta and hunegnaw (2022). also, the net migration showed a negative and insignificant impact on economic growth both in the short run and long run. table 5 presents the short-run results of the moderating role of population growth on the remittance-growth nexus in nigeria. it shows that population growth negatively moderates the relationship between remittances and economic growth, though it is statistically insignificant. with a negative sign, the parameter of the error correction term, which co-integrates the long and short-run effects, shows conformity with economic expectations, suggesting the possibility of adjusting the lags or disequilibrium in the long run. the error correction model has a coefficient of -0.552260, and it is statistically significant. this indicates that approximately 55.2% of the disequilibrium in the model will be corrected within the short-run period in the long run. 5.1. post estimation test stability test (cusum test) for the model: -8 -6 -4 -2 0 2 4 6 8 2018 2019 2020 2021 2022 cusum 5% significance figure 3. cusum plots for stability test. figure 3 illustrates that every coefficient in the calculated model remains constant over time within the crucial 5% range. this stability test allows us to accept the model's output. 5.2. granger causality test results the granger causality test is an estimation used to determine the direction of causality between population growth rate (popr), foreign remittance (lrem), and economic growth (lrgdp) in nigeria. hypothesis: h0: no causal relationship. h1: there is causal relationship. decision rule: reject h0 if p-value ≤ 0.05 level of significance. otherwise, fail to reject the null hypothesis. table 6. granger causality test result. null hypothesis: obs. f-statistic prob. value lrgdp does not granger cause popr 32 0.84 0.51 popr does not granger cause lrgdp 5.77 0.00 lrem does not granger cause popr 2 0.26 0.90 popr does not granger cause lrem 1.42 0.26 lrem does not granger cause lrgdp 32 3.35 0.03 lrgdp does not granger cause lrem 8.74 0.00 source: author’s estimation using e-views. from table 6 there is no causal relationship between lrgdp and popr, lrem and popr, and, popr and lrem, because the probability value of their null hypothesis is higher than the 5% level of significance. whereas, there is a unidirectional causality flowing from popr to lrgdp and also a bidirectional causality running from lrem to lrgdp and from lrgdp to lrem. this conforms to the results earlier estimated. 6. conclusion and recommendation according to the study's conclusions, the population growth rate has a negative long-term impact on remittances. the causation result revealed a one-way causality from population increase to economic growth, as well as a twoway causality between remittances and economic growth. it consequently proposes that the government and individuals who receive these remittances invest them in more productive sectors such as health, education, and training so that they have a positive impact on the country's economic progress. they should likewise establish economy, 2025, 12(2): 130-138 137 © 2025 by the authors; 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https://doi.org/10.1007/s12134-021-00833-1 87 © 2020 by the authors; licensee asian online journal publishing group economy vol. 7, no. 2, 87-97, 2020 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2020.72.87.97 © 2020 by the authors; licensee asian online journal publishing group hiv/aids, infant mortality and economic growth: a systematic assessment of their causal relationship in nigeria sede, peter1 oghenerurie, precious uzezi2 abu, prince oshoke3 eniye, blessing adesuwa4 ( corresponding author) 1,2,3department of economics, faculty of social sciences, university of benin, benin city, edo, nigeria. 4access bank nigeria plc, nigeria. abstract nigeria has the second largest hiv/aids burden in the world and this has been closely associated with adverse economic effects and in turn hiv/aids has hindered economic growth in the past decades. in this study, the vector error correction model was employed to investigate the relationship among hiv/aids, infant mortality and economic growth in nigeria using time series data from 1980-2015. mixed results were recorded as on one hand, hiv/aids impacts positively on infant mortality through mother-to-child-transmission while on the other hand, economic growth was found to be positively correlated with hiv/aids. this is because, in most countries, including nigeria, relatively rich and better educated men and women have higher rates of partner change. we therefore recommends that to achieve the desirable objective of sustainable economic growth, the health sector should be given a larger budgetary allocation and support as the current government expenditure on health is not making any significant impact. keywords: hiv/aids, infant mortality, economic growth, vector error correction model (vecm). jel classification: i10, i15, f43, c22. citation | sede, peter; oghenerurie, precious uzezi; abu, prince oshoke; eniye, blessing adesuwa (2020). hiv/aids, infant mortality and economic growth: a systematic assessment of their causal relationship in nigeria. economy, 7(2): 87-97. history: received: 13 april 2020 revised: 25 may 2020 accepted: 29 june 2020 published: 20 july 2020 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group acknowledgement: all authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ...................................................................................................................................................................................... 88 2. literature review ............................................................................................................................................................................ 88 3. theoretical framework, methodology and model specification .......................................................................................... 91 4. presentation and analysis of empirical results ........................................................................................................................ 92 5. summary, recommendations and conclusion ........................................................................................................................... 96 references .............................................................................................................................................................................................. 97 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2020.72.87.97&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ https://www.asianonlinejournals.com/index.php/economy/article/view/1909 https://orcid.org/0000-0002-7715-6367 https://orcid.org/0000-0002-5305-4411 https://orcid.org/0000-0002-7799-0634 https://orcid.org/0000-0003-1861-015x https://www.asianonlinejournals.com/index.php/economy/article/view/1909 https://orcid.org/0000-0002-7715-6367 https://orcid.org/0000-0002-5305-4411 https://orcid.org/0000-0002-7799-0634 https://orcid.org/0000-0003-1861-015x https://www.asianonlinejournals.com/index.php/economy/article/view/1909 https://orcid.org/0000-0002-7715-6367 https://orcid.org/0000-0002-5305-4411 https://orcid.org/0000-0002-7799-0634 https://orcid.org/0000-0003-1861-015x https://www.asianonlinejournals.com/index.php/economy/article/view/1909 https://orcid.org/0000-0002-7715-6367 https://orcid.org/0000-0002-5305-4411 https://orcid.org/0000-0002-7799-0634 https://orcid.org/0000-0003-1861-015x https://www.asianonlinejournals.com/index.php/economy/article/view/1909 https://orcid.org/0000-0002-7715-6367 https://orcid.org/0000-0002-5305-4411 https://orcid.org/0000-0002-7799-0634 https://orcid.org/0000-0003-1861-015x https://www.asianonlinejournals.com/index.php/economy/article/view/1909 https://orcid.org/0000-0002-7715-6367 https://orcid.org/0000-0002-5305-4411 https://orcid.org/0000-0002-7799-0634 https://orcid.org/0000-0003-1861-015x economy, 2020, 7(2): 87-97 88 © 2020 by the authors; licensee asian online journal publishing group contribution of this paper to the literature the study is significant in the following respects. firstly, the research provides an empirical analysis of the impact of hiv/aids and infant mortality on the nigerian gross domestic product (gdp). since it is not based on just theoretical assessment, it provides the researcher and other concerned individuals the opportunity to evaluate the extent to which these factors and other health indicators have affected economic growth in nigeria. secondly, the study will serve as a literature for other individuals or organizations to make reference to in the nearest future. finally, the study proffers solutions and recommendations that would be useful to the government, and agencies in formulating and implementing policies that would help in reducing the spread of hiv/aids and infant mortality to the barest minimum in the country. 1. introduction the first two cases of hiv in nigeria were detected in 1985 and reported in 1986 at the international aids conference in lagos. the news of this first aids case sent panic, doubt and disbelief to the whole nation as aids was perceived as the disease of american homosexuals. the skepticism sold the impression of aids as a ploy by the americans to discourage sex in nigeria. this was exemplified in the emergence of various acronyms, one of which was ‘american idea for discouraging sex’ (awofala & ogundele, 2016; eze, 2009). up to six more were detected in 1987. this was when the nigerian government decided to establish national aids advisory committee. the response by the nigerian government to combat hiv/aids was very slow at the initial stage. the federal ministry of health made its first real attempt to assess the aids situation in nigeria in 1991; this was several years after the virus was first detected in the nation (nigerian finder, 2017). this rather absence of an efficient proactive foresight at taking on the combat against the disease allowed it to overtake any meaningful effort to be made after then. hiv/aids is endemic in most parts of the world and remains a major cause of morbidity and mortality in nigeria and africa at large. nigeria has the second largest hiv burden in the world. the impact of hiv/aids extends beyond those living with the virus. this is because as families struggle with poverty when they lose a bread winner or have the added expenses of caring for economically disabled family members who may die sooner or later, household savings tends to decrease leading ultimately to wider financial depreciation. it also exerts impact on other members of the household (usually wives or children) who may miss school or work in order to take care of the sick person (cox, 1997). there are many risk factors that contribute to the spread of hiv/aids such as commercial sex working, wandering female hawking, itinerant trading, perinatal transmission, unscreened blood transfusion and a host of other deep rooted unhealthy traditional practices. the the world bank (2016) statistics reveal that hiv prevalence is higher among the female gender than their male counterpart in nigeria. motherto-child transmission (mtct) or vertical transmission of hiv infection, is the most common medium through which the virus is contracted among this age group as these children are not yet sexually active. mothers infected with the virus can transmit the virus to their babies in utero, intrapartum or postpartum through breastfeeding. 1.1. hiv/aids and infant mortality in nigeria mothers infected with the virus can transmit the virus to their babies in utero, intrapartum or postpartum through breastfeeding. shapiro and lockman (2010) identified three factors that emerged from the hiv epidemic to worsen the ongoing childhood mortality epidemic. first, more than half of hiv infected infants will die within the first two years of life without antiretroviral treatment. this is the major reason that formed the idea of utilizing under-five mortality data. second, infant feeding options pose a difficult dilemma: longer breastfeeding may increase mother-to-child-transmission (mtct) of hiv and subsequent hiv-associated mortality, but shorter breastfeeding (or no breastfeeding) may increase mortality from common childhood illnesses. finally, hiv-exposed but uninfected infants have higher mortality rates than do infants born to hiv-infected mothers even when feeding patterns are similar. national agency for the control of aids (2015) remarked that the sites of prevention-of-mother-to-childtransmission (pmtct) has increased from 675 in 2010 to 6283 in 2014 while the number of hiv positive pregnant women who received antiretroviral prophylaxis to pregnant mother to child transmission has increased by over 87 percent from 33,891 to 2010 to 63, 350 in 2014. thus, the progress the nigerian government has made in her response to achieving an end to hiv/aids epidemic in the year 2030 was highly commended. there is a vast number of literature on hiv/aids and economic growth in existence. most of the researches related to the issue at hand are based on just two economic focus. always, they are either hiv/aids or infant mortality and economic growth. on the contrary, this is a three-nexus study that seeks to analyze the simultaneous relationship among hiv/aids, infant mortality and economic growth and how they affect one another. another point worthy of note here is the econometric technique used in the analysis. vector error correction model (vecm) is more advanced and closer to reality than most of the techniques used in previous studies. the vecm examines a bi-directional causality between variables as variables are considered to be interdependent. this is more realistic and reliable for policy recommendation. the objective of this study is to assess the relationship among hiv/aids, infant mortality and economic growth in nigeria and specifically, this study seeks to examine the impact of hiv/aids on infant mortality and economic growth in nigeria. 2. literature review 2.1. transmission mechanism among hiv/aids, infant mortality and economic growth the attempt here is to answer the germane question that the study poses. what is the chain of causality among hiv/aids, infant mortality and economic growth? a plethora of literature exists with regards to the issue at hand. from previous studies and economic theory, we can contend that both hiv/aids and infant mortality rates have serious implications on the economic growth of any nation. in recent times, child mortality is regarded as one economy, 2020, 7(2): 87-97 89 © 2020 by the authors; licensee asian online journal publishing group of the best measures of the health status of a country. in fact, it has been argued that infant/maternal mortality and education indicators such as literacy should be used to indicate a country’s developmental status (hanmer, lensink, & white, 2003). there are various schools of thought with divergent views with respect to the chain of causality between these variables. the first school of thought we consider here are those that tenaciously believe that improvement in human capital (health) leads to economic growth and not the other way around. ramirez, ranis, and stewart (2000) and grossman (1972) posited that investment in human capital can lay the basis for subsequent growth, that is, investment in education and health can lead to high rates of economic growth as countries which have focused exclusively on economic growth have in the end, achieved neither sustained growth nor human development. this is corroborated by todaro and smith (2012) as they claimed both education and health can be seen as vital components of economic growth and development. they further argued that a higher household income is no guarantee of improved health and education, and that human capital must be given direct attention in its own right even in economies that are growing rapidly. this is because improved health and education help families escape from the vicious circles of poverty in which they are trapped. this has been foreseen by the british economist, dudley seers in 1969 who pioneered the ‘dethronement of gnp’. in his postulation, he reasoned that if the central problems of poverty, inequality and unemployment grow worse in an economy, it cannot be said that such economy has experienced economic development even if per capita income has soared. the second school of thought belongs to the group that steadfastly cling to the ideology that changes in health are attributed to changes in income. ravallion (1997) admits that sustained improvements in welfare are best brought about by increasing income. upadhyay and srivastava (2015) supported this by asserting that in countries with low per head gdp, macroeconomic growth will increase the average income of individuals and improve the incomes of poor people which will in turn improve the quality of life by providing better consumption of goods, increased access to healthcare services, better housing and sanitation and reduced rates of infant mortality. there is a third school that does not fall into any of the above categories. countries in africa and particularly nigeria have exhibited unconventional patterns in their infant mortality rates as these rates continue to consistently decline despite fluctuations in real gdp. this can be attributed to other factors other than economic growth such as medical advances and improved technology. vaccinations and immunization has played a vital role in the eradication and decline of the incidence of small pox, chicken pox, measles, polio, meningitis and so on which speeds up mortality improvement. hanmer et al. (2003) in their analysis confirmed that there is a strong but imperfect link between income and infant mortality. 2.2. transmission mechanism from hiv/aids to economic growth specifically, hiv/aids has created severe economic impacts in many countries especially nigeria because it strikes people in the most productive age group. there are two channels through which hiv/aids affect economic growth; reduction in labour participation and reduction in capital accumulation. 2.2.1. channel 1: lower economic growth through reduction in capital accumulation. aids → treatment → decrease in savings → lower capital accumulation → lower economic growth from the above, the aids epidemic on a macro level will divert public spending from investments in physical and human capital to health expenditures in the form of treatment costs which leads to a decrease in savings, lower accumulation of capital and slower growth of the gdp (manuelli & yurdagul, 2016). foreign and domestic private investments may also decline if potential investors become convinced that the epidemic is seriously undermining the rate of returns to investment which encourages capital flight. 2.2.2. channel 2: slow economic growth due to reduction in labour participation aids → invalidity → reduction in labour participation → reduction in economic growth it a known fact that hiv/aids targets the young and vibrant youths at their most productive age and these young individuals constitute a large portion of the labour force. when a considerable number of individuals in this age group are infected with the virus, they become invalids as they can no longer work efficiently. this tends to slow down or reverse growth in the labour supply, productivity and economic growth (iya, purokayo, & gabdo, 2012; kithinji, 2015). however, it has been argued that economic impact can vary with regards to the sector involved. that is, the effect depends on whether or not the virus affects hard-to-replace skilled labour and also whether or not there is a substantial pool of surplus labour to replace those lost (levinsoln, shisana, mclaren, & zuma, 2013). based on the above, regardless of the channel or means of transmission, it could be concluded that hiv/aids has a detrimental effect on any economy irrespective of whether or not there is a substantial pool of labour to replace those losses. if replacement is possible, there is the cost of training new workers to replace skilled and experienced individuals and if replacement is not possible, it becomes worse. 2.3. transmission mechanism from economic growth to hiv/aids the world bank (1997) opines that widespread poverty and unequal distribution of income that typify underdevelopment appear to stimulate the spread of hiv. the channel through which slow economic growth feeds hiv/aids is poverty. international labour office (ilo) (2005) reports that there are strong bi-directional linkages between hiv/aids and poverty in resource poor settings. in fact, hiv/aids is both a manifestation of poverty conditions that exist, taking hold where livelihoods are unsustainable. 2.3.1. hiv/aids ↔ poverty poverty can make one engage in risky sexual/social behaviour as well as limit access to healthcare, hiv testing and medications. consider the vicious circle below that links the variables of interest. economy, 2020, 7(2): 87-97 90 © 2020 by the authors; licensee asian online journal publishing group figure-1. vicious circle connecting low economic growth, poverty and poor health. figure 1 demonstrates the connection between low economic growth, poverty, poor health and low human capital. low economic growth creates poverty which generates risky health habit, which in turn slows human capital formation which results in low economic growth. this circle continues until there is a strategic policy shift to advance a different economic growth and development trajectory. 2.4. transmission mechanism from hiv/aids to infant mortality most children acquire the virus through transmission from hiv-infected mothers, therefore. the incidence of paediatric hiv reflects that of hiv infection in women of childbearing age. mtct of hiv which can occur during pregnancy, delivery or breastfeeding is responsible for more than 90% of hiv infection in children worldwide (unaids/who, 1998). 2.4.1. hiv/aids →mtct →infant mortality given the dilemma of infant feeding options, there is very little information on the safety of infant-feeding alternatives for sero-positive mothers. these alternatives include commercial infant formula, home-made infant formula, heat-treated expressed breast milk and wet-nursing. worthy of attention are identification of approaches to treating expressed breast milk to eliminate the risk of transmission while preserving the milk’s nutritional content (who, 2005) and inculcation of unseen values of human and emotional instinct development in the infant. from the above, we can comfortably reason that there is a uni-directional chain of causality between hiv/aids and infant mortality. 2.5. empirical literature waziri, nor, abdullah, and adamu (2016) assessed the effect of the prevalence of hiv/aids and life expectancy on the economic growth of 33 ssa countries over the period of 11 years (20022012). the study employed a dynamic panel approach as opposed to the static traditional approach utilized in literature. they used the differenced gmm, as proposed by arellano and bond (1991). the result revealed that hiv/aids is statistically significant and negatively related to growth which is consistent to economic theory and apriori expectation. mcdonald and roberts (2006) employed an augmented solow model, a human capital approach to estimate the elasticity of aids in relation to economic growth. the study utilized the econometric approach of ols and instrumental variables estimation using time series data for 112 countries over the period 1960 to 1998. the result revealed that the macroeconomic effects of the hiv/aids epidemic have been substantial especially on the per capita income of africans while the human and social costs ofthe epidemic are a major cause for concern. delacruz (2007) using the ols and 2sls carried out an estimation on the impact of hiv/aids on economic growth from 1990-2004 across 86 industrial and developing countries. he created 3 simultaneous equations where explanatory variables are entered both independently and linearly. contrary to expectations, the result obtained were mixed as some countries such as botswana, lesotho, uganda, and rwanda exhibit high growth rates parallel to high hiv prevalence while on the other hand, we also discover low hiv prevalence related to low income countries such as brazil, mexico, philippines, germany, sweden and finland. maijama’a and mohammed (2013) examined the impact of hiv/aids on economic growth and development in nigeria using the cointegration and error correction technique and discovered that hiv/aids has a negative impact on real gdp in nigeria. they used primary data, a total of 360 respondents comprising 180 persons infected with hiv/aids and 180 uninfected persons were selected using stratified sampling technique. bloom and mahal (1997) conducted a cross country analysis that examines the statistical link between hiv prevalence rate and the growth rate of per capita gdp across 51 developing and industrial countries from 19801992. they used the 2sls to estimate their parameters and discovered that hiv prevalence is higher in countries with slower gdp growth. they however concluded that the aids epidemic may have serious implications for economic development. masha (2004) examined the macroeconomic impact of prevention and increased access to healthcare in botswana from 2005-2015 and realized that for a country in which natural resource extraction constitute a large share of gdp, it is very important to account for the sector separately because they are very likely to be prone to exogenous shocks such as international changes in the price of natural resource. crampin et al. (2003) in mahy (2003) used data from a longitudinal study site in malawi to measure child mortality to hiv positive women versus hiv negative women. they found significantly different under-five mortality levels for hiv-positive mothers (46 percent) versus hiv-negative mothers (16 percent). whether this increased mortality is due to vertical transmission or the negative impacts of an ill-parent are not established. however, this is a clear evidence for a correlation between mother and child mortality in high hiv-prevalence settings. a vast number of the literatures reviewed above have drawn our attention to some obvious flaws which create a gap that this study aims to fill as an improvement. majority of the researchers based their study on just one variable (hiv/aids) linked to economic growth. however, it has been proven that hiv/aids has great implications on other health variables (such as infant mortality, under-5 mortality, maternal mortality and others) economy, 2020, 7(2): 87-97 91 © 2020 by the authors; licensee asian online journal publishing group and these variables in turn affects economic growth. this is the reason why this study links three variables and examines the relationship among them. furthermore, some of these studies were carried out far back in time and since then, a lot of plans and policies have been adopted and the effects of these changes on the economy were not considered. in the same vein, flaws can be found in the method of estimation. although the ols technique possesses the desirable blue (best, linear and unbiased estimates) properties, and cointegration examines the existence of a long run relationship between variables, these techniques assume the presence of a uni-directional chain of causality between variables. as an improvement on this, this study adopted the vector error correction model (vecm) which is closer to reality as variables are considered to be interdependent. finally, this research is country specific as our study is confined to the nigerian economy. this is justified because as of today, she has the second highest number of persons living with hiv/aids in the world. after conducting series of empirical analyses using real life data, the study intends to prescribe recommendations that if taken, will not only halt the spread of the virus, reduce infant mortality but also would yield the most coveted phenomenon of sustainable economic growth and development in nigeria. 3. theoretical framework, methodology and model specification 3.1. theoretical framework this chapter presents the theoretical framework and empirical model used to achieve this study’s objectives. the study adopts an econometric model to find out the relationship among hiv/aids, infant mortality and economic growth in nigeria. the theoretical foundation hinges on the grossman model. the grossman model by grossman (1972) was the first to construct a theoretical model of the demand for health capital. he proposed a model of health production inspired by the human capital model of becker (1967). grossman described the demand for health and health care via the theory of human capital. healthy workers are more physically and mentally fit and they take less time off work due to illness and are more productive. health is therefore viewed as a durable capital stock that generates production benefits. the model is concerned with how individuals allocate their resources to produce health. this model goes beyond traditional demand analysis as it utilizes the idea that the individual is a producer of health. 3.1.1. the grossman model consider an individual with a planning horizon of two time periods. during each period he or she experiences a nonnegative amount of sick time ts, which is lower than the larger health stock h. in other words, healthy time constitutes the non-tradable return of the unobserved stock of health. the individual derives positive utility from consumption goods x while deriving disutility from sick time ts(h). the marginal rate of substitution between sick time and consumption does not change with aging. future utility is discounted by a subjective factor β≤ 1. thus, the individual maximizes discounted utility denoted by u in equation 1. u= u (t2(h0),x0) + βu(ts(h1),x1) (1) ,0 st u   ,0 )( 2 2  st u   ,0   x u ,0 2 2    x u 0   h t s the crucial component of the grossman model is the equation that defines the change in the health stock over time. on the one hand, health capital depreciates at a rate δ, causing health to worsen over time and δ is not constant. on the other hand, the individual can increase health capital by investing i. this may either be in the form of purchase of medical services m or spending ti units of time on preventive effort (such as balanced diet, exercise, abstinence from cigarettes and other harmful substances). in all, one has h1 = h0(1−δ) + i(m0, ti) (2) ,0   it i 0 )( 2 2  it i   it is pertinent to note here that equation 2 constitutes a constraint that we can use to solve the maximization problem using the lagrange multiplier. 3.2. methodology and model specification in view the objective of this study, the empirical methodology employs several econometric procedures within a multiple linear regression framework. in order to avoid spurious regression results, the econometric procedure of this study entails pre-estimation diagnostic analysis, long-run and short-run analysis. first, the pre-estimation diagnostic analysis involvesthe augmented dickey-fuller (adf) tests of unit roots or non-stationarity. englegranger two stage and the philip-ouliariscointegration tests is used to examine the long run relationship amongst the variables of interest. the error correction mechanism model is used to capture effects of the specified regressors in the model on economic growth and also to determine the amount of deviations from its long-run equilibrium. the empirical growth regression model is estimated using time series data set spanning a 36-year period (1980-2015). data on economic growth and health indicators are sourced from the central bank of nigeria (2014) world bank development indicators and the national bureau of statistics. the study aims to investigate the interacting and transmission causalities between hiv/aids, infant mortality and economic growth and their resultant equilibrium convergence in the long run. within the framework, the short run divergences and speed of adjustments amongst the incorporated variables will be analysed. the econometric technique vector autoregression(var) was pioneered by sims (1980) and its provides a flexible and traceable estimation technique for analysing time series. the technique is superior since it does not dichotomize economic variables into endogenous and exogenous, rather treating all variables in the simultaneous systems equations as endogenously determined within the estimated model arodoye (2012). however, where the variables are found to be cointegrated, the var becomes unsuitable and this justifies the use of the vector error correction model (vecm). economy, 2020, 7(2): 87-97 92 © 2020 by the authors; licensee asian online journal publishing group based on grossman (1972) investment model, the price of health depends on many other variables besides the price of medical care. it is from this assumption we deduce our empirical model. lhivpr = f (lrgdp, lu5m, lghexp, llitr, lpci) (3) equation 3 indicates that lhivpr is a function of lrgdp, lu5m, lghexp, llitr, and lpci the vector error correction model (vecm) form of equation 3 is specified as: δ𝑙𝑛𝑍𝑡 = 𝛽0+  n i 1 1 δ𝑙𝑛𝑍𝑡−1+𝜙𝐸𝐶𝑀𝑡+𝜇𝑖𝑡 (4) equation 4 is the specification of the over-parameterized system vecm which shows that the vector of variables is dependent on the vector of lagged variables. where: zt = f (lhivpr, lrgdp, lu5m, lghexp). zt-1 = f (lhivprt-1, lrgdpt-1, lu5mt-1, lghexpt-1). zt = vector of variables. zt-1 = vector of lagged variables. ecmt = error correction term. μit = stochastic error term. β0 = vector of intercept terms. hence, the explicit specification of the over-parameterized system vecm can be written as;                                                                                                     4 3 2 1 4 3 2 1 1 1 1 1 1 4441 1411 4 3 2 1 55           ecm lghexp mlu lrgdp lhivpr a a a a lghexp mlu lrgdp lhivpr k i t t t t t t t t where: table-1. regression variables description lhivpr= natural log of hiv prevalence rate φ = error correction coefficient lrgdp= natural log of real gdp as a proxy for β = coefficients of the vector matrix variables economic growth lu5m= natural log of under-5 mortality μ = stochastic error term lghexp= naturallog of government health expenditure δ = first order difference operator table 1 above describes the regression variables used in our vector error correction model specified in equation 4. 4. presentation and analysis of empirical results this section presents and analyses the empirical results of the data sourced for this study. among such results are; unit root tests, cointegration, granger causality tests, vector error correction mechanism (vecm), variance decomposition and others. the variables were estimated using data in their natural log form so that their coefficients represent elasticities. 4.1. unit root test result econometric studies have shown that most macroeconomic time series variables are non-stationary and nonstationary variables leads to spurious results that would make estimates biased and inconsistent (engle & granger, 1987). to avoid producing spurious results that would make parameter estimates inconsistent and biased, all the variables utilized for this study were tested to ascertain the stationarity status. the augmented dickey fuller (adf) approach was used to conduct this test. the result is shown below: table-2.unit root test results. unit root test at levels i(0) unit root test at first difference i(1) variable adf test statistic adf critical value at 5% remark adf test statistic adf critical value at 5% remark lhivpr -5.637036 -4.374307 stationary -7.705222 -3.622033 stationary lghexp -2.052466 -3.544284 non-stationary -4.561836 -3.55759 stationary lu5m -5.994276 -3.580623 stationary -5.994276 -3.580623 stationary lrgdp -2.321868 -3.544284 non-stationary -6.299132 -3.548490 stationary the results that appear in table 2 above show that apart from lhivpr and lu5m, all others variables were not stationary at levels, but after first difference, all variables were found to be stationary at the 5% level of significance. 4.2. cointegration test after stationarity has been established, the study further tested for cointegration. this test is conducted to determine if there is a convergence between the long run equilibrium and the short run dynamics of the time series data. this therefore estimates a long run relationship between economic variables. this is very important for the purpose of policy making. since the study involves a system of equations, it therefore follows the johansen and juselius (1990) approach. thus, the maximum eigenvalue and trace tests were utilized in determining the number of cointegrating vectors. the cointegration test results are presented below: economy, 2020, 7(2): 87-97 93 © 2020 by the authors; licensee asian online journal publishing group table-3. cointegration test results. trace test maxeigen test hypothesized no. ofce (s) eigenvalue trace statistic 0.05 critical value max-eigen statistic 0.05critical value none ** 0.958629 180.1317 95.75366 76.44448 40.07757 at most 1 ** 0.873551 103.6873 69.81889 49.63003 33.87687 at most 2 * 0.645675 54.05723 47.85613 24.90100 27.58434 at most 3 0.482702 29.15624 29.79707 15.81928 21.13162 at most 4 0.349585 13.33696 15.49471 10.32348 14.26460 at most 5 0.117999 3.013477 3.841466 3.013477 3.841466 note: trace test indicates 3 cointegrating eqn(s) at the 0.05 level. max-eigenvalue test indicates 2 cointegrating eqn(s) at the 0.05 level. ** denotes rejection of the hypothesis at the 0.05 level. from table 3 above, the test statistic of trace and maximum-eigen values reveals the existence of 3 and 2 cointegrating equations at the 5% level respectively. therefore, the study rejects the null hypothesis of no cointegration among the variables at the 5% level. this endorses the existence of a long run relationship among the variables of interest. 4.3. optimum lag length selection to estimate vector error correction model, the first step is to establish the optimum lag length. this was determined using the akaike information criterion(aic) among others as shown on table 4. the decision was based on the result from aic which implies that the optimal lag length of this study is 2. the result is presented below: table-4. optimal lag length. lag logl lr fpe aic sic hq 0 -7.262725 na 3.00e-05 0.938560 1.134903 0.990650 1 175.4476 289.2914 2.85e-11 -12.95397 -11.97226 -12.69352 2 221.6815 57.79230* 2.61e-12* -15.47346* -13.70638* -15.00465* note: * indicates lag order selected by the criterion 4.4. error correction estimates the ecm corrects for disequilibrium, it indicates the speed of convergence back to equilibrium in the event of any temporary disturbance in the economy. economic theory requires that the coefficients should be negatively signed, statistically significant and their absolute values should be between 0 and unity. table-5. error correction estimates. error correction d(lhivpr) d(lrgdp d(lu5m) d(lghexp) ecm -0.068459 -0.692457 -0.602283 -0.533262 [-1.92049] [-2.71209] [-2.61462] [-4.63319] table-6. vector error correction estimates. explanatory variables d(lhivpr) d(lrgdp) d(lu5m) d(lghexp) d(lhivpr(-1)) -0.208212 -1.974125 0.025950 -34.49622 [-0.72129] [-0.49719] [ 1.35766] [-2.71425]** d(lhivpr(-2)) 0.104565 6.995306 -0.005865 -24.94461 [ 0.33791] [ 1.64344]* [-0.28622] [-1.83087]* d(lrgdp(-1)) 0.036575 0.647023 0.000103 2.723364 [ 1.41458] [ 1.81930]* [ 0.06011] [ 2.39234]** d(lrgdp(-2)) 0.001997 0.384652 -0.001386 2.745666 [ 0.07009] [ 0.98172] [-0.73510] [ 2.18927]** d(lu5m(-1)) 1.632488 -243.1318 1.241893 -216.0696 [ 0.24988] [-2.70559]** [ 2.87092]** [-0.75118] d(lu5m(-2)) 1.724000 150.0219 -0.486131 452.5738 [ 0.30779] [ 1.94721]* [-1.31077] [ 1.83518]* d(lghexp(-1)) 0.009971 0.168062 0.000215 -0.33472 [ 1.85765]* [ 2.27632]** [ 0.60513] [-1.41638] d(lghexp(-2)) 0.002338 0.104088 0.000128 0.046509 [ 0.41054] [ 1.32891] [ 0.34013] [ 0.18551] ecm -0.068459 -2.092457 -0.002283 -4.033262 [-1.22049] [-2.71209]** [-0.61462] [-1.63319]* summary statistics r-squared 0.964970 0.647196 0.995734 0.606185 adj. r-squared 0.940719 0.402947 0.992781 0.333545 s.e. equation 0.014640 0.201366 0.000969 0.644546 f-statistic 39.79063 2.649738 337.1731 2.223385 akaike aic -5.311164 -0.068365 -10.74092 2.258479 schwarz sc -4.817471 0.425328 -10.24723 2.752172 mean dependent 0.021285 0.121669 -0.028942 0.193311 s.d. dependent 0.060127 0.260603 0.011409 0.789529 note: standard errors in ( ) & t-statistics in [ ]. t-values significant * and ** significant at 10% and 5% levels respectively. economy, 2020, 7(2): 87-97 94 © 2020 by the authors; licensee asian online journal publishing group table 5 shows that the four cointegrating equations are adjusting. all the coefficients meet the economic requirements. aside lhivpr whose speed of adjustment is only 6.8%, other variables have relatively high speed of adjustment at 69.2%, 60.2% and 53.3% which again confirms the stability of the economy. the t-values of all the variables were found to be significant at the 5% level. table 6 presents the vecm estimates of our regression model with four distinct equations. however, to make an incisive study, we will focus our analysis exclusively on equations 1, 2 and 3 as these equations will enable us achieve the objectives of this study. 4.4.1. equation one analysis in this equation, hiv prevalence is the dependent variable while all other variables are the explanatory variables. the coefficient of the intercept although not statistically significant implies that there would still be hiv prevalence rate of about 10.6% in the economy even if the coefficient of all the explanatory variables are assumed to be zero. in the first lag, the coefficient of lhivpr, -0.208 implies that 1% increase in lhivpr in the immediate past year will result in 20.8% decline in the current lhivpr. this can be attributed to the effectiveness of the antiretroviral therapy (art) as treatment in the past year reduces the spread of the virus in the current year. in the second lag, a slight change is recorded as lhivpr has an inverse impact on current lhivpr. a percentage increase in two lagged periods of lhivpr will result in a 10.5% increase in current lhivpr. this is a proof of the devastating and selffeeding effect of the virus. however, the variable is not statistically significant even at the moderate rate of 10% level. economic growth has a positive relationship with lhivpr in both lags as a percentage increase in lrgdp either period will lead to a 3.65% or 0.19% increase current lhivpr respectively. in other words, as income rises, hiv prevalence rate also rises. this confirms (gillespie, kadiyala, & greener, 2008) whose study asserts that hiv is more prevalent among richer and more educated individuals because they have higher rate of partner change and also serial autonomy and spatial mobility. under-5 mortality was found to be strongly and positively related with lhivpr in both lags. a one percent increase in either lag will yield a 63.2% or 72.49% respectively in the hivprevalence rate of the present period. this is suggestive of the prevalence rate of the virus among parents as the infants are not yet sexually active. although this conforms to economic theory, the variables are not significant at 5%. government health expenditure was found surprisingly to be positively correlated with hiv prevalence rate in both lags. a one percent increase in either lag will result in a 0.99% or 0.23% rise in lhivpr respectively. though this is opposing to both apriori expectations and theoretical expectations, this can be attributed to corruption and inefficiency in the sector. the allocation given to the health sector is usually not sufficient and the little they have is being diverted to private pockets. the variable was only found to be statistically significant in the first lag at the 10% level. the r2 of 96% and its adjusted counterpart of 94% implies that about 94% of the systematic variations in the current hiv prevalence rate are accounted for by its past values and that of lrgdp, lu5m and lghexp. the f-statistic of 39% confirms the overall significance of the model and it is significant at the 1% level. 4.4.2. equation two analysis this equation regards economic growth (lrgdp) as the dependent variable and the impact of all other variables on the dependent variable are analysed. the intercept is statistically significant and it implies that if all other variables are assumed to be zero, there would be not be economic growth. lhivpr recorded mixed results as it conformed to economic theory only in the first lag. a percentage increase in last year’s hiv prevalence rate yields a decrease of about 197.4% in this year’s economic growth. this can either be through reduction in labour participation or reduction in capital accumulation which results in a decline in economic growth. though the coefficient was correctly signed, it was not statistically significant. however, in the second lag, the coefficient was not correctly signed but was significant at the 10% level. economic growth was found to be positively correlated with itself in both lags. this conforms to apriori expectations as a percentage increase of economic growth in either lag will result in a rise of 64.7% or 38.4% respectively in the current real gdp. this shows that the economy is self-driven. the coefficients are correctly signed but only the t-value of the first lag passed the test of significance at the 10% level. the lu5m variable was correctly signed in lag 1 with a coefficient of (-243.13) and significant even at the stringent level of 1%. under-5 mortality was found to have a very strong but negative impact on economic growth which conforms to economic theory and apriori expectations. however, in lag 2, the coefficient of 150.02 implies the presence of a very strong but positive relationship of lu5m with economic growth. the coefficient was significant at the 5% level. lghexp was correctly signed in both lags and found to have a positive impact on economic growth. a percentage rise of lghexp in either lags will yield a 16.8% or 10.4% increase in current economic growth. this affirms the assertions of the school of thought that tenaciously believe that investment in human capital leads to economic growth. the r2 implies that about 64% of the systematic variations in economic growth are accounted for by the independent variables. after adjusting for degrees of freedom, the coefficient was reduced to 40%. the fstatistic value is found to be significant at the moderate rate of 10%. 4.4.3. equation three analysis in this equation, under-5 mortality is the dependent variable and the impact of all other variables on it are analysed. the coefficient of the intercept implies that there would still be under-5 mortality rate of about 0.22% even if all the explanatory variables are zero. conforming to economic theory, lhivpr in lag1 has a positive correlation with lu5m as a one percent increase in lhivpr in the immediate past year leads to a 2.6% increase in lu5m presently. this is corroborated by the fact that children die from either the hiv virus itself before the age of 2, or because of lack of maternal care if their mothers are either dead or incapacitated as a result of the virus. in the second lag however, we record a negative relationship as increase in hivpr of two period lag will result in a economy, 2020, 7(2): 87-97 95 © 2020 by the authors; licensee asian online journal publishing group 0.58% decline in the current u5m rate. this is an affirmation of the effectiveness of the art and other preventive mechanisms in curbing the mtct of the virus. the small magnitude of the coefficient points out that there is still room for improvement. the t-values were not statistically significant at the 5% level. the coefficient of lrgdp in the first lag indicates that a one percent increase in lrgdp will result in only about 0.01% increase in lu5m. although the coefficient is not correctly signed, its magnitude is very small and it is not statistically significant at the 5% level. but in the second lag, a percentage increase in economic growth leads to a 0.14% decline in lu5m. this implies that the plans and policies adopted to halt u5m are effective but at a very slow pace. the coefficient was not also significant at the 5% level. lu5m is positively correlated with itself in the first lag with a coefficient of 1.2418. this is a clear pointer to the fact that lu5m is self-driven and self-feeding. this implies that a percentage increase in last year’s u5m will yield approximately a 124.1% increase in current u5m. however, in the second lag, the coefficient of -0.486 implies that a one percent increase in two period lagged value of lu5m will yield a 48.6% decline in current lu5m. a reasonable explanation for this is that as with all other health variables, the dividend of investment in lu5m is not reaped immediately. the r2 and its adjusted counterpart indicate that about 99.2% of the variations in lu5m can be attributed to changes in the explanatory variables. the fstatistic of 337.17 confirms the overall significance of the model. 4.5. impulse response functions (irfs) estimates the impulse response functions describes the response of one variable to a one-unit impulse in the specified value of the variable with all other variables at time t (hamilton, 1994). the irfs analyzes the path followed by the variables to return to equilibrium identifying each innovation in a particular variable in the matrix vector, the effect of a one-unit shock on the entire vector system. the irf graph shows the movement in the individual variables taking into account the identified shocks in the variable of interest per time. figure-2. response to cholesky, one s.d. innovations. figure 2 presents the impulse response function for lhivpr, lrgdp, lghexp and lu5m against each of their own shocks and against the shocks of other variables in the regression model. the graph shows the impulse response function for lhivpr against its own shocks and innovations in economic growth, government health expenditure and under-5 mortality over a ten-year period. the result reveals that hiv prevalence rate shocks on itself have a positive correlation from the beginning of the time horizon till the end of the period. the response of lhivpr to economic growth showed that the relationship was consistently negative from the first period to the tenth. when the impulse is lghexp, the response of lhivpr was zero for the first two periods and became consistently negative until the tenth period. contrariwise, the response to lu5m was consistently positive after the third period. the response of lrgdp to lhivpr was positive in the first period but became negative in the second period and finally assumed positive but fluctuating values till the tent period. its response to itself and lghexp was positive but not steady or the entire period while its response to lu5m was negative for the entire period. the response of lghexp to lhivpr was negative but fluctuating for the ten periods while its response to itself was positive for the entire period. the response of lghexp to lrgdp and lu5m fluctuated between positive and negative values with more inconsistencies recorded in lu5m. the response of lu5m to both itself lhivpr recorded a steady rise of positive values from the first period to the tenth economy, 2020, 7(2): 87-97 96 © 2020 by the authors; licensee asian online journal publishing group period. on the other hand, its response to lrgdp and lghexp was a steady decline of negative values from the first period across the entire time horizon. 4.6. policy implications from the series of empirical examinations carried out in the study, the following implications are presented as it relates to the nigerian economy:  to achieve economic growth, government must increase the budget allocation of the health sector. the analysis has proven that there are strong linkages between health and economic growth as healthier people are more productive, live longer and make important contributions to economic progress.  hiv/aids has positive correlation with economic growth which implies that we cannot assume that hiv/aids is the disease of the poor. therefore, in planning and designing programs for the prevention, care and treatment of those infected with the virus, necessary adjustments should be made.  although the art has been effective, mtct is still a threat to infants. policy makers should make it compulsory for all pregnant women to test for hiv so that those positive will start the art at the early stage of pregnancy to prevent mtct. this will not only save the lives of the infants but also the lives of the mothers. 5. summary, recommendations and conclusion 5.1. summary of findings the study empirically examined the relationship and interaction among hiv/aids, infant mortality and economic growth in nigeria utilizing the vector error correction model. time series data from 1980 to 2015 was employed to achieve this purpose. given the influences other economic variables have on hiv/aids, infant mortality and economic growth, we incorporated four variables in our analysis. the unit root test conducted using the augmented dickey fuller (adf) approach reveal that some variables were stationary at levels while others were not. however, all the variables became stationary at first difference. the johansen cointegration result confirmed the existence of a stable long run relationship among the four variables. the vecm results showed the significance of each variable in relation to other variables. significant relationships that correlated with economic theory were reported. the error correction mechanism (ecm) that showed the speed of convergence to equilibrium was correctly signed and statistically significant for all variables of interest. the results for the forecast error of variance decomposition revealed that the innovations in the variables are substantially sourced from their own shocks and also contemporaneous shocks in other cointegrating equations. essentially, it showed the proportion of forecast error variance for each variable that is attributable to own innovation and to innovations in other endogenous variables. the impulse response functions (irfs) analysis reported the accumulated responses of the variables to their own shock as well as shocks from other variables. also, the arithmetic root mean stability test established the stability status of all the variables used in the analysis. 5.2. policy recommendations in view of the empirical evidence of the empirical assessment of hiv/aids, infant mortality and economic growth, the following recommendations are proffered:  government at all levels, ngos, fbos and other international financial institutions should intensify their efforts to reduce the number of newly infected persons to the barest minimum. this includes but not restricted to education, awareness creation and campaigns in both rural and urban centres to end the silence, indifference and stigma attached to hiv/aids in nigeria.  the antiretroviral therapy and drugs should be made readily available for both adults and adolescents that are hiv-positive to reduce the risk of mother-to-child transmission. the who in 2009 recommended that arvs be provided to hiv-positive mothers early in pregnancy, starting at 14 weeks and continuing through the end of the breastfeeding period. they also encouraged longer periods of breastfeeding (12 months) to reduce the risk of hiv transmission and improve the infant’s chance of survival.  voluntary testing should be encouraged so that every individual is aware of his/her hiv status. this is because so many individuals wait until the symptoms of the virus become visible before they reluctantly go for hiv tests. this reduces their chances of survival as their immunity level is already dangerously low.  there should be a revision of previous plans and policies aimed at reducing under-5 mortality so that the gains from economic growth can translate into improved welfare for infants. economic growth was found to have a strong negative relationship with under-5 mortality this implies that increase in economic growth results in a decrease in child mortality.  to achieve the desirable objective of sustainable economic growth, the health sector should be given a larger budgetary allocation and support as the current government expenditure on health is not making any significant impact. the strong bi-directional linkages between health and economic growth ensure that improvement in health leads to increase in economic growth and vice versa. 5.3. conclusion from all the empirical analysis and examinations carried out using various econometric approaches to assess the interrelationship amongst hiv/aids, infant mortality and economic growth in nigeria, there is no doubt that hiv/aids is a reality in nigeria and its magnitude poses a real threat to economic growth. with the evidence at hand, we can conveniently say that there is an urgent need for intervention to curb and reverse the spread of hiv. unless this is done, we would not only record zero but constant negative figures of 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(2015). association between economic growth and infant mortality: evidence from 13 demographic and health surveys from 36 developing countries. mumbai, india: international institute for population sciences. waziri, s. i., nor, n. m., abdullah, n. m. r., & adamu, p. (2016). effect of the prevalence of hiv/aids and the life expectancy rate on economic growth in ssa countries: difference gmm approach. global journal of health science, 8(4), 212-218.available at: https://doi.org/10.5539/gjhs.v8n4p212. who. (2005). infant feeding and hiv transmission. consultation on nutrition and hiv/aids in africa: evidence, lessons, and recommendations for action. geneva, switzerland: world health organization. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. http://www.cbn.gov.ng/out/2015/sd/2014%20statistical%20bulletin%20contents%20and%20narratives.pdf http://www.ifpri.org/publication/poverty-or-wealth-driving-hiv-transmission http://www.ifpri.org/publication/poverty-or-wealth-driving-hiv-transmission http://www.ilo.org/aids/publications/wcms_120468/lang--en/index.htm http://www.ilo.org/wcmsp5/groups/public/---ed_protect/---protrav/---ilo_aids/documents/legaldocument/wcms_532857.pdf http://www.ilo.org/wcmsp5/groups/public/---ed_protect/---protrav/---ilo_aids/documents/legaldocument/wcms_532857.pdf http://datatopics.worldbank.org/world-development-indicators/ 34 © 2019 by the authors; licensee asian online journal publishing group economy vol. 6, no. 1, 34-40, 2019 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/journal.502.2019.61.34.40 © 2019 by the authors; licensee asian online journal publishing group china’s outward foreign direct investment in africa: how are ghana benefiting and its issues on the economy? yeboah evans1 agyeiwaah vivian antwi2 ( corresponding author) 1,2nanjing university of science and technology, china. abstract as more nations continue to embrace foreign direct investment (fdi) inflow to enhance economic development, china has increased its outward foreign direct investment on the african continent of which most countries have benefited from it with ghana not an exemption. to investigate whether china is contributing significantly to the number of projects by foreign investors over the years, the total number of fdi registered projects by the top investing countries within the ghanaian economy were considered. this paper makes use of quantitative analysis through a descriptive statistical approach based on the data generated from the ghana investment promotion centre (gipc) between 2013 and 2018. it was revealed that, china’s contribution to the total number of fdi registered projects is very significant, but the estimated cost of these chinese projects is lower. however, chinese investment is mostly found in the manufacturing sector of the ghana’s economy. it is suggested that, as the government prepares to roll out on the one-direct-one factory initiative, sound investment policies should be established to protect these infant industries and promote outward fdi. keywords: fdi, economy, projects, ghana, cost, china. citation | yeboah evans; agyeiwaah vivian antwi (2019). china’s outward foreign direct investment in africa: how are ghana benefiting and its issues on the economy? economy, 6(1): 34-40. history: received: 2 may 2019 revised: 7 june 2019 accepted: 18 july 2019 published: 16 september 2019 licensed: this work is licensed under a creative commons attribution 3.0 license publisher: asian online journal publishing group acknowledgement: both authors contributed to the conception and design of the study. funding: this study received no specific financial support. competing interests: the authors declare that they have no conflict of interests. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study was reported; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. ethical: this study follows all ethical practices during writing. contents 1. introduction ...................................................................................................................................................................................... 35 2. technical assistance ....................................................................................................................................................................... 35 3. development assistance ................................................................................................................................................................. 35 4. investment motive ........................................................................................................................................................................... 35 5. contradictions beyond investment motives .............................................................................................................................. 36 6. challenges pose with china’s presence in ghana ..................................................................................................................... 37 7. literature review ............................................................................................................................................................................ 37 8. data and methodology ................................................................................................................................................................... 38 9. registered chinese projects in ghana ........................................................................................................................................ 38 10. discussions ...................................................................................................................................................................................... 39 11. conclusion ....................................................................................................................................................................................... 39 references .............................................................................................................................................................................................. 39 http://crossmark.crossref.org/dialog/?doi=10.20448/journal.502.2019.61.34.40&domain=pdf&date_stamp=2017-01-14 http://creativecommons.org/licenses/by/3.0/ http://creativecommons.org/licenses/by/3.0/ http://asianonlinejournals.com/index.php/economy/article/view/1001 https://orcid.org/0000-0002-0934-3996 http://asianonlinejournals.com/index.php/economy/article/view/1001 https://orcid.org/0000-0002-0934-3996 http://asianonlinejournals.com/index.php/economy/article/view/1001 https://orcid.org/0000-0002-0934-3996 economy, 2019, 6(1): 34-40 35 © 2019 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study contributes to existing literature by investigating whether china is contributing significantly to the number of projects by foreign investors over the years; the total numbers of fdi registered projects by the top investing countries within the ghanaian economy were considered. 1. introduction china’s outward foreign direct investment on the african continent has grown massively over the past years. in 2003, china’s total ofdi to africa stood at us$74.8 million (claassen et al., 2012). as foreign direct investment outshines foreign aid, china still provides most nations with aids which comes in the forms of providing most rural areas and villages access to potable water in africa. china’s foreign aid to ghana cuts across infrastructural development, education and agriculture, cooperation in infrastructural development appears to have been more welcomed by ghana due to ghana’s estimated $2.5 billion infrastructure deficit in financing (davies et al., 2008). the official discretionary ties between ghana and china has been portrayed by regular level of visits, cultural/educational exchanges, economic cooperation and development aids provisions. the majority of african countries provided significant support for china before its economic reform began in 1979. these ranges from the congolese donating a huge amount of money in building a school in a rural community under the shanghai municipality as well as many african leaders cast their vote to help china’s membership under the united nations general assembly. in the early 2000s, china has brought forth many initiatives and policies to strengthen its cooperation with africa. there has been a massive and continuous movement of chinese investment and companies in african countries, especially in the area of raw materials extraction ,such as mining and textiles, oil and gas, and infrastructure development (broadman, 2007). ghana has benefited significantly from china’s outward foreign direct investment which ranges from trade-investment, technical and development assistance. currently china has the highest number of foreign direct investment registered projects among the other investing nations in the ghanaian economy. during the during the first (1th) quarter of 2012, the center reordered a total of 95 new projects registered with a total estimated value of $1.18billion, the estimated value represented an increase of 212.35% compared to the value recorded in the same quarter of 2011 (ghana investment promotion centre, 2012). china topped the top ten (10) investing countries in ghana with 12 new registered projects in the fourth quarter of 2012. this paper is targeted on both positive and negative influences of chinese investment in ghana. 2. technical assistance the various public sectors have enjoyed some advantages as an outcome of chinese investment in the ghanaian economy. these benefits range from fisheries, education, training, communication, energy and agriculture. under the education benefits are wide range of scholarship offers to ghanaians and other countries in africa to study in china from bachelors to the phd level. example of scholarships enjoyed by ghanaians are chinese government scholarship, municipal and local government, and university scholarships. ghanaians and countries on the african continent do not benefit from the one belt one road initiative scholarship as it is purposely for countries part of this initiative. however, other educational exchange programs for technical assistance cut across personnel, equipment and training which aids in the improvement of various sectors in ghana. bui hydro-electric power dam projects in the energy sector and support for irrigation farming, which includes afire rice project in the volta region are some of the projects under technical cooperation between china and ghana. the national communications backbone network project was the recipient of a usd 32 million financing package to finance phase one of the project in 2007, which aims to link the various regional capitals and other major towns with telecommunications access (acet, 2009). 3. development assistance ghana’s economic growth recorded over the past two decades has been among the strongest in africa at around 4.5 per cent annually and growth accelerated to about 5.3 per cent in 2000-03, rose further to 5.8 per cent in 2004 and to an estimated 5.9 per cent in 2005 (oecd, 2006). however, there was a serious economic crisis in 2016, but as a result of good economic fundamentals and sound policies, the economy of ghana attained a massive growth in 2017. loans and investment from china has been a substantial factor in the development of the country. major notable completed public sector projects with chinese aid in building and construction sector entails: us$15 million office complex building for the ministry of foreign affairs and regional integration, us$622 million development of the bui hydro-electric power dam, us$ 28 million constructions of 17km ofankor-nsawam road network, and us$ 6 billion ghana railway project (kwasi and li, 2016). bauxite barter agreement between china and ghana of us$ 2billon to build the country’s infrastructure with bauxite. the agreement among others, will fund infrastructure projects in ghana, including roads, bridges, interchange, hospitals, housing, railway development as well as rural electrification1. 4. investment motive for multinational companies, the ultimate aim and common encouragement to invest in other countries is maximizing output. using the typology of foreign direct investment which was developed by jere behrman to explain the different motives of fdi under oli theory. there were four objectives of fdi, which includes resource seeking, market seeking, efficiency seeking and strategic asset/capabilities seeking. resource seeking investment happens rapidly when there is an insufficient capital base to develop a vast stock of resources or when there is a shortage of skilled labor and professional knowledge (unctad, 1998). multinational companies, individuals and governments invest in other nations for the purpose of seeking and securing natural resources such minerals (gold, diamond, bauxite, aluminum etc.), raw materials and cheaper labor cost. with the abundance of natural resources 1 https://citinewsroom.com/2018/09/07/bauxite-agreement-with-china-is-barter-not-a-loan/akufo-addo/ economy, 2019, 6(1): 34-40 36 © 2019 by the authors; licensee asian online journal publishing group and availability of skilled and unskilled labor, investors turn to exploit these resources with the intention of reexporting to the parent country or for the host country’s consumption. china and other developed countries are investing heavily on the african continent and in ghana for the access to these resources. market seeking has become one of the ultimate motive investors consider when investing abroad. population size, income and the purchasing power of the people are taken into account. the special regions on the african continent are often used as a medium of getting access to other market within these zones. chinese investors in ghana can gain access to the west africa sub-region common market as an outcome of ghana being a member of the economic community of west african states. however, as more and more ghanaians developing a special taste and preference for a commodity or a product induce investors to establish a subsidiary company abroad for its consumers. with the majority of the people developing much interest in made in china phones and other manufactured products have influenced many chinese companies investing in the ghanaian economy. efficiency seeking, most investors consider the ultimate ways of becoming more productive. the restructuring of its already existing investment in order to attain an efficient allocation of global economic activities of companies. the motive brings about global specialization whereby organizations and firms seek to gain from the difference in product and factor price variegate risk. the intention of the efficiency-seeking mne is to take advantage of different factor endowments, cultures, institutional arrangements, economic systems and policies, and market structures by concentrating production in a limited number of locations to supply multiple markets (dunning, 1993). strategic asset/capabilities seeking, this where investors such as multinational firms pursue the agenda of strategic operations for the acquisition of existing companies or assets so as to protect specific superiority with the aim of advancing its international competitive posture. these acquisitions can be of some key domestic established firms, local capabilities (r&d, knowledge and human capital), market knowledge and pre empting market entry by competitors. 5. contradictions beyond investment motives as many developed economies turn to influence most developing nations and least developed countries, several funds and development projects are packaged in the form of foreign direct investment. initially, china’s major trading partners were the united states and the european union, but during this era, there has been a new sense of direction of which china is investing heavily in africa. according to the united nations conference on trade and development (unctad) world investment report in 2017 indicated that, the united states, united kingdom and france remain the top three investors economies by fdi stock in africa. however, china is ranked as the top four investing nations and, between 2010 and 2015 the percentage change in the rate at which the top three (3) investing countries investment were growing in terms of value weighed lower than the chinese. the value of chinese investment increased at the rate of 269.2 percent between 2010 and 2015. with regards to the recent ways of investment by countries goes beyond the normal investment motives. china’s investment on the african continent has been focused mostly on mineral deposits. for instance, china is investing in minerals in countries like zimbabwe, zambia and ghana. ghana recently agreed on a barter agreement on bauxite with china for infrastructural development projects. conversely, some of the motives which could go beyond the proposed fdi motives by dunning and other researches includes political influence, gaining domination over developing and least developed countries, and over exploitation of natural resources. political influence happens when one country can exert pressure on another country to control its decisions. as many nations develop bilateral relationships among each other for economic and security benefits. however, nations also form allies for protection purpose and security threats. foreign investing countries, international financial institutions, donor’s clubs and international monetary fund (imf) do exercise influence on the least developed and developing countries economic and development decisions which affect the distribution and allocation of certain vital fdi projects within their economies. apparently, china also do exercise some political pressure through its outward foreign direct investment in africa. china recently started building military base in some african countries. conversely, the over dependence of most african nations on foreign direct investment inflows without pursing outward foreign direct investment turn to give them less advantages on the other continent. through fdi many developed economies turn to manipulate most african leaders. as a result of many fdi packages coming in the form of loans, these investing nations applied strict conditions attached, whereas most african leaders end up not being able to fulfil the terms and conditions involved. considering the mining sector of ghana, almost all the mining companies are foreign owned businesses. ghana’s percentage share from gold mines is way lower than its supposed to enjoy as the ownership of these mineral resources and the same applies to the crude oil being drill on the jubilee field. there is a notion that, many african leaders fear of not getting loans from the developed countries, china and india if they fail to comply and conform to their rules. according to mr. di maio, “france is one of those countries that by printing money for 14 african states prevents their economic development and contributes to the fact that refugees leave and die in the sea or arrive on our coast”2 gaining domination, the hypothetical power formation which attained or desired to, of which a strong single political hegemony posses power over some countries across the globe. the political fiction, where it postulates that some group of people or nations have achieved this objective in a secret way. this domination is currently happening on the african continent as most developed countries such as the united states of america, france, germany, the united kingdom etc.as well as developing nations such as china and india expanding their authorities in many countries in africa who have become subservient to it. as technology becomes a new set of modern development in the world turns to induce many countries in africa to embark on a technological advancement in their various economies. today no technological hindrance persists in the path of a global empire as modern technology has made it possible to extend the control of mind and actions to every corner of the globe regardless of geography and climate changes (alfred, 1967). during the early 17th century, sir walter raleigh 2 https://www.bbc.co.uk/news/amp/world-europe-46955006 economy, 2019, 6(1): 34-40 37 © 2019 by the authors; licensee asian online journal publishing group came out with a proposal that world domination could be attained through control of the ocean, stating that “whosoever command the sea commands the trade: whosoever commands the trade of the world command riches of the world, and consequently the world itself (sir, 1829). conversely, china is controlling the world through its exports of manufactured products and technology, thereby commanding riches from its trading partners. as part of the major world leading economies such as china and the us motives to control the world economy through fdi, international trade and determining global market prices of certain vital commodities turns to affect many least developed and some developing nations. over dependence on the us dollar affects import and export by most businessmen and women in africa. over exploitation of natural resources, a major factor for african countries to achieve a great benefit from fdi inflows is as a result of the abundance of its natural resources. one main favored position of numerous african nations for drawing in fdi is their natural resources (unctad, 2007). an exploitation of natural resources contributes significantly to a country’s economic and development. however, over exploitation of these resources come with many adverse impacts on an economy. with the recent aggressiveness of many chinese in ghana in search of gold has led to several illegal mining activities. this illegal gold mining has resulted in major environmental issues such as changing of productive land into mining zones, pollution of air, water and land, and degradation of fertile soils which affect ecology and climate. 6. challenges pose with china’s presence in ghana there are negative effects which comes along with the inflow of foreign direct investment from china. loans from china to ghana comes with conditions attached which in the short run have a constructive outcome for the administration of ghana and a negative effect over the long run. the beijing summit in 2006 increased the interaction between china and africa even further, as the both sides agreed to accelerate cooperation, especially in seam resources examination and utilization. as indicated by the ghanaian government projections of oil costs, ghana with end up paying us$ 6.4 billion to china for the us$ 3 billion credit, or should give away 750 million barrels of the nation’s raw petroleum to a chinese company for more than 15 years. consequently, the development and technical assistance as in the form of investment also comes with conditions attached to them, thereby raising concerns about how to refinance these loans in a profitable way without societal costs in the long run (joseph, 2015). another example of an investment with major conditions attached is the dam funding deal, where natural resources such as cocoa will be used to pay for the cost of credit (reuters, 2007). conversely, like other african countries such as south africa and nigeria, ghana’s manufacturing sector is missing out on the opportunities for trade with china. because of increasing chinese business and investment with majority shareholder control, the industrial sector is being challenged by the continuous and rising import of manufactured goods (joseph, 2015). the relationship between china and the african continent through china-africa cooperation has ultimately received many criticisms from international observers. china’s foreign policies in the direction of african nations of weakening universal struggles to expand transparency and quality governance. the chinese’s contribution to illegal mining , which is locally known as galamsey has been a major challenge facing ghana government. the minister of information, mustapha hamid in an interaction with the chinese ambassador warned that all chinese nationals will be severely punished by the law should they be found linked to the menace of illegal small scale mining3. 7. literature review there have been numerous studies done by many research on the account of china’s outward foreign direct investment in africa and other part of the world using diversified approaches attaining different outcomes. however, only a few researchers have focused on chinese investment in ghana. this literature review is set to explore the major research works done on china’s investment specifically to ghana. kwasi and li (2016) considering china’s contribution to the development process in ghana through foreign direct investment, provision of financial aids has increased management training skills, and the transfer of innovation and technological strategies. the authors examined the linked between china’s foreign direct investment and ghana’s building and construction sector performance, by using the robust regression model and the outcome show that chinese foreign direct investment in the building and construction sector of ghana has a relevant positive effect on economic growth of ghana as a result of a strong expansion of investors dauntless in ghana’s economy. joseph (2015) chinese investment in ghana, using the investment development path (idp) theory introduced by dunning in 1981 to examine the basis of the chinese investment model , of which the author sheds light china’s investment in ghana after 2008 and the performance these investments so as briefly examines the specifics of chinese investment in ghana. samuel and nubuor (2013) a research on chinese investment in ghana, stating that paris club of donors and the international financial institutions do exert political pressure on african government for political and economic reforms, although such vigorous economic and financial cannot avoid having political repercussions whereas china exercise no political pressure on african countries. however, the author revealed that ghana is not an exemption and hence china continues to invest in ghana and help in the country’s economic development. decai and gyasi (2012) ghana identifying foreign direct investment as a key way to transform its economic growth and as china seeking to offer ghana a new model for developing alternative to the western style that depends on commercial relations and fair market. the focused on the impact of china foreign direct investment (fdi) flows on the ghanaian employment sector using a statistical descriptive method which supports the analysis of the influence of fdi inflow in a quantitative way. the result indicated that, about 80% or more of investments from china has been mostly concentrated in the manufacturing, building & construction and general trade sectors of the economy of ghana between 2006 and 2010. kojo (2013) examining the specificities of chinese agricultural investments in ghana in relation to wider investments and chinese interests in the country. as china has rapidly emerged as the largest trading and 3 https//www.yen.com.gh/amp/92772-ghana-warns-china-illegal-mining.html economy, 2019, 6(1): 34-40 38 © 2019 by the authors; licensee asian online journal publishing group investment partner in africa and the structure of its trade reflects the emergence of a highly sophisticated manufacturing economy which imports raw minerals, energy and primary agricultural commodities and exports manufactured goods, machinery, information and communication technologies, and construction. chinese investments within african countries have expanded rapidly, enabling african nation states to begin to develop the beginnings of a modern infrastructure that should attract more investments. kwasi and li (2017) foreign direct investment showing a positive influence on national economic growth and advancement, examining the fdi inflow in ghana and the contribution of the selected countries observed fdi inflows between 2000 and 2014. comparing the quantitative study using china, us, india and south africa showed that the selected countries contributed more to the agriculture, manufacturing, building/construction, and service sectors of ghana in terms of volumes of investments and projects as compared to other sectors of the economy due to incentives attached to prioritized economic sectors. many studies of china outward fdi in ghana failed to outline the yearly number of projects by the chinese in the ghanaian economy. however, there is always a positive conclusion china’s presence in ghana by most authors without hammering on the negative aspect of chinese investment in ghana. i believe that considering both the negative and positive help to weigh the significance of the fdi component in ghana. 8. data and methodology this paper is being focused on the examination of chinese foreign direct investment inflow into ghana’s economy. the paper makes use of the quantitative analysis through a descriptive statistical approach. since china’s fdi forms part of the overall fdi in ghana which goes into all the various sectors of the ghanaian economy. by considering the total number of registered projects recorded through fdi between 2013 and 2018. i separated the number of chinese foreign direct investment from the overall registered projects established by foreign investing nations. the value (the estimated cost of projects) was also taken into account. the study also makes use of data from the quarterly investment reports generated from the ghana investment promotion centre the sole organization formed by the government mandated to regulate, promote and foster investment inflows and the wellbeing of investors. 9. registered chinese projects in ghana from 1994 september to december 2009 the total registered projects from foreign countries was 3,214. out of the 3214 china had the largest registered projects in ghana with a total 415. however, these chinese registered projects were distributed among all the sectors in the ghanaian economy. agriculture 8, building and construction 20 projects, export trade 7 projects, general trading 103 projects, liaison 7 projects, manufacturing 145 projects, service 66 projects and tourism 59 projects. however, there have been 182 registered projects by the chinese in the ghanaian economy from 2013 to 2018. conversely, a total of 1,311 foreign direct investment projects were registered between 2013 and 2018 of which 418 projects were recorded in 2013, 183 projects in 2014, 170 projects in 2015, 180 projects in 2016, 192 and 168 projects in 2017 and 2018 respectively. the table 1 shows breakdown of the registered projects. table-1. chinese registered projects between 2013 and 2018. year number of projects cost of projects (us$m) 2013 34 41.91 2014 15 1,609.92 2015 22 172.2 2016 36 301.52 2017 38 232.93 2018 37 159.3 total 182 2,517.78 source: author’s calculations base on the data from gipc. from the table 1 the data collection were based on the quarterly reports by the ghana investment promotion centre. however, there was no data for registered projects by china and the estimated cost of projects in the third quarter of 2013 whereas there were no records on the number of registered projects for the second quarter of 2014. china registered one project in the second quarter of 2015 but there was no record on the estimated cost of the project as it was not captured by the gipc as it was not ranked among top ten (10) investment cost of projects. figure-1: china’s registered projects verses total number of registered projects. source: author’s calculations base on the data from gipc. economy, 2019, 6(1): 34-40 39 © 2019 by the authors; licensee asian online journal publishing group the total estimated cost of the total foreign direct investment registered projects between 2013 and 2018 amounted to us$19,930.03 million of which the breakdown was as follows 4,261.22million in 2013, us$3,121.45 million in 2014, us$2,680.60 million in 2015, us$ 2,433.50 million in 2016, us$3,562.50million in 2017 and us$2,870.76million in 2018. china’s cost of registered projects percentage, share on the yearly accumulated total cost of projects are as follow 0.98% in 2013, 51.57% in 2014, 6.42% in 2015, 12.39% in 2016, 6.53% in 2017 and 5.55% in 2018. the figure 2 indicates total cost of projects, verses cost of china’s registered projects. figure-2. fdi total cost of projects verses cost of china’s registered projects. source: author’s calculations base on the data from gipc. 10. discussions ghana’s investment environment has been very conducive for chinese investment and other top investing countries. the effect and implication of china-ghana trade and investment are diverse. employment of skilled and unskilled workforce has been an ultimate significant factor when considering the investment environment in ghana. experts and technology transfer has been readily available to the various sectors of the ghanaian economy to employ experienced workers. on the other hand, it is clear that the number of registered foreign direct investment projects in ghana by the chinese is significantly lower than the amount ghana’s outward foreign direct investment in china. ghana and most african countries are faced with international trade deficits and are not benefiting from slang break of trading with china. major chinese investment are found in the manufacturing sector of the ghanaian economy which turns to increase a stiff competition from giant chinese manufacturing companies. ghana export raw materials to china and imports over 60% of manufactured product china. with ghana’s exportation mainly being raw materials and other resources turns to put its economy at risk. the commodity price shock of 1999 is a clear example – between 1998 and 2000, a fall in world commodity prices affected the economy with a negative 20% drop in ghana’s gdp growth rate (imf, 2012). however, with the current government agenda of one-district-one factory initiative which aims at transforming ghana’s economy into an industrial economy should set out policies and regulations to protect these infant industries in all the sectors. 11. conclusion regardless of external and internal factors affecting foreign direct investment inflows in ghana, ghana continue to provides sound business and investment-friendly environment for both domestic and foreign investment of which chinese investors do benefit from it. foreign direct investment inflows in ghana has been growing significantly every year as ghana reached the major recipient of fdi ahead of nigeria in 2018. the investment motives which is set to be achieved by foreign investors should be a major concern by the host countries on the african continent as there might be a hiding agenda beyond the normal investment motives. objective which focuses on chinese foreign direct investment, its benefit and issues on ghana’s economy was achieved after considering china’s contribution to the registered projects and other wide range of development packages to ghana. this may not be adequate to capture the number of employments and impact of the third quarter of 2013, second quarter of 2014. however, ghana’s longstanding bilateral relationship in the aspect of investment and trade in recent year has brought many developments to both nations. references acet, 2009. looking east: china-africa engagements. ghana country case study. accra: african center for economic transformation. alfred, a., 1967. politics among nations: the struggle for power and peace. 4th edn., new york: 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from https://www.gipcghana.com/press-and-media/downloads/reports.html. imf, 2012. world economic outlook: growth resuming, dangers remain. washington dc: international monetary fund. joseph, y.a., 2015. chinese investment in ghana. argumenta oeconomica cracoviensia(13): 61-81.available at: https://doi.org/10.15678/aoc.2015.1304. kojo, s., 2013. expanding agribusiness: china and brazil in ghanaian agriculture. ids bulletin, 44.4. available from http://onlinelibrary.wiley.com/journal/10.1111/(issn)1759-5436/issues. economy, 2019, 6(1): 34-40 40 © 2019 by the authors; licensee asian online journal publishing group kwasi, b.-g. and y. li, 2016. the linkage between china s foreign direct investment and ghana s building and construction sector performance. eurasian journal of business and economics, 9(18): 81-97.available at: https://doi.org/10.17015/ejbe.2016.018.05. kwasi, b.g. and y. li, 2017. fdi trends in ghana: the role of china, us, india and south africa. eurasian journal of 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(1829, reprinted 1965), 8: 325. unctad, 1998. world investment report 1998: trends and determinants. new york and geneva: united nations conference on trade and development. unctad, 2007. asian foreign ddirect investment in africa: towards a new era of cooperation among developing countries. unctad/ite/iia/2007/1. available from https://unctad.org/en/docs/iteiia20071_en.pdf. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. 165 © 2025 by the authors; licensee asian online journal publishing group economy vol. 12, no. 2, 165-174, 2025 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/economy.v12i2.7725 © 2025 by the authors; licensee asian online journal publishing group economic complexity in africa: the role of trade and governance institutions obed ifeanyichukwu ojonta1 jonathan emenike ogbuabor2 ( corresponding author) 1,2department of economics, university of nigeria, nsukka, nigeria. 1email: obed.ojonta@unn.edu.ng 2email: jonathan.ogbuabor@unn.edu.ng abstract it is evident that the role of trade and governance institutions in enhancing economic complexity in africa is still under serious debate regarding whether it is detrimental or beneficial to economic growth. the purpose of this study is to investigate how trade and governance institutions influence economic complexity in africa using a system generalized method of moments (system gmm) and 31 african economies for the period 2011-2020. beyond these key variables of interest, our study includes some macroeconomic variables in the model, such as international tourism arrivals, infrastructural development, and human capital development, to ensure robustness of the results. the results of the system gmm reveal that trade promotes economic complexity in africa, while institutional quality indicators such as control of corruption, rule of law, government effectiveness, regulatory quality, political stability, and absence of violence/terrorism, including voice and accountability, are predominantly negative in improving economic complexity on the continent. further results of system gmm also reveal that infrastructural and human capital developments are relevant drivers of economic complexity, while international tourism arrivals played a detrimental role. this study proposes that african leaders and policymakers across the continent should come together to advance free trade and advocate reform for strong institutions through the instrumentality of the african union. keywords: africa, economic complexity, institutional quality, system gmm, trade. citation | ojonta, o. i., & ogbuabor, j. e. (2025). economic complexity in africa: the role of trade and governance institutions. economy, 12(2), 165–174. 10.20448/economy.v12i2.7725. history: received: 2 october 2025 revised: 17 october 2025 accepted: 3 november 2025 published: 18 november 2025 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. institutional review board statement: not applicable. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. this study followed all ethical practices during writing. competing interests: the authors declare that they have no competing interests. authors’ contributions: both authors contributed equally to the conception and design of the study. both authors have read and agreed to the published version of the manuscript. mailto:obed.ojonta@unn.edu.ng mailto:jonathan.ogbuabor@unn.edu.ng https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v12i2.7725 https://orcid.org/0000-0002-0162-0303 economy, 2025, 12(2): 165-174 166 © 2025 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study contributes to the existing literature by investigating the combined effects of trade and governance institutions on economic complexity in africa. it aims to determine whether trade and governance institutions, when included together in the model, can significantly influence economic complexity in africa. 1. introduction trade is one of the most crucial aspects of income generation in most economies across the world. indeed, the essential role of trade has been documented in recent literature. for instance, trade stimulates job creation and raises the standard of living (nchofoung, asongu, njamen kengdo, & achuo, 2022; nkemgha, nchofoung, & sundjo, 2023). it can also change the fortune of african economies from the category distinguished by poverty to those distinguished by wealth (geo-jaja & mangum, 2003). according to acemoglu, gallego, and robinson (2014), trade can help in poverty alleviation, which in turn contributes to overall growth. the report from world bank (2022) revealed various levels of trade participation in the world. on average, trade participation in africa is 3 percent at the global level, while other continents such as the european union and latin america and the caribbean have average trade levels of 55 and 42 percent, respectively. this report implies that trade in africa is low relative to other continents of the world. this is because african economies are characterized by some factors such as poverty (emmanuel o nwosu, ojonta, & orji, 2018), high dependency ratio (ojonta, 2023), and high level of inequality (nwosu & orji, 2016). these factors confronting trade development in african economies have constrained the continent from catching up with the rest of the world. thus, african economies are generally characterized by a low level of total trade despite their abundance of both human and natural resources. this issue motivated this study. interestingly, trade (import and export) can be essential in illuminating the dynamics of economic complexity in an economy. indeed, the ongoing argument about how trade promotes economic sophistication has drawn the attention of economists, with some arguments suggesting that economies that are more sophisticated have higher trade participation and more diversified exports compared to less developed economies that mainly export less complex products with little or no value addition (sweet & eterovic, 2019; vu, 2020; zhu & li, 2016). thus, economies that expand and diversify their participation in international trade are therefore anticipated to be comparatively more sophisticated than those with less emphasis on participating in international trade. the studies, lee, olasehinde‐williams, and gyamfi (2023) and doğan, balsalobre-lorente, and nasir (2020) attest the facts and establish that trade diversification can engineer rapid and steady growth in sophisticated economies. this suggests that if trade is well harnessed, it will go a long way in contributing to global efficiency. an active participation of a country in international trade can enhance economic sophistication in diverse sectors of the economy. for instance, some recent empirical works have shown that international trade is an important channel through which economies can derive gains from economic complexity at both local and international levels (mealy & teytelboym, 2022; ogbuabor, emeka, orji, & onuigbo, 2023; zhu & li, 2017). regretfully, africa’s economic complexity, when compared to other continents worldwide, shows that the large bulk of them are at the lowest rankings of the economic complexity index. according to the 2021 atlas of economic complexity index, as issued in table 1, which provides the values of economic complexity in africa and other countries of the world in order of ranking, the report indicates that many african economies are not among the top 44 countries in this index. indeed, tunisia is the only african country that recorded a positive value in this index in 2021. this low ranking of economic complexity associated with african economies has been a significant concern to policymakers, despite the fact that african economies are endowed with abundant natural resources. this issue motivates this study to investigate the role of trade in driving economic complexity on the continent. economy, 2025, 12(2): 165-174 167 © 2025 by the authors; licensee asian online journal publishing group table 1. distribution of 2021 economic complexity index (eci) by countries ranking. eci ranking for the top 25 countries eci ranking for top 25 countries in africa country ranking eci country ranking eci japan 1 2.26 tunisia 45 0.39 switzerland 2 2.14 eswatini 63 0 south korea 3 2.04 egypt 67 -0.13 germany 4 1.94 south africa 68 -0.15 singapore 5 1.83 mauritius 71 -0.17 czechia 6 1.75 kenya 80 -0.35 austria 7 1.68 morocco 81 -0.35 united kingdom 8 1.61 malawi 89 -0.51 slovenia 9 1.59 uganda 92 -0.53 sweden 10 1.54 namibia 95 -0.58 hungary 11 1.52 algeria 96 -0.63 slovakia 12 1.46 senegal 97 -0.66 ireland 13 1.44 mali 99 -0.73 united states of america 14 1.4 burkina faso 100 -0.75 finland 15 1.36 madagascar 102 -0.77 italy 16 1.35 zambia 105 -0.84 france 17 1.34 ethiopia 108 -0.88 china 18 1.33 tanzania 109 -0.91 romania 19 1.23 botswana 111 -0.92 belgium 20 1.18 zimbabwe 113 -1.01 israel 21 1.17 togo 114 -1.03 mexico 22 1.14 angola 116 -1.04 thailand 23 1.12 libya 119 -1.11 denmark 24 1.06 mozambique 120 -1.17 poland 25 1.02 ghana 121 -1.18 source: author’s computation sourced from 2021 atlas of economic complexity index with 133 ranking countries were conducted by massachusetts institute of technology’s observatory of economic complexity (http://atlas.media.mit.edu). apart from the role of trade in explaining the changes in economic sophistication, it has been established in the literature that institutional quality can also be essential in amplifying or deterring economic complexity. indeed, many economies around the world cannot afford to function in isolation because their economies are enshrined in strong governance institutions. however, there is no doubt that any economy plagued by a lack of government effectiveness, widespread corruption, willful disregard for the rule of law, poor or weak regulatory environments, lack of accountability in governance, and persistent political instability and violence will find it difficult to achieve a high level of sustainable economic sophistication (hussen, 2023). additionally, ojonta, obodoechi, and ugwu (2021) established that a considerable improvement in economic growth sustainability in many african countries has not been achieved because of the absence of relevant high-quality institutions in these countries. north (1990) also explained the significant role of high-quality institutions in an economy. the study believes that high-quality institutions create the enabling environment for businesses to thrive and also increase investors’ confidence in the domestic economy. hence, the study posited that strong institutions are relevant to ensure overall growth in an economy. easterly (2002) agrees with this position, and further suggested that this overall growth should be anchored on the respect for the rights of citizens. unfortunately, most african economies have consistently performed poorly in various indicators of institutional quality, at least in the last two decades. for example, the poor levels of economic growth and development in nigeria have been largely blamed on the persistently high level of corruption in the country due to weak governance institutions (ogbonna, ogbuabor, eze, & ugwuoke, 2021; ogbuabor et al., 2023). table 2 also shows that african economies have generally been characterized by weak institutions, and this further motivated this study. table 2. average distributions of institutional quality according to their indicators from 2002 to 2021. indicators/countries control of corruption government effectiveness political stability and absence of violence/terrorism regulatory quality rule of law voice and accountability nigeria -1.150 -1.047 -1.924 -0.901 -1.108 -0.625 china -0.392 0.209 -0.464 -0.292 -0.416 -1.612 germany 1.820 1.542 0.793 1.604 1.663 1.394 usa 1.388 1.525 0.341 1.455 1.550 1.111 brazil -0.185 -0.215 -0.233 0.016 -0.222 0.447 note: the countries showcased in the table are captured based on the fact that such countries witnessed the highest nominal gdp in 2021 in their respective regions. nigeria is for africa, china for asia, germany for europe, usa for north america, and brazil for south america. source: author’s compilations using data originated from world bank (2022). in light of the aforementioned background, this study raises two crucial questions. (i) how is economic complexity responding to trade and institutional quality on the continent? (ii) how are other macroeconomic variables (examples of these include international tourism arrivals, infrastructural and human capital developments) incorporated in the model influencing economic complexity in africa? therefore, the specific objectives of this study are, first, to examine how economic complexity in africa responds to trade and institutional quality. second, to analyze how the effects of other macroeconomic variables (examples of these include http://atlas.media.mit.edu/ economy, 2025, 12(2): 165-174 168 © 2025 by the authors; licensee asian online journal publishing group international tourism arrivals, infrastructural and human capital developments) incorporated in the model influence economic complexity in africa. the data and methodology are presented in section 3, the empirical results are discussed in section 4, the literature review is provided in section 5, and the research is concluded with specific recommendations in section 6. 2. literature review 2.1. theoretical literature many economic theories are cited in this paper, such as the theory of international trade, which is the similarity trade theory; the theory of economic complexity, which is also the theory of endogenous technological progress; and the theory of institutional quality, which is the theory of planned behavior. an explanation of these theories is provided below. the country similarity trade theory was developed by linder (1961). the theory explains the relationship between nations at similar stages of development and consumers with similar preferences. the theorist established that nations at comparable stages of development tend to have consumers with similar preferences. additionally, the theorist believes that countries sharing uniform per capita incomes are more likely to engage in trade of most produced commodities. some existing literature, such as samuelson (1948), supports this theory. this support affirms that companies typically manufacture for domestic consumption and subsequently export to countries where end users share similar preferences. to understand trade theories where consumer decisions are influenced by product reputation and brand names, the theory of country similarity is particularly suitable. some studies (e.g., (blundell, dearden, goodman, & reed, 2000; fitzenberger & kurz, 2003; psacharopoulos, 1994)) lend support to this theory. the theory of endogenous technological progress as proposed by aghion and howitt (1992), states that technological progress is useful in promoting economic complexity. the theorist believes that the usefulness can engender the contest between the implementation of long-term technological innovation and firms' product generation. the theory by aghion and howitt (1992) reveals that each innovation is expected to bring into the market new interim goods (technology), which can be utilized in a more efficient and effective production of products than the previous one. furthermore, when there are products driven by technology, they tend to attract the interest of tourists. therefore, policies and reforms have to be channeled towards technological advancement in order to enhance international tourism. some studies abbasi, lv, radulescu, and shaikh (2021) and fatai, agboola, ozturk, bekun, and agboola (2021), lend support to this theoretical perspective. ajzen (1991) developed the theory of planned behavior, which is another important theory in this study. the theory focuses on the general behaviors that allow a person to exercise self-control. it also establishes that human behavior can be classified into four distinct components: action behavior, target behavior, context behavior, and time behavior. the theorist believes that human behavior can be controlled through subjective norm. the theory conceptualizes institutional quality not only as the rule of law to capture a general perception of society but also to ensure that society is being controlled by the rule of law in terms of the quality of contract enforcement, the police, property rights, courts, violence, and crime. 2.2. empirical literature a large sample of empirical studies has also investigated how economic complexity is driven by total trade and institutional quality using various econometric techniques across different countries and regions of the world. this section of the study reviews relevant literature within the objectives. 2.2.1. trade, institutional quality and economic complexity in a research to scrutinize the determinants of economic complexity in africa, nchofoung and asongu (2022) showed that trade is a potent channel for promoting economic complexity on the continent. jiya, sama, and ouedraogo (2020) explored the alliance between trade and infrastructural development for the period 1993-2016 using a dynamic fixed effect approach. the outcome of the study revealed that trade openness significantly impacts economic growth in africa. another study ho and iyke (2021), engaged three variables, including institutions and economic growth, as control variables. the focus of the study was to investigate how trade openness influences financial development in africa for the using 43 countries. the study employed sen’s capability approach to predict the estimation result. the study maintained that trade openness is potential driver of financial development in africa. the study by shao and razzaq (2022) intend to estimate how trade is impacting infrastructural development for the period 1996-2017. the results show that components of trade, such as imports and exports, are necessary factors in enhancing infrastructural development. nkemgha et al. (2023) employed system gmm regression to investigate how trade and financial development moderate the consequence of human capital development on industrialization in africa. the study achieved its objective by analyzing 33 economies in africa. the results show that the impact of financial development is negative. fleisher, li, and zhao (2010) conducted a study in china to examine the nexus between trade, output, and productivity growth patterns in china. the findings of the study indicate that trade has a positive influence on both output and productivity growth. the review of institutional quality and economic complexity, for example, emeka, ajah, and asongu (2025) found that institutional quality and terrorism had a substantial influence on economic complexity in africa when examining the contributions of industrialization and infrastructure development as drivers of economic complexity in the continent. ogbuabor et al. (2023) look at the factors that influence economic complexity in africa in a different study. research indicates that economic complexity in africa is significantly impacted by uncertainty. once more, ogbuabor et al. (2023) provided evidence of how governance institutions influence economic complexity. the study concludes that the continent's economic complexity is significantly and positively impacted by governance institutions. subsequently, ogbuabor et al. (2023) also demonstrated that, although institutional quality greatly reduces and amplifies their effects on economic complexity, international financial flows are crucial drivers of economic complexity in africa. economy, 2025, 12(2): 165-174 169 © 2025 by the authors; licensee asian online journal publishing group however, the previous studies like nkemgha et al. (2023) and shao and razzaq (2022) focused on the financialgrowth relationship. clearly, most studies in the literature failed to consider the combined effect of trade and governance institutions in promoting economic complexity; rather, the study focused mainly on the trade-economic growth nexus. we depart from the existing literature by focusing on the combined effect of trade and governance institutions on economic complexity for the period 2011–2020 in a panel of 31 african economies, using the system gmm technique. we therefore contribute to knowledge by filling the gap in the literature. 3. data and methodology 3.1. the data as you may remember, the main purpose of this research is to scrutinize how trade and institutional quality affect africa's economic complexity. hence, africa is the geographical area of the study, and the time span runs from 2011 to 2020 based on the data currently available. this study covers the following nations: algeria, botswana, angola, cameroon, chad, burkina faso, the republic of congo, the democratic republic of the congo, egypt, ethiopia, côte d'ivoire, guinea, kenya, gabon, ghana, madagascar, mali, namibia, mozambique, nigeria, niger, south africa, senegal, tanzania, sudan, tunisia, togo, zambia, uganda, and zimbabwe. appendix 1 provides more details on the variables used in the study as well as the data source. additionally, appendixes 2 and 3 present the variables' descriptive statistics and correlation matrix, respectively. descriptive statistics show that the mean values of all institutional quality indices are negative, indicating that, generally speaking, african economies are characterized by weak institutions. the mean value of 0.4042 for the human capital variable indicates that african economies have generally struggled with low levels of human capital development. the economic complexity index variable also revealed a negative mean value of -0.9376, indicating that african economies are generally experiencing low levels of economic complexity. there are no outliers in the data because the mean, maximum, and minimum values are generally fairly close to one another. all the variables showed some fluctuations during the study period, as expected based on the standard deviations. according to the correlation matrix results, only institutional quality measures have a high relationship with each other. hence, to avoid collinearity problems, these indicators of institutional quality variables are utilized independently in each estimation of the underlying model for this study. 3.2. model specification to interrogate the effect of trade and institutional quality on economic complexity in africa, this study follows kang-kook and trung (2020) and nguea, kaguendo, and noumba (2022) by specifying a panel data model in terms of its functional form. 𝐸𝐶𝐼 = 𝑓(𝑇𝑂𝑅, 𝐻𝐶𝐴𝑃, 𝑇𝑅𝐷, 𝐼𝑁𝐹𝑆, 𝐼𝑁𝑆𝑇) (1) where: 𝐸𝐶𝐼= economic complexity; 𝐼𝑁𝐹𝑆 = infrastructural development; 𝐻𝐶𝐴𝑃 = human capital development; 𝑇𝑂𝑅 = international tourism; 𝑇𝑅𝐷 = trade; and 𝐼𝑁𝑆𝑇 = institutional quality indicator comprises control of corruption, government effectiveness, regulatory quality, rule of law, voice and accountability, and political stability and absence of violence/terrorism. to simplify the estimation, the functional form of the economic complexity model in equation 1 is specified econometrically in terms of a dynamic panel data model as follows. 𝐸𝐶𝐼𝑖𝑡 = 𝛽0 + 𝛿1𝐸𝐶𝐼𝑖𝑡−1 + 𝛿2𝑇𝑂𝑅𝑖𝑡 + 𝛿3𝐻𝐶𝐴𝑃𝑖𝑡 + 𝛿4𝑇𝑅𝐷𝑖𝑡 + 𝛿5𝐼𝑁𝐹𝑆𝑖𝑡 + 𝛿6𝐼𝑁𝑆𝑇𝑖𝑡 + 𝜋𝑖𝑡 (2) where: 𝐸𝐶𝐼𝑖𝑡−1is defined as the initial level of economic complexity, while 𝜋𝑖𝑡 = 𝜇𝑖 + 휀𝑖𝑡, so that 𝜇𝑖 is the country-specific effect and the error term, 휀𝑖𝑡~𝑖𝑖𝑑𝑁(0, 𝜎𝜀 2), shows no serial correlation, 𝐸[휀𝑖𝑡 ′ , 휀𝑖𝑠] = 0. here, 𝐼𝑁𝑆𝑇𝑖𝑡 denotes the variable of institutional quality. the variables such as trade, international tourism arrivals, and infrastructural development were subjected to a logarithm before the estimation. the purpose of logging the variables is in line with ketu, tchouto, and kelly (2022) and kamguia, ndjakwa, and tadadjeu (2023) model specification. 3.3. estimation method and pre-estimation tests the system gmm approach was utilized to estimate the underlying model specification as provided in equation 2. hence, panel data analysis in this perspective has been found to be the most suitable application for this study. this is because our study's cross-sectional unit size exceeds the time period, which implies that the thirtyone african countries adopted for this research are higher in number than the time period, which is from 2011 to 2022. another reason for adopting the technique is its superiority in managing endogeneity problems (arellano & bover, 1995; blundell & bond, 1998). other estimation methods, such as the pooled ordinary least squares (ols) estimation method, are typically hampered by endogeneity issues. further research by windmeijer (2005) indicates that the system gmm technique helps to improve model precision and reduces the bias associated with finite samples in the first-difference gmm estimator. however, we conducted a bond (2002) test for the model in equation 2 to ensure that our choice to use the system gmm estimator was appropriate. the results from the bond (2002) test in appendix 4 indicate that the system gmm estimator is suitable for this study. this is because the values are positive and significant in influencing the lag of the dependent variable, economic complexity. additionally, a cross-sectional dependence test was performed, considering that many african economies, particularly those included in our analysis, may be interdependent. furthermore, several sub-regional economic blocs within the african union (au) contribute to this interdependence, reflecting the trend toward economic integration across the continent. according to de hoyos and sarafidis (2006), neglecting the cross-sectional dependence test in our panel may lead to inefficient estimates. as a result, this study used a cross-sectional dependence test in accordance with pesaran (2021), frees (1995), and friedman (1937) studies. the overall results of the cross-sectional dependence tests are shown in appendix 5. the test confirms that cross-sectional independence exists. as a result, the cross-sectional dependence test is not problematic in our model. the arellanobond tests for second-order serial correlation, ar(2), indicate that our models (see table 3) are free from serial correlation issues. additionally, our hansen (1982) tests, which assess over-identifying restrictions, reveal that the null hypothesis that the instruments used in the estimations are collectively valid is not rejected in any case. this economy, 2025, 12(2): 165-174 170 © 2025 by the authors; licensee asian online journal publishing group demonstrates that the instruments employed in the estimations are valid. therefore, the results in table 3 satisfy the conditions of jointly valid instruments and absence of serial correlation. 4. empirical results the results of the system gmm as given by equation 2 are shown in table 3 with six panels. in order to prevent the estimation-related issue of collinearity, the indicators of institutional quality variables are included in the model and estimated independently. some recent research findings, such as emeka et al. (2025) and ogbuabor et al. (2023), are consistent with this modelling procedure. the estimation results from table 3 indicate that the combined effects of trade and institutional quality are important drivers of the complexity of africa's economy. on the other hand, the estimation results indicate that trade in africa contributes to the continent’s economic complexity through strong governance institutions. this finding aligns with the a priori of economic expectation. it is also consistent with the yalta and yalta (2021) submission, which revealed that the combined effects of trade and human capital greatly increase lesotho's economic complexity. additionally, the result aligns with findings showing that trade through sectoral performance is the most potent factor influencing economic complexity in africa. the conclusion is that the combined effects of trade and sectoral performance promote africa's economic complexity. however, the findings of this study are contrary to some recent studies, which include emeka et al. (2025) and ogbuabor et al. (2023), which generally suggest that governance institutions can exert an unconditional, significant positive effect on economic complexity in africa. additionally, it goes against the view of vu (2022) and khan, khan, abdulahi, liaqat, and shah (2019), who contend that institutional quality can positively and significantly affect economic complexity. however, our results are in line with the reality of most african economies, which hold that weak institutions are a serious impediment confronting these countries. the evidence is found in appendix 2, where the institutional quality indicators are showing negative in the mean values. other factors, the initial level of the predicted variable (i.e., the lag of the economic complexity variable), trade, human capital development, and infrastructural development are positive and significantly impact economic sophistication across all panels. these variables promote economic complexity in africa. specifically, the outcome of the initial level of economic complexity aligns with the findings of javorcik, lo turco, and maggioni (2018) and njangang, beleck, tadadjeu, and kamguia (2022), and ogbuabor et al. (2023). these studies demonstrate that the initial level of the predicted variable is a crucial factor in enhancing economic complexity. our finding that human capital development has a positive and significant influence on economic complexity is consistent with economic expectations. this result further indicates that as economies prosper, they gain greater capacity to improve their level of sophistication. the outcome of the study is consistent with romero and gramkow (2021), which revealed that there exists a significant and positive relationship between human capital development and economic complexity. hence, this study has also established that increasing human capital development is an appropriate channel for promoting economic sophistication in african economies. our conclusions in table 3 unveil that infrastructural development exerts a positive and significant effect on africa’s economic sophistication. economically, improved infrastructural development increases business operations, enhances the exchange of goods and services, and improves job creation. it is also believed that infrastructural innovation can enhance the performance of local economies in terms of the quality production of goods and services for global competitiveness. these economic gains from infrastructural development can also lead to a higher economic complexity in domestic economies. interestingly, our results are also consistent with studies like ogbuabor et al. (2023); gómez-zaldívar, llamosas-rosas, and gómez-zaldívarc (2021); khan, bibi, lorenzo, lyu, and babar (2020), and antonietti and franco (2021). these studies also established that infrastructural development promotes economic complexity. the regression results in table 3 also revealed that international tourism arrivals are negatively and significantly impacting economic complexity in all the panels at the 5% level of significance. this finding establishes that international tourism arrivals are not contributing towards promoting economic complexity in africa. this is contrary to some studies in the literature, such as farsari, butler, and szivas (2011) and quattrociocchi, mercuri, calabrese, and perano (2017), which established a significant positive relationship between international tourism arrivals and economic complexity in greece and europe, respectively. indeed, our finding is also contrary to economic expectation, which posits that international tourism arrivals could be a channel for enhancing the economic complexity of african countries. economically, international tourism arrivals are expected to attract various economic gains such as knowledge and technology transfer, foreign investors, and increased productivity, and these, in turn, are expected to promote the economic complexity of an economy. however, our finding reflects the fact that african economies not only have low levels of economic complexity but also low levels of international tourism arrivals relative to other continents of the world. the earlier findings can be summed up as follows. we find that: (i) the combined effects of trade and institutional quality are positive in influencing economic complexity in africa; (ii) key drivers of economic complexity in africa include the initial level of the predicted variable (economic complexity), infrastructural and human capital developments; (iii) international tourism arrivals are not relevant factors in promoting economic complexity on the continent. economy, 2025, 12(2): 165-174 171 © 2025 by the authors; licensee asian online journal publishing group table 3. system gmm regression results for the economic complexity model. regressors panel 1 panel 2 panel 3 panel 4 panel 5 panel 6 eci l1. 0.978*** (0.000) 0.972*** (0.000) 0.962*** (0.000) 1.011*** (0.000) 0.957*** (0.000) 0.990*** (0.000) tor -0.484*** (0.002) -0.352*** (0.006) -0.353** (0.017) -0.737*** (0.000) -0.359*** (0.008) -0.611*** (0.002) hcap 0.120*** (0.002) 0.127*** (0.002) 0.134*** (0.002) 0.108** (0.011) 0.132*** (0.002) 0.124*** (0.002) infs 0.095*** (0.008) 0.082** (0.014) 0.090** (0.010) 0.105** (0.016) 0.104*** (0.001) 0.077* (0.093) trd 0.337** (0.017) 0.361*** (0.002) 0.306*** (0.008) 0.304** (0.023) 0.279*** (0.009) 0.417*** (0.006) inst (cfc) -0.025* (0.066) inst (ge) -0.016 (0.269) inst (rl) -0.003 (0.814) inst (vc) -0.034*** (0.000) inst (rq) 0.000 (0.997) inst (polst) -0.028*** (0.003) _cons 0.086 (0.613) -0.062 (0.615) -0.028 (0.845) 0.393** (0.030) -0.005 (0.967) 0.158 (0.300) diagnostic observations 310 310 310 310 310 310 hansen 0.409 0.412 0.392 0.309 0.252 0.431 ar (2) 0.212 0.199 0.198 0.209 0.208 0.215 instruments 27 27 27 27 27 27 note: the estimation coefficients are provided, while the p-values are enclosed in parentheses. * p < 0.10. ** p < 0.05. *** p < 0.01. further information: (i) human capital and infrastructural development, including trade, are positively significant in all panels; (ii) the effects of all the indicators that constitute institutional quality, such as cfc, ge, rl, vc, and polst, are predominantly negative, while rq is mainly insignificant; (iii) the effects of international tourism arrivals on trade are negatively significant in all panels. 5. conclusion and policy recommendations here are some policy implications of the above-mentioned findings. the finding that the initial level of economic complexity, trade, infrastructural, and human capital developments all contribute to economic complexity in africa suggests that leaders and policymakers on the continent should collaborate to enlarge their economies, improve trade, enhance the quality of their human capital, and infrastructural developments. this can be accomplished through poverty alleviation and job creation in africa, which typically impede the region's overall progress. the estimation results that trade through institutional quality promotes economic complexity in africa imply that the combined effects of trade and institutional quality in the region on economic complexity should be embraced. this study, however, recommends that policymaking bodies should ensure that strong institutions are established in africa through institutional reforms. for instance, the countries in the african union can come together at the continental level to discuss the deficiencies in governance institutions that have led to pervasive corruption, disdain for the rule of law, incompetence in public service, ongoing political unrest, and the surge in terrorism, among other challenges. this can be achieved through the instrumentality of the union. the african union should make it a matter of policy to build strong institutions on the continent so that any african leader who undermines governance institutions entrusted to him by the citizens will be severely sanctioned. the finding that international tourism arrivals are exerting negative impacts on economic complexity in africa implies that economic sophistication on the continent is not driven by international tourism arrivals. hence, this study recommends that policymakers and leaders on the continent should team up in order to harness and promote international tourism arrivals to the african region, which, as at present, have mostly been untapped. this also suggests that factors that could discourage tourists or foreigners from visiting the continent, such as insecurity of lives and property, should be adequately addressed at the level of the african union. for instance, the existing multinational joint taskforce in the region can be reinforced by the african union to combat insecurity on the continent. this will make tourist destinations in the region safer and enable african economies to leverage their tourism sector to diversify their economies. references abbasi, k. r., lv, k., radulescu, m., & shaikh, p. a. 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(2016). economic complexity, human capital and economic growth: empirical research based on cross-country panel data. applied economics, 49(38), 3815-3828. https://doi.org/10.1080/00036846.2016.1270413 appendix 1. definitions of variables and data sources. variable acronym description / measurement data source economic complexity eci the index is determined by the diversity of exports a country produces and its ubiquity. massachusetts institute of technology’s observatory of economic complexity (http://atlas.media.mit.edu) international tourism tor international tourism, number of arrivals world development indicators, wdi (https://datacatalog.worldbank.org/dataset/worlddevelopment-indicators) infrastructural development infs africa infrastructure development index african development bank’s africa infrastructural development index (aidi), (https://infrastructureafrica.opendataforafrica.org/rscz nob/africa-infrastructure-development-index-aidi) human capital development hcap human capital index world bank’s human capital index, hci (https://data.worldbank.org/indicator/hd.hci.ovrl ) trade trd trade (% of gdp) world development indicators, wdi (https://datacatalog.worldbank.org/dataset/worlddevelopment-indicators) government effectiveness ge government effectiveness world governance indicators, wgi (https://datacatalog.worldbank.org/dataset/worldwide -governance-indicators) voice and accountability vc voice and accountability world governance indicators, wgi (https://datacatalog.worldbank.org/dataset/worldwide -governance-indicators) regulatory quality rq regulatory quality world governance indicators, wgi (https://datacatalog.worldbank.org/dataset/worldwide -governance-indicators) rule of law rl rule of law world governance indicators, wgi (https://datacatalog.worldbank.org/dataset/worldwide -governance-indicators) control of corruption cfc control of corruption world governance indicators, wgi (https://datacatalog.worldbank.org/dataset/worldwide -governance-indicators) political stability and absence of violence/terrorism polst political stability and the absence of violence or terrorism world governance indicators, wgi (https://datacatalog.worldbank.org/dataset/worldwide -governance-indicators) appendix 2. descriptive statistics of the variables. variable no. of observations mean std. dev. minimum maximum eci 310 -0.937 0.515 -2.227 0.390 tor 310 1.835 2.982 1.040 1.510 hcap 310 0.404 0.055 0.286 0.546 trd 310 2.288 1.800 0.406 0.455 infs 310 3.464 1.896 3.909 0.389 cfc 310 -0.711 0.532 -1.592 0.966 ge 310 -0.754 0.495 -1.744 0.497 polst 310 -0.762 0.777 -2.522 1.104 rq 310 -0.676 0.512 -1.892 0.764 rl 310 -0.674 0.512 -1.822 0.601 vc 310 -0.567 0.632 -1.848 0.688 https://doi.org/10.1016/0305-750x(94)90007-8 https://doi.org/10.2307/2225933 https://doi.org/10.1016/j.resourpol.2022.103034 https://doi.org/10.1016/j.worlddev.2018.10.009 https://doi.org/10.1016/j.socscimed.2020.113480 https://doi.org/10.1007/s00181-021-02175-4 https://doi.org/10.1016/j.jeconom.2004.02.005 https://doi.org/10.1080/00036846.2016.1270413 http://atlas.media.mit.edu/ https://datacatalog.worldbank.org/dataset/world-development-indicators https://datacatalog.worldbank.org/dataset/world-development-indicators https://infrastructureafrica.opendataforafrica.org/rscznob/africa-infrastructure-development-index-aidi https://infrastructureafrica.opendataforafrica.org/rscznob/africa-infrastructure-development-index-aidi https://data.worldbank.org/indicator/hd.hci.ovrl https://data.worldbank.org/indicator/hd.hci.ovrl https://datacatalog.worldbank.org/dataset/world-development-indicators https://datacatalog.worldbank.org/dataset/world-development-indicators https://datacatalog.worldbank.org/dataset/worldwide-governance-indicators https://datacatalog.worldbank.org/dataset/worldwide-governance-indicators https://datacatalog.worldbank.org/dataset/worldwide-governance-indicators https://datacatalog.worldbank.org/dataset/worldwide-governance-indicators https://datacatalog.worldbank.org/dataset/worldwide-governance-indicators https://datacatalog.worldbank.org/dataset/worldwide-governance-indicators https://datacatalog.worldbank.org/dataset/worldwide-governance-indicators https://datacatalog.worldbank.org/dataset/worldwide-governance-indicators https://datacatalog.worldbank.org/dataset/worldwide-governance-indicators https://datacatalog.worldbank.org/dataset/worldwide-governance-indicators https://datacatalog.worldbank.org/dataset/worldwide-governance-indicators https://datacatalog.worldbank.org/dataset/worldwide-governance-indicators economy, 2025, 12(2): 165-174 174 © 2025 by the authors; licensee asian online journal publishing group appendix 3. correlation matrix of the variables. eci tor infs trd hcap cfc rl ge rq vc polst eci 1.0000 tor -0.1121 1.0000 infs 0.0841 -0.0318 1.0000 trd 0.4017 -0.2943 -0.3757 1.0000 hcap 0.4001 -0.2031 0.0310 0.5235 1.0000 cfc 0.5392 -0.0730 -0.1444 0.4268 0.1535 1.0000 rl 0.6837 -0.0469 -0.0978 0.4343 0.2147 0.8853 1.0000 ge 0.6802 -0.1105 -0.2150 0.5445 0.3372 0.8568 0.9105 1.0000 rq 0.5957 -0.0369 -0.0316 0.3172 0.0424 0.7482 0.8533 0.8356 1.0000 vc 0.5679 -0.0207 -0.0244 0.3579 0.1139 0.8038 0.8325 0.8205 0.9047 1.0000 polst 0.4182 0.1697 -0.2909 0.3446 0.0614 0.6801 0.6888 0.6452 0.6650 0.6895 1.0000 appendix 4. bond (2002) test results for choice of gmm estimator. indicators eci l1.(bond1) eci l1.(bond2) eci l1.(bond3) eci l1.(bond4) eci l1.(bond5) eci l1.(bond6) fe 0.458*** 0.455*** 0.469*** 0.471*** 1.106*** 0.295*** ols 0.895*** 0.867*** 0.880*** 0.886*** 0.901*** 0.899*** first diff 0.310*** 0.307*** 0.295*** 0.335*** 0.402*** 0.341*** second diff 1.070*** 1.043*** 1.108*** 1.055*** 1.106*** 1.060*** note: there are six panels in this table, since the institutional quality variables are included in separate estimations of the underlying models. *** p < 0.01 represents 1% level of significance appendix 5. results of tests for cross-sectional independence. economic complexity model (1) cfc (2) rl (3) ge (4) rq (5) vc (6) polst pesaran fe 1.648 (0.331) 1.653 (0.331) 1.667 (0.329) 1.619 (0.329) 1.644 (0.328) 1.621 (0.332) pesaran re 1.146 (0.314) 1.142 (0.316) 1.128 (0.316) 1.224 (0.315) 1.144 (0.314) 1.088 (0.314) friedman fe 1.000 (0.331) 1.000 (0.331) 1.000 (0.329) 1.000 (0.329) 1.000 (0.328) 1.000 (0.332) friedman re 1.000 (0.314) 1.000 (0.316) 1.000 (0.316) 1.000 (0.315) 1.000 (0.314) 1.000 (0.314) frees' – fe 1.215 (0.331) 1.236 (0.331) 1.050 (0.329) 1.042 (0.329) 1.063 (0.328) 1.186 (0.332) frees' – re -0.054 (0.314) 0.102 (0.316) 0.121 (0.316) 0.039 (0.315) -0.005 (0.314) 0.103 (0.314) decision cid cid cid cid cid cid note: there are six panels in this table, since the institutional quality variables are included in separate estimations of the underlying models. pr values are reported for the tests based on pesaran and friedman, while the alpha values are reported for the frees’ tests. average absolute values are reported in parentheses in all cases. cid denotes cross-sectional independence. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. 78 © 2025 by the authors; licensee asian online journal publishing group economy vol. 12, no. 2, 78-89, 2025 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/economy.v12i2.6840 © 2025 by the authors; licensee asian online journal publishing group multivariate garch estimations of volatility spillover amongst oil prices, exchange rates and news-based uncertainty in the cee 3 countries david umoru1 timothy igbafe aliu2 shehu s. umar3 beauty igbinovia4 ( corresponding author) 1,2department of economics, edo state university uzairue, iyamho, nigeria. 1email: david.umoru@yahoo.com 2email: timothyigbafe@gmail.com 3department of statistics, auchi polytechnic auchi, nigeria. 3email: shehu.umar@gmail.com 4department of economics, edo state university uzairue, iyamho, nigeria. 4email: beauty.igbinovia@edouniversity.edu.ng abstract this study empirically examined the comparative difference in the outcomes of multivariate garch estimations in the volatility transmission amongst oil prices, new-based policy uncertainty and exchange rates of the cee-3 countries. the methodological scope is restricted to bekk-garch, constant ccc-garch and vec-garch. the results of this research indicate significant transfer of volatility from the huf/eur, pln/eur, and czk/eur exchange rates to the price of brent oil. the bekk-garch results uphold the co-volatility with relation to exchange rates and oil prices in the cee-3 countries and this was found as highly reciprocating and interdependent. the research also established a reciprocating transmission of volatility between the fluctuating price of oil and news based economic policy uncertainties in hungary and czech. the ccc-garch model sufficiently estimated oil price volatility spillover on currency rate and its volatility spillover on oil price fluctuation in czech while vec-garch model estimations sufficiently estimated oil price volatility transmission to exchange rates. the polish and czech news-based policy uncertainties were significant in influencing the pln/eur and czk/eur exchange rates respectively. the bekk-garch and vech-garch model estimations are efficient and hence highly recommended for ascertaining the volatility transmission within the financial markets in the cee-3 countries. keywords: bekk-garch model, ccc-garch model, czk/eur exchange rate, high-income countries, huf/eur exchange rate, news-based uncertainty, oil price variation, pln/eur exchange rate, vec-garch model, volatility transmission. citation | umoru, d., aliu, t. i., umar, s. s., & igbinovia, b. (2025). multivariate garch estimations of volatility spillover amongst oil prices, exchange rates and news-based uncertainty in the cee 3 countries. economy, 12(2), 78–89. 10.20448/economy.v12i2.6840 history: received: 12 may 2025 revised: 6 june 2025 accepted: 9 june 2025 published: 27 june 2025 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. institutional review board statement: not applicable transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. this study followed all ethical practices during writing. competing interests: the authors have no competing interests to declare authors’ contributions: all authors contributed equally to the conception, methodology, discussion, writing, and supervision of the manuscript. all authors have read and agreed to the published version of the manuscript. contents 1. introduction ...................................................................................................................................................................................... 79 2. earlier scientific findings ............................................................................................................................................................. 80 3. econometric methodology ............................................................................................................................................................ 80 4. results and discussions .................................................................................................................................................................. 81 5. conclusion ......................................................................................................................................................................................... 88 references .............................................................................................................................................................................................. 88 mailto:david.umoru@yahoo.com mailto:timothyigbafe@gmail.com mailto:shehu.umar@gmail.com mailto:beauty.igbinovia@edouniversity.edu.ng https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v12i2.6840 https://orcid.org/0000-0002-1198-299x https://orcid.org/0000-0002-1920-6901 https://orcid.org/0009-0001-5615-9833 https://orcid.org/0009-0005-6820-1110 economy, 2025, 12(2): 78-89 79 © 2025 by the authors; licensee asian online journal publishing group contribution of this paper to the literature the study advances our understanding of the modeling volatility spread amongst news-based uncertainty, exchange rate returns, and shocks to the price of oil of the cee-3 countries. the discovery of a reciprocal distribution of volatility between news-based economic policy uncertainty and fluctuating oil prices in hungary and the czech republic adds to the body of empirical research. for future financial economics scientists who could be intrigued by the fields of market volatility modeling, this could serve as a resource. 1. introduction the three nations that make up central and eastern europe (cee) are the subject of this study is hungary, the czech republic, and poland. the prolonged instability brought on by russia's war has exposed the cee region to longer-term vulnerabilities, including high inflation and an economic downturn. along with increased uncertainty, pandemics, and shocks to energy prices, these economies have also seen slower short-term growth and long-term macroeconomic prospects that are affected. significant disruptions have been transmitted to poland, hungary, and the czech republic by the combined effect of all these variables. in july 2024, the positive trade balance with eu member states increased by czk 5.8 billion, year over year, according to the (ikwuagwu & yagboyaju, 2023). the amount of the trade imbalance with non-eu nations rose by czk 3.4 billion. the primary cause of the negative impact on the overall trade balance was a greater trade deficit of czk 3.7 billion in basic metals and czk 1.9 billion in "refined petroleum products," among other items. the hungarian economy is extremely susceptible to shocks from without. the threats are defined by poor macroeconomic growth and significant uncertainty about the strength of the macroeconomy. the selection of these countries stems from the fact that, in terms of economic growth and development, they are transition economies, becoming market economies. these nations also use the same currency. the vulnerabilities are typified by large budget deficit expenditure, poor macroeconomic activity, and significant concerns about the health of the macroeconomy. for instance, the gdp growth rate in 2022 was 4.6%, but in 2023 it fell by 0.9%. capital inflows that generate debt are used to finance the external deficit. in july 2024, the usd to huf exchange rate saw a 90-day high of 371.5440 and a 90-day low of 351.6660. this suggests that the usd/huf changed by -3.92 and the 90-day average was 359.5148. poland is home to a thriving market that is situated in the center of central europe. in 2022, the gdp expanded by 4.9% after declining by 2.7% in 2020. nonetheless, there has been a noticeable decline in economic activities of poland as a result of russia's invasion of ukraine. the exchange rate between the euro and polish zloty on september 19, 2024, was 4.27. in june 2023, poland's exchange rate versus the us dollar averaged 4.1 (usd/pln). in comparison to april 2024, the daily average foreign exchange market turnover grew by 276 million usd (3.1%) to usd 9,145 million, according to the (nabila, usman, indryani, & kurniasari, 2021). the cee countries are major consumers of oil, rather than producers. when oil prices rise, these countries experience higher import costs, leading to inflation and a weaker currency (abiad & qureshi, 2023). conversely, when oil prices fall, their economies benefit from lower fuel costs, leading to decreased inflation and a stronger currency. aside oil price shocks, news-based uncertainty is another crucial factor that may also play significant role in the dynamics of financial markets in africa and europe (adeosun, adeosun, tabash, & anagreh, 2023). in recent years, the rise of globalization has interconnected economies and financial systems across the globe, making news events and uncertainty in one region affect foreign exchange rates in another. hence, news events such as political unsteadiness, economic downturns, natural disasters, or geopolitical tensions in one region can have ripple effects on foreign exchange rates in other regions (bush & noria, 2021). investors and traders closely monitor news events to assess risks and make informed decisions on foreign exchange trading. in europe, news-based uncertainty can impact foreign exchange rates, especially during times of economic instability or political turmoil (olasehinde‐williams & olanipekun, 2022). the eurozone, which comprises 19 nations that use the euro as their currency, is particularly sensitive to news events that can impact the stability of the euro. for instance, news of a potential breakup of the eurozone or a major economic crisis in one of its member countries can lead to fluctuations in foreign exchange rates across the region. moreover, news-based uncertainty in europe can also be driven by external factors such as global economic trends, trade policies, or changes in interest rates by central banks. for example, news of a trade war between major economies like the us and china can impact foreign exchange rates in europe as investors and traders adjust their positions based on the potential risks and opportunities arising from such news events (aftab, naeem, tahir, & ismail, 2024). in europe, the oil price uncertainty and exchange rate problems also pose significant challenges to the economy. this is because high income nations in europe is highly dependent on oil imports to meet its energy needs, and fluctuations in oil prices can lead to increased costs for consumers and businesses. this can impact inflation rates, consumer spending, and overall economic growth in the region. additionally, exchange rate problems resulting from oil price uncertainty can create instability in the financial markets, leading to fluctuations in stock prices, currency values, and investment decisions (olasehinde‐williams & olanipekun, 2022). despite the fact that some studies have been carried out for the brics nations (umoru et al., 2023; wang, cheng, & cao, 2022) no recent study utilized a combination of multivariate garch estimation methods like bekk-garch, ccc-garch and vec-garch from 2019q1 to 2023q4. this study sought to fill this research gap. accordingly, the study aims at ascertaining whether or not there is a significant difference in the outcomes of volatility spillover amongst oil prices, exchange rates and uncertainty basing analysis on multivariate garch estimations in high income countries. the findings of the study contribute to knowledge and add up to empirical literature on oil price shocks, news-based uncertainty and exchange rate returns modeling. this could become a reference point for prospective researchers in financial economics who may be interested in the areas of market volatility modeling. the following section provides a synopsis of related studies. the study's methodology, results, and discussions come next. the final section of the paper is the concluding remarks. economy, 2025, 12(2): 78-89 80 © 2025 by the authors; licensee asian online journal publishing group 2. earlier scientific findings the dynamic volatility spillover between the brics nations' gold, exchange, and oil prices was examined by oladeji and musa (2022). the analysis discovered a relationship between china's exchange rate and oil prices, but not between brazil and india's volatility spillover toward gold. yusufu, yusufu, and abdullahi (2022) worked on the association that exists between foreign direct investment and volatility in rates of exchange in turkey. expected gain from fdi is at risk as the oscillations in the rate of exchange express or show instability. nevertheless, fdi has crucially influenced how many investments take place. we examine the relationship between the volatility of the exchange rate and foreign direct investment (fdi) in turkey from the fourth quarter of 2005 to the first quarter of 2018. with the use of the toda-yamamoto causality test, the oscillations in the rate of exchange were ascertained. using copulas, wang et al. (2022) investigated the potential of oil price shocks to predict the cny/usd exchange rate. the bivariate copula outperformed the univariate in terms of predicting abilities, according to the results. the influence of both domestic and international oil prices on the chinese currency rate was shown to be considerable by kutu, alorı, and ngalawa (2021). chang and tan (2008) investigated how the dollar's value fluctuated in relation to the exchange rates of opec nations. the dynamic factor technique was used by camanho, hau, and rey (2022) to assess the degree of uncertainty in the colombian economy. the market rate of the peso and the prices of gas and oil were utilized by the author. the created index demonstrates the rise in unpredictability that coincided with the 2008 global and covid-19 crises. in a study by abdullahi, abubarkar, fakunmoju, and giwa (2016) which analyzed the causes of instability in rates of exchange, it was pointed out that change in foreign reserves adversely caused fluctuations in currency rates in bangladesh, malaysia, and china, while india's exchange rate fluctuated wildly. nonetheless, changes in government spending had a positive and significant impact on currency rate fluctuations in china, malaysia, pakistan, indonesia, and bangladesh. the fluctuation in terms of trade required a significant reduction in the rate of exchange fluctuations in bangladesh and pakistan. but in china, malaysia, pakistan, indonesia, and india, it causes an increase in that. on its own side, variations in gold price added advantageously and in a momentous way to the rate of exchange volatility in indonesia, bangladesh, and malaysia.’ the precariousness in the rate of exchange of pakistan and indonesia was majorly influenced by production. by using the wavelet analysis approach, engle (2002) highlighted the time-frequency connection between oil prices, stock market returns, and currency rates. the results demonstrate a strong relationship between foreign exchange rates and oil prices, that is, the indian stock market. the association between the indian market's exposure to developed markets' volatility and a few macroeconomic events was identified by the author. seguino (2020) examines the link between the g10 exchange rate and the opec newspaper count index using a bayesian inference approach and multiple vector autoregressive models. salimi, saeedi, heidarzadeh, and emamverdi (2023) investigated the influence the instruments of monetary policy had on the volatility of the rate of exchange from 1997 to 2017 in sudan. to ascertain the influence in the short-term period, they made use of co-integration analysis. proceeding from this, they established that the variables were stable at their first difference. to analyze the long-term link, vecm was estimated. the findings showed that there has been instability in the currency rate of sudan throughout the time frame under investigation. the variations in the money supply and variables of the rate of profit margin that experienced involvement of the central bank of sudan from time to time explained the volatility in the short term. 3. econometric methodology the research evaluates transmission of volatility amongst the cee-3 countries' exchange rates. the cee3 countries considered in this research are hungary, poland and czech republic. accordingly, the huf/eur, pln/eur and czk/eur serve as the cee-3's currency exchange rates, respectively. each of the cee-3's monthly currency exchange rate returns was utilized. also, monthly volatility in brent crude oil prices was utilized for estimation. the news-based economic policy uncertainty index uncertainty was constructed by evaluating the frequency of words associated with news, policy, and uncertainty appearing together in the english-language main newspapers of hungary, poland, and the czech republic. this methodology of obtaining economic country-specific uncertainty was pioneered by baker, bloom, and davis (2016). it has also been adopted by kilic and balli (2024). the econometrics estimations covered the sample period of january 2009 to june 2024. the choice of these cee3 countries stems from the fact that they are transition economies. these countries are on transition to market economies as against being communist nations. the econometric methodological scope is restricted to three (3) multivariate-garch estimation techniques. these include: bekk-garch, ccc-garch and vechgarch. the e-views 13 econometric software was utilized in the estimation process. the output of each was compared to determine the best fit for volatility spillover estimation for developing and developed countries. we measure the reliability of news-based uncertainty by examining their track record of accuracy. this was done by looking at the history of the news outlet and checking for any past instances of false reporting or bias. additionally, analyzing the sources of the news outlet provided insight into the credibility of news outlets. according to bush and noria (2021) when a news source consistently relies on reputable sources and fact-checks their information, it is likely to be more reliable. the bekk-garch, ccc-garch and vec-garch models were estimated. the justification for estimating these set of equations is rooted on the fact that bekk-garch equation is a potent tool for measuring volatility in financial markets. its capacity to measure cross-correlations between variables as well as time-varying volatility makes it a useful model for risk control and portfolio enhancement (rastogi & kanoujiya, 2024). similarly, the ccc-garch equation has become a valuable tool for financial analysts and researchers in modeling and forecasting asset or rate returns in volatile markets (xiao, xu, liu, & liu, 2020). by incorporating both the ccc assumption and the garch process, this equation provides a more comprehensive and flexible framework for capturing the dynamics of volatility (salimi et al., 2023). as financial markets continue to evolve and become more complex, the ccc-garch equation remains a key tool for understanding and managing risk in portfolios. in line economy, 2025, 12(2): 78-89 81 © 2025 by the authors; licensee asian online journal publishing group with the preceding, the bekk-garch model was effectively applied in this research to the analysis of financial data to show interdependencies. the mean and variance equations listed below define the model: 𝐻𝑈𝐹/𝐸𝑈𝑅𝑖𝑡 = 𝛿𝑖 +∑𝛾𝑖𝑘𝐻𝑈𝐹/𝐸𝑈𝑅𝑡−𝑗 +∑𝛽𝑒𝑡−𝑗,𝑖 𝑞 𝑗=1 𝑝 𝑖=1 𝜎𝐻𝑈𝐹/𝐸𝑈𝑅𝑖𝑡 2 = 𝐵0𝐵0 ′ 𝛿𝑖 + ∑ 𝐺𝑖𝑘𝑒𝑡−𝑖𝑒𝑡−𝑖 ′ 𝐺𝑖 ′𝑝 𝑖=1 + ∑ 𝐶𝑖𝜎𝐻𝑈𝐹/𝐸𝑈𝑅𝑖𝑡𝑡−𝑖 2𝑞 𝑗=1 𝐶𝑖 ′ (1) 𝑃𝐿𝑁/𝐸𝑈𝑅𝑖𝑡 = 𝜑𝑖 +∑𝛼𝑖𝑘𝑃𝐿𝑁/𝐸𝑈𝑅𝑡−𝑗 +∑𝜌𝑒𝑡−𝑗,𝑖 𝑞 𝑗=1 𝑝 𝑖=1 𝜎𝑃𝐿𝑁/𝐸𝑈𝑅𝑖𝑡 2 = 𝐵0𝐵0 ′ + ∑ 𝐺𝑖𝑘𝑒𝑡−𝑖𝑒𝑡−𝑖 ′ 𝐺𝑖 ′𝑝 𝑖=1 + ∑ 𝐶𝜎𝑃𝐿𝑁/𝐸𝑈𝑅𝑖𝑡𝑡−𝑖 2𝑞 𝑗=1 𝐶𝑖 ′ (2) 𝐶𝑍𝐾/𝐸𝑈𝑅𝑖𝑡 = 𝜏𝑖 +∑𝜛𝑖𝑘𝐶𝑍𝐾/𝐸𝑈𝑅𝑡−𝑗 +∑𝜇𝑒𝑡−𝑗,𝑖 𝑞 𝑗=1 𝑝 𝑖=1 𝜎𝐶𝑍𝐾/𝐸𝑈𝑅𝑖𝑡 2 = 𝐵0𝐵0 ′ + ∑ 𝐺𝑖𝑘𝑒𝑡−𝑖𝑒𝑡−𝑖 ′ 𝐺𝑖 ′𝑝 𝑖=1 + ∑ 𝐶𝜎𝐶𝑍𝐾/𝐸𝑈𝑅𝑖𝑡𝑡−𝑖 2𝑞 𝑗=1 𝐶𝑖 ′ (3) where: i 𝜑𝑖𝜏𝑖 are the mean of huf/eur, pln/eur and czk/eur exchange rates; 𝛾 and 𝛽; 𝛼 and 𝜌; and 𝜛 and 𝜇are the autoregressive and moving average coefficients of the aforementioned exchange rates respectively; 𝜎𝐻𝑈𝐹/𝐸𝑈𝑅𝑖𝑡 2 , 𝜎𝑃𝐿𝑁/𝐸𝑈𝑅𝑖𝑡 2 and 𝜎𝐶𝑍𝐾/𝐸𝑈𝑅𝑖𝑡 2 are the conditional covariance matrices of huf/eur, pln/eur and czk/eur at time t; 𝐵0 is a matrix of constants; 𝐺𝑖𝑘 and 𝐶𝑖 are coefficient matrices; 𝑒𝑡 is an array of standardized regression errors; p and q are the lag orders. the breaking down of the conditional covariance matrix into conditional correlation is the methodological applicability of the ccc-garch model. therefore, a considering serially uncorrelated vectors of zero-mean, the variables are modeled using the following equation 4. 𝑒𝑡 = 𝑋𝑡 − 𝜇 (4) the covariance of the study's variables was used to express the contemporaneous correlation, so that: ∑ 𝛦𝑡−1[(𝑋𝑡 − 𝜇)(𝑋𝑡 − 𝜇)′]𝑡 (5) to correct for conditional heteroskedasticity, we estimated for each variable, the conditional volatility 2i t using a garch model and the standardized residuals are given by: 𝜐𝑡 = 𝐶𝑡 −1(𝑋𝑡 − 𝜇), (6) { 𝐶𝑡 𝑖,𝑖 = 𝜎𝑡 𝑖∀𝑖 = 𝑗 𝐶𝑡 𝑖,𝑖 = 0∀𝑖 ≠ 𝑗 (7) where tc represents conditional fluctuations contained in a diagonal matrix as expressed in equation 7, so that the ccc estimator matrix of (bollerslev, 1990) becomes: 𝑟 = 1/𝑇∑ [𝐶𝑡 −1(𝑋𝑡 − 𝜇)]𝑇 𝑡=1 [𝐶𝑡 −1(𝑋𝑡 − 𝜇)]𝑡 ′ (8) the dynamic conditional correlations (dcc) were estimated based on equation 9. 𝜌𝐶𝐶𝐶 = 𝑟 + 𝜑[𝜐𝑡−1𝜐𝑡−1 ′ − 𝑟] + 𝜂[𝜌𝑡−1 − 𝑟] (9) 𝜌𝐶𝐶𝐶 = 𝑟 + 𝜑 1 𝐶𝑡−1 ([(𝑋𝑡−1 − 𝜇)][(𝑋𝑡−1 − 𝜇)]𝑡 ′ − 𝑟) + 𝜂[𝜌𝑡−1 − 𝑟] (10) the garch representation of the dcc-garch model is given correspondingly in equation 11: 𝜌𝐶𝐶𝐶 = 𝛷 + 𝜑𝜐𝑡−1𝜐𝑡−1 ′ + 𝜂𝜌𝑡−1 (11) 𝜌𝐶𝐶𝐶 = 𝑟 + ∑ 𝜑𝑖[𝜐𝑡−1𝜐𝑡−1 ′ − 𝑟] + ∑ 𝜂𝑗[𝜌𝑡−1 − 𝑟 𝑞 𝑗=1 𝑝 𝑖=1 ] (12) where is a matrix with 2 ( 1/ 2)n n+ + parameters. in effect, the unconditional relationship represented by the dcc-garch model according to engle (2002) and becomes equation 13 accordingly: 𝑟 = 𝛷/1 − 𝜑 − 𝜂 (13) therefore, while estimating time-varying covariance and correlations between variables, the dcc-garch methodology targets variance. we used the quasi-maximum likelihood estimation (qmle) approach to estimate the bekk-garch model having assumed that the regression residuals obey a standardized distribution that is normally distributed. the qmle was adopted because, even in cases when the error distribution deviates from normality, the method yields consistent and asymptotically gaussian regression estimates (bollerslev, 1990). the main source that provides data for the study was the imf dataset. 4. results and discussions the pooled data for the cee-3 countries of europe are descriptively presented in table 1. table 1 show that mean oil price is 1.6. the standard deviation of news-based policy uncertainty in the cee -3 countries are 0.637554, 1.3267, and 1.32038 are moderately low. the huf/eur, pln/eur, and czk/eur currency exchange rates had standard deviation values given by 153.1, 67.4 and 112.5 respectively. these values signify instability in the exchanger rates of the cee-3 countries. the series are not normal in distribution, according to the jarque-bera test (p<0.05). economy, 2025, 12(2): 78-89 82 © 2025 by the authors; licensee asian online journal publishing group table 1. preliminary results. statistics oilp hunnews polnews czenews huf/eur pln/eur czk/eur mean 1.600 3.209 1.293 1.288 17.081 19.386 187.349 median 1.592 3.087 3.871 1.568 10.913 184.267 148.487 maximum 2.530 5.100 0.187 1.289 372.596 426.481 790.374 minimum 0.590 2.000 1.139 2.489 0.501 32.489 134.086 std. dev. 0.271 0.638 1.327 1.320 153.182 167.389 112.549 skewness -0.152 0.521 1.732 1.371 4.294 13.489 18.487 kurtosis 3.923 2.716 1.389 1.380 22.159 19.743 18.034 jarque-bera 37.086 21.062 79.560 1.230 13.546 14.571 123.809 probability 0.000 0.000 0.000 0.000 0.000 0.000 0.000 source: authors’ eviews 13 results (2024). from figures 1 and 2 the trend behavior of oil price, news-based uncertainty and they exchange rates of the cee-3 countries of europe showed high volatility clustering. this is evident as high rise shocks are followed with higher rise values while low drops are followed with further drops. figure 1. oil price, news-based policy uncertainty and exchange rates of the cee-3 countries. source: authors’ plot (2024) with eviews 13 results. economy, 2025, 12(2): 78-89 83 © 2025 by the authors; licensee asian online journal publishing group figure 2. % change in oil price, news-based policy uncertainty and exchange rates of the cee-3 countries. source: authors’ plot (2024) with eviews 13 results. this section analyzes the results of estimations of the three (3) multivariate-garch (m-garch) models. tables 2, 3, and 4 are the bekk-garch estimates for hungary, poland and czech. according to tables 2, 3 and 4 the mean equations of the bekk-garch for hungary, poland and czech republic shows that oil price volatility spillover on huf/eur was significant (p=0.0001) while volatility spillover of the huf/eur on oil prices was also insignificant (p=0.0745). similar results were obtained for poland and czech republic. accordingly, oil price volatility transmissions on the pln/eur and czk/eur exchange rates are both substantial at the 1% level. also, the volatility transmission from the huf/eur, pln/eur and czk/eur exchange rates to brent oil prices is substantial at the 1% level. thus, the volatility vectors change overtime, the co-volatility between economy, 2025, 12(2): 78-89 84 © 2025 by the authors; licensee asian online journal publishing group currency rates and oil prices in the cee-3 countries is highly reciprocating and interdependent. also, the volatility spillover of hungary news based policy uncertainty on the huf/eur exchange rate was positively significant (p=0.000) as revealed by the coefficient 0.027813. conversely, the huf/eur exchange rate volatility transmission on news economic policy uncertainty of the hungarian economy was insignificant (p=0.6689) with a negative coefficient. however, the polish and czech news based economic policy uncertainties were significant in influencing the pln/eur and czk/eur exchange rates respectively. the coefficients of all the variance equations and covariance specifications of the diagonal bekk-garch are all significant for hungary, poland and czech. this shows that bekk-garch does sufficiently estimate impact of fluctuations in oil prices on the currency rates of the cee-3 countries of europe. table 2. bekkgarch estimates for hungary. variables coefficient p-value variables coefficient p-value constant 0.808*** 0.000 constant 0.785*** 0.000 oilvol 0.045** 0.000 hunnews 0.028*** 0.000 constant 1.533*** 0.000 constant 4.109*** 0.000 huf/eur 0.039** 0.001 huf/eur -0.001 0.669 variance equation coefficients variables coefficient p-value variables coefficient p-value c(5) 0.069 0.000 c(5) 1.185 0.000 c(6) 0.036 0.000 c(6) 3.975 0.004 c(7) 2.043 0.000 c(7) -0.071 0.000 c(8) 1.844 0.000 c(8) 0.011 0.000 c(9) -0.218 0.999 c(9) 0.879 0.844 c(10) 0.131 0.028 c(10) -0.041 0.000 covariance specification: diagonal bekk covariance structure coefficient p-value covariance structure coefficient p-value m(1,1) 0.007 0.000 m(1,1) 0.010 0.000 m(2,2) 0.026 0.000 m(2,2) 0.008 0.004 a1(1,1) 1.013 0.000 m(1,1) 2.145 0.000 a1(2,2) 1.844 0.000 m(2,2) 2.136 0.000 b1(1,1) -2.182 0.991 m(1,1) -0.013 0.844 b1(2,2) 0.139 0.028 m(2,2) 0.181 0.000 note: significance is indicated at 1%, 5%, respectively, by ***, **. source: authors’ eviews 13 results (2024) table 3. bekk-garch estimates for poland. variables coefficient p-value variables coefficient p-value constant 1.038** 0.003 constant 0.171*** 0.000 oilvol 13.488*** 0.000 polnews 1.047** 0.002 constant 1.093* 0.000 constant 1.039*** 0.000 pln/eur 1.029*** 0.000 pln/eur 1.095 0.061 variance equation coefficients variables coefficient p-value variables coefficient p-value c(5) 1.388 0.000 c(5) 1.185 0.000 c(6) 3.104 0.000 c(6) 3.102 0.000 c(7) -0.194 0.000 c(7) -0.123 0.000 c(8) 1.079 0.000 c(8) 0.062 0.000 c(9) 0.943 0.000 c(9) 0.103 0.000 c(10) -7.044 0.000 c(10) -6.021 0.000 covariance specification: diagonal bekk covariance structure coefficient p-value covariance structure coefficient p-value m(1,1) 2.479 0.000 m(1,1) 1.289 0.000 m(2,2) 3.175 0.000 m(2,2) 3.913 0.000 a1(1,1) -0.194 0.000 m(1,1) -0.287 0.000 a1(2,2) 1.016 0.000 m(2,2) 0.017 0.000 b1(1,1) 0.239 0.000 m(1,1) 0.103 0.000 b1(2,2) -0.158 0.000 m(2,2) -6.041 0.000 note: significance is indicated at 1%, 5%, and 10%, respectively, by ***, **, and *. source: authors’ eviews 13 results (2024) economy, 2025, 12(2): 78-89 85 © 2025 by the authors; licensee asian online journal publishing group table 4. bekkgarch estimates for czech republic. variables coefficient p-value variables coefficient p-value constant 0.436* 0.000 constant 0.179*** 0.000 oilvol 2.481*** 0.000 czenews 0.161*** 0.000 constant 1.209 0.225 constant 1.190*** 0.000 czk/eur 0.104** 0.003 czk/eur 2.102 0.061 variance equation coefficients variables coefficient p-value variables coefficient p-value c(5) 7.361*** 0.000 c(5) 1.156 0.000 c(6) 0.287*** 0.000 c(6) 0.194 0.000 c(7) -0.029*** 0.000 c(7) -0.588 0.000 c(8) 0.287*** 0.000 c(8) 0.206 0.000 c(9) 0.188*** 0.000 c(9) 0.039 0.000 c(10) -0.023*** 0.000 c(10) -0.561 0.000 c(11) 5.192*** 0.000 c(11) 9.476 0.000 covariance specification: constant conditional corr. covariance structure coefficient p-value covariance structure coefficient p-value m(1,1) 5.239 0.000 m(1,1) 1.089 0.000 m(2,2) 1.075 0.000 m(2,2) 0.191 0.000 a1(1,1) -0.156 0.000 m(1,1) -0.587 0.000 a1(2,2) 2.011 0.000 m(2,2) 0.271 0.000 b1(1,1) 0.879 0.000 m(1,1) 0.066 0.000 b1(2,2) -8.236 0.000 m(2,2) -9.561 0.000 note: significance is indicated at 1%, 5%, and 10%, respectively, by ***, **, and *. source: authors’ eviews 13 results (2024) tables 5, 6 and 7 are the ccc-garch estimates for hungary, poland and czech respectively. the significance of oil price volatility transmission on huf/eur, pln/eur, and czk/eur at the 1% level with a pvalue of 0.000 was identified. the volatility transmission from huf/eur, and pln/eur on oil price volatility was insignificant with the p-values, 0.8679, and 0.1567 respectively. only the czk/eur exchange rate volatility spillover had significant influence on oil prices. the news based policy uncertainty of hungary had insignificant effect on huf/eur exchange rate as reported by high p-value of 0.6121. nonetheless, the effects of the polish and czech news based economic policy uncertainty indices on the pln/eur, and czk/eur exchange rates are considerable given the zero p-value for each currency. the huf/eur exchange rate volatility spillover on hungary news based uncertainty was significant with a negative value. similarly, czk/eur rate had a significant coefficient given by 0.00395**. this shows significant volatility transmission from the czk/eur to the czech policy uncertainty. hence, the price of oil fluctuates in tandem with economic policy in the hungary. the coefficients of the variance equations and covariance specification of the ccc-garch model were all significant with p-value less than 0.05. this shows that ccc-garch sufficiently estimate oil price volatility spillover on currency rate and currency rate volatility spillover transmission on oil price in the cee-3 countries. table 5. ccc-garch estimates for hungary. variables coefficient p-value variables coefficient p-value constant 26.037*** 0.000 constant 0.862*** 0.000 oilvol -11.964** 0.002 hunnews 0.002 0.612 constant 1.569*** 0.000 constant 3.062*** 0.000 huf/eur 6.187 0.868 huf/eur 0.005*** 0.000 variance equation coefficients variables coefficient p-value variables coefficient p-value c(5) 1.1854 0.224 c(5) 0.002 0.017 c(6) 3.975 0.000 c(6) 2.929 0.000 c(7) -0.071 0.948 c(7) 1.061 0.991 c(8) 0.011 0.000 c(8) 0.002 0.059 c(9) 0.879 0.000 c(9) 2.772 0.000 c(10) -0.049 0.477 c(10) 0.019 0.627 c(11) 0.122 0.252 c(11) -0.054 0.416 covariance specification: constant conditional correlation covariance structure coefficient p-value covariance structure coefficient p-value m(1) 1.182 0.000 m(1) 2.383 0.000 a1(1) 1.089 0.000 a1(1) 5.001 0.000 b1(1) -0.002 0.000 b1(1) 0.011 0.000 m(2) 0.011 0.000 m(2) 1.885 0.000 a1(2) 0.879 0.000 a1(2) 3.569 0.000 b1(2) -0.011 0.000 b1(2) 0.485 0.000 r(1,2) 0.158 0.000 r(1,2) -0.813 0.0000 note: at 1%, 5%, respectively, ***, ** indicate significance. source: authors’ eviews 13 results (2024) economy, 2025, 12(2): 78-89 86 © 2025 by the authors; licensee asian online journal publishing group table 6. ccc-garch estimates for poland. variables coefficient p-value variables coefficient p-value constant 0.157*** 0.000 constant 0.807 0.625 oilvol 0.014*** 0.000 polnews 0.047*** 0.000 constant 1.797 0.234 constant 1.532*** 0.000 pln/eur 0.001 0.157 pln/eur 0.039 0.069 variance equation coefficients variables coefficient p-value variables coefficient p-value c(5) 0.975*** 0.000 c(5) 1.216** 0.019 c(6) 0.219*** 0.001 c(6) 18.155*** 0.007 c(7) 0.011** 0.000 c(7) -0.065** 0.010 c(8) 0.003*** 0.000 c(8) 3.962** 0.004 c(9) 0.165** 0.000 c(9) 5.332*** 0.000 c(10) 0.069** 0.000 c(10) -0.717*** 0.000 c(11) 0.107*** 0.000 c(11) 1.145*** 0.000 covariance specification: constant conditional correlation covariance structure coefficient p-value covariance structure coefficient p-value m(1) 0.157*** 0.004 m(1) 1.0158 0.011 a1(1) 0.076*** 0.000 a1(1) 1.005*** 0.007 b1(1) 0.011*** 0.000 b1(1) -0.065** 0.000 m(2) 0.003*** 0.000 m(2) 3.961*** 0.004 a1(2) 0.002*** 0.000 a1(2) 5.332*** 0.000 b1(2) 0.002*** 0.007 b1(2) -0.712** 0.000 r(1,2) 0.101*** 0.002 r(1,2) 1.146*** 0.000 note: at 1%, 5%, respectively, ***, ** indicate significance. source: authors’ eviews 13 results (2024) table 7. ccc-garch estimates for czech republic. variables coefficient p-value variables coefficient p-value constant 0.561** 0.000 constant 0.808*** 0.000 oilvol 0.021*** 0.000 czenews 0.047*** 0.000 constant 1.451*** 0.000 constant 1.532 0.143 czk/eur 0.176*** 0.000 czk/eur 0.004** 0.001 variance equation coefficients variables coefficient p-value variables coefficient p-value c(5) 2.383 0.001 c(5) 0.002 0.002 c(6) 5.001 0.008 c(6) 2.925 0.008 c(7) 0.011 0.793 c(7) 1.868 0.005 c(8) 1.853 0.000 c(8) 0.003 0.000 c(9) 3.698 0.000 c(9) 1.722 0.000 c(10) 0.458 0.000 c(10) 0.019 0.000 c(11) -0.829 0.000 c(11) -0.054 0.000 covariance specification: constant conditional correlation covariance structure coefficient p-value covariance structure coefficient p-value m(1) 0.975 0.000 m(1) 1.185 0.000 a1(1) 0.219 0.000 a1(1) 3.975 0.000 b1(1) 0.013 0.000 b1(1) -0.007 0.000 m(2) 0.046 0.000 m(2) 0.011 0.000 a1(2) 0.164 0.000 a1(2) 0.894 0.000 b1(2) 0.098 0.000 b1(2) -0.047 0.000 r(1,2) 0.107 0.000 r(1,2) 0.125 0.000 note: at 1%, 5% respectively, ***, ** indicate significance. source: authors’ eviews 13 results (2024) from tables 8, 9 and 10 which report the vech-garch estimates for hungary, poland and czech republic, the mean equation of the vech-garch shows that oil price volatility spillover on the huf/eur, pln/eur, and czk/eur was significant (p=0.000) while the huf/eur and pln/eur volatility effect on oil price volatility were insignificant. also, the influence of hunnews uncertainty on the huf/eur exchange rate was significant (p=0.0072) while huf/eur exchange rate volatility spillover on news based hunnews uncertainty was also significant (p=0.0000). this shows significance of the mean vector coefficient of the garch equation. same results were obtained for the czech republic. the coefficients of the variance equations and covariance specification of the vech-garch coefficients are all significant. this shows that vech-garch only sufficiently estimated oil price volatility spillover on currency rate, but not the reverse. however, the reciprocal volatility spillover exists between oil price variation and news based uncertainties in high income nations in europe. economy, 2025, 12(2): 78-89 87 © 2025 by the authors; licensee asian online journal publishing group table 8. vech-garch estimates for hungary. variables coefficient p-value variables coefficient p-value constant 0.436*** 0.000 constant 0.104*** 0.000 oilvol 0.018*** 0.000 hunnews 0.059** 0.007 constant 1.395** 0.000 constant 1.023** 0.006 huf/eur 1.953 0.661 huf/eur -0.002*** 0.000 variance equation coefficients variables coefficient p-value variables coefficient p-value c(5) 0.067*** 0.000 c(5) 0.058*** 0.000 c(6) 0.393*** 0.000 c(6) 0.104*** 0.000 c(7) 3.195*** 0.000 c(7) 2.811*** 0.000 c(8) -1.529*** 0.000 c(8) -1.791** 0.000 transformed variance coefficients covariance structure coefficient p-value covariance structure coefficient p-value m(1,1) 0.023*** 0.000 m(1,1) 0.008*** 0.000 m(2,2) 0.039*** 0.000 m(2,2) 0.010*** 0.000 a1 3.195** 0.000 a1 2.811** 0.002 b1 -2.035*** 0.852 b1 -1.095*** 0.000 note: at 1%, 5% respectively, ***, ** indicate significance. source: authors’ eviews 13 results (2024) table 9. vech-garch estimates for poland. variables coefficient p-value variables coefficient p-value constant 0.808*** 0.000 constant 0.808** 0.000 oilvol 0.045*** 0.000 polnews 0.047*** 0.000 constant 1.533 0.286 constant 1.533** 0.000 pln/eur 0.033 0.061 pln/eur 0.004 0.061 variance equation coefficients variables coefficient p-value variables coefficient p-value c(5) 0.187** 0.000 c(5) 0.010*** 0.001 c(6) 1.603*** 0.003 c(6) 0.089*** 0.000 c(7) 5.109*** 0.000 c(7) 1.587*** 0.000 c(8) 3.025*** 0.000 c(8) 2.131*** 0.000 transformed variance coefficients covariance structure coefficient p-value covariance structure coefficient p-value m(1,1) 1.349** 0.000 m(1,1) 0.007*** 0.001 m(2,2) 7.467** 0.008 m(2,2) 0.039 0.002 a1 1.210*** 0.000 a1 0.195*** 0.000 b1 5.039*** 0.000 b1 -9.467*** 0.000 note: at 1%, 5%, respectively, ***, ** indicate significance. source: authors’ eviews 13 results (2024) table10. vech-garch estimates for czech republic. variables coefficient p-value variables coefficient p-value constant 0.153 0.327 constant 0.088*** 0.000 oilvol 5.019*** 0.000 czenews 0.011*** 0.000 constant 1.133*** 0.000 constant 1.099*** 0.000 czk/eur 5.044 0.356 czk/eur 1.568*** 0.000 variance equation coefficients variables coefficient p-value variables coefficient p-value c(5) 0.897*** 0.000 c(5) 0.103*** 0.000 c(6) 6.011*** 0.000 c(6) 0.879*** 0.000 c(7) 3.098*** 0.000 c(7) 2.091*** 0.000 c(8) -2.568*** 0.000 c(8) 5.879*** 0.000 transformed variance coefficients covariance structure coefficient p-value covariance structure coefficient p-value m(1,1) 0.567*** 0.000 m(1,1) 0.103*** 0.000 m(2,2) 6.009*** 0.000 m(2,2) 0.239*** 0.000 a1 3.115*** 0.000 a1 2.099*** 0.000 b1 -2.016*** 0.000 b1 5.898*** 0.000 note: at 1% respectively, *** indicate significance. source: authors’ eviews 13 results (2024) 4.1. discussion the results demonstrate considerable volatility transmission from huf/eur, pln/eur and czk/eur exchange rates to brent oil prices. the bekk-garch results uphold an extremely interconnected co-variability between currency rates and oil prices in the cee-3 countries. the findings of this study are consistent with those of li and chen (2023) and ding, zheng, cui, and du (2023) respectively. the research results of li and chen (2023) confirm that there are transmission intensity changes between energy costs and the rmb exchange rate. the covariance between fluctuations in energy prices and those in exchange rates and oil prices was econometrically clarified by ding et al. (2023). the implication associated with the research was that a continuous reduction in the co-movement between the fluctuations of oil prices and currency rates in developing economies is indispensable. economy, 2025, 12(2): 78-89 88 © 2025 by the authors; licensee asian online journal publishing group the findings of the resent research agrees with those of adi, adda, and wobilor (2022) where it was established that that there was a non-reciprocating volatility transmission from the price of brent oil to the effective exchange rate market, but a considerable reversible volatility transmission between the energy price (brent oil) and the dollar-naira exchange rate. these authors established that nigeria had loosened the fixed exchange rate regime during the post-structural adjustment programme era, which had a substantial impact on the naira's strong depreciation against other currencies, particularly the us dollar. also, the present research outcome aligns with the outcome of balcilar and usman (2021) empirical research which reveals significant volatility in both the price of oil and the currency rate. our results also agree with chang and tan (2008) who identified a remarkable link between the world oil prices and the stock performance of the brics countries. throughout the whole study period, the relationship's degree fluctuates depending on which countries import and export oil. countries that export oil typically have a stronger and more positive correlation with changes in oil prices than those relying on imported oil, which typically have a negative correlation. the findings are consistent with the research of seguino (2020) which discovered significant correlations at truncated frequencies, indicating a significant long-term impact on currency rates and equity market returns of g7 countries. in addition, the result agrees with the work of salisu, rufai, and nsonwu (2025) who found that the typical market index went straight down by 35 per cent both within the group of nations using the hit associated with the pandemic. the brics and group 7 countries' market indices went straight down as well because the lives of individuals are greatly impacted during this period. also, the result corroborated the findings of salimi et al. (2023) who discovered robust connectivity at low frequencies shows that covid-19 cases have a major long-term influence on the stock market and exchange rate returns of the most afflicted countries under consideration. 5. conclusion the study evaluates whether or not there is a notable variation in the outcomes of volatility spillover amongst oil prices, exchange rates and uncertainty basing analysis on multivariate garch estimations in for the cee-3 countries, namely czech republic, hungary and poland. the summary of research findings are as follows: the bekk-garch model does not sufficiently estimate oil price volatility spillover on currency rate and its volatility spillover on oil price in the cee-3 countries. the ccc-garch sufficiently estimated fluctuation of the oil price that affects the exchange rate and volatility transmission in exchange rate on oil price in the cee-3 countries. on its part, the vec-garch only sufficiently estimated oil price volatility spillover on exchange rate. however, the reciprocal volatility spillover exists between oil price and news-based uncertainties in high income nations in europe. we found evidence of transmission of oil price fluctuations on exchange rate in high income nations in europe. the foreign currency market's significance cannot be overestimated in an open economy. based on findings, it is concluded that increase in volatility spillovers in oil price and news-based uncertainties leads to dynamic changes in foreign exchange returns in in the cee-3 countries. the national currency's value should be stabilized by the government through the implementation of a flexible currency regime that is sufficiently adaptable to be adjusted at whim. in any economy, the balance of payments will improve with policies that promote the normalization of currency rates. the government could execute a discretionary policy on exchange rate management. other econometrics multivariate modeling approaches like o-garch are suggested in further studies. references abdullahi, i., abubarkar, m., fakunmoju, s., & giwa, k. 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(2022). how does economic policy uncertainty respond to the global oil price fluctuations? evidence from brics countries. resources policy, 79, 103025. https://doi.org/10.1016/j.resourpol.2022.103025 xiao, w., xu, c., liu, h., & liu, x. (2020). volatility transmission in chinese trucking markets: an application using bekk, ccc and dccmgarch models. paper presented at the in 2020 ieee international conference on artificial intelligence and computer applications (icaica), 1179-1188). ieee. yusufu, s. o., yusufu, a. i., & abdullahi, m. h. (2022). privatization and the efficiency of selected enterprises in nigeria. journal of social sciences advancement, 3(1), 20-25. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. https://doi.org/10.14293/s2199-1006.1.sor-.ppbl3hy.v1 https://doi.org/10.1002/pa.2278 https://doi.org/10.1108/jeas-08-2021-0167 https://doi.org/10.1108/ijhma-10-2023-0137 https://doi.org/10.1080/13545701.2019.1609691 https://doi.org/10.22495/jgrv12i1art17 https://doi.org/10.1016/j.resourpol.2022.103025 40 © 2025 by the authors; licensee asian online journal publishing group economy vol. 12, no. 2, 40-50, 2025 issn(e) 2313-8181: / issn(p) 2518-0118: doi: 10.20448/economy.v12i2.6779 © 2025 by the authors; licensee asian online journal publishing group modelling asymetric response of stock market volatility to monetary policy: empirical evidence from nigeria zainab said suwaid1 lawal wasiu omotayo2 ( corresponding author) 1,2department of economics bayero university kano and al-hikmah university ilorin, nigeria. email: zzsuwaid.sce@buk.edu.ng email: suki4wisdom@yahoo.com abstract this paper analyses how stock market volatility responds to monetary policy during bull and bear market phases in the period from the first quarter of 1990q1 to the fourth quarter of 2023q4 using ms-var model. it investigated stock market fluctuation in both the bull and bear periods using the composite index of the nigerian stock exchange (nse), the all share index and the most appropriate monetary policy indicator, the interest rates. the monetary policy shocks were found to positively respond to the stock market volatility with relatively small volatility in the first regime. for the second regime, the graph shows that an increase in monetary policy shock positively affects volatility at the onset before afterwards turning the move into the negative side of volatility. this policy advice is that the central bank of nigeria (cbn) should be extra cautious when setting and enforcing fiscal measures. furthermore, due to the erratic performance by nigeria stock market, the government and the relevant authorities should avoid interfering with the market during these situations as such interferences may trigger further instabilities to the market, because such measures merely slow the causes down, and do not bring lasting solutions. keywords: exchange rate, interest rate, money supply markov switching. citation | suwaid, z. s., & omotayo, l. w. (2025). modelling asymetric response of stock market volatility to monetary policy: empirical evidence from nigeria. economy, 12(2), 40-50. 10.20448/economy.v12i2.6779 history: received: 26 april 2025 revised: 19 may 2025 accepted: 10 june 2025 published: 16 june 2025 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. institutional review board statement: not applicable transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. this study followed all ethical practices during writing. data availability statement: the corresponding author may provide study data upon reasonable request competing interests: the author declares that there are no conflicts of interests regarding the publication of this paper. authors’ contributions: both authors contributed equally to the conception and design of the study. both authors have read and agreed to the published version of the manuscript. contents 1. introduction ...................................................................................................................................................................................... 41 2. literature review ............................................................................................................................................................................ 42 3. methodology ..................................................................................................................................................................................... 44 4. results and findings ....................................................................................................................................................................... 45 5. discussion of findings .................................................................................................................................................................... 48 6. conclusion and recommendation ................................................................................................................................................ 48 references .............................................................................................................................................................................................. 49 appendix ................................................................................................................................................................................................ 50 https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v12i2.6779 economy, 2025, 12(2): 40-50 41 © 2025 by the authors; licensee asian online journal publishing group contribution of this paper to the literature a major weakness observed in the previous studies is that annual data were employed however, this study has used monthly and quarterly data. consequently, the bulk of the studies utilized the stock market as the representation of the overall financial market neglecting the rest of the market segments. among all but one or two of the literatures scrutinized in this section, only two incorporate the usage of ms var. 1. introduction cbn’s major responsibility as stated expressly in the cbn act of 2007 was to achieve price stability and a sound monetary system. in achieving these, updated information and tendencies related to the functioning of the economy must be well established. as a result, research towards a better perspective of the nigerian economy will assist the cbn in attaining its monetary policy goals. stock market fluctuation has been a worrisome factor in the financial markets among policy makers, analysts, corporate executives and economists. during the 1980’s there was explosive development of new financial markets in the international level as futures and options contracts on interest rates, stock indices, and foreign exchange rates. these markets experienced spectacular expansion until the world stock market was damped in october 1987, resulting into serious consideration on shocks and effects of these new financial products. hence, a number of reforms concerning the financial markets were introduced and instituted. as the economies experienced high growth and high fluctuations in asset prices, there arise the need to question the efficient markets hypothesis, which asserts that financial markets must provide the correct value for securities. monetary policy and its impact on stock market volatility have also received considerable attention in the literature with focused on developed countries (bomfim, 2003; chatziantoniou, duffy, & filis, 2013; chen & clements, 2007; farka, 2009; konrad, 2009; lobo, 2002; vähämaa & äijö, 2011). the synthesis of various previous studies reveals that central bank monetary policy is an important determinant of stock market volatility. the evidence indicates that the responses of stock returns and volatility to policy interest rate changes are symmetric. while analyzing stock returns, lobo (2000); bernanke and kuttner (2005); chuliá, martens, and van dijk (2010) and zare, azali, and habibullah (2013) investigated the asymmetries associated with the direction of the monetary policy shocks. guo (2004); andersen, bollerslev, diebold, and vega (2007) and basistha and kurov (2008) worked on business cycles asymmetry. besides, jiang (2018) focused on the asymmetrical effects of the positive and negative monetary policy shocks on stock market volatility. however, existing literature testing the asymmetry effect of stock market volatility to monetary policy during the bull and bear phases remains scanty. in the last four decades, co-movement between stock markets and monetary variables has attracted considerable emphasis from economists and financiers of the developed and emerging economies (hassan, 2017). theoretically this linkage is perhaps obvious since monetary variables are known to have a pivotal role in the course of determining a firm’s cash flows and the systematic risk of the firm. because stock prices equal the present value of expected dividend tutorials, any prospective or contingent alteration in information related to inflation, interest rates, exchange rates and other monetary variables might disturb stock prices through alliterating either expectations of dividends or discount rates, or perhaps both (arnold & vrugt, 2006). hence, it is theoretically plausible to claim that the conditional variance of current stock returns is associated with the conditional variance of expected future cash flows and discount rates, together with their conditional covariance. since both expected cash flow and discount rate depends on monetary variables, it is not surprising to find that higher variability of these variables cause a similar response in the volatility of current returns on stock (poon & granger, 2003). a cross-section of african countries have operated in the context of continuing macroeconomic troubles accentuated by constant shifts in monetary and macroeconomics. as a result, the over-arching question arise; to what extent are these policies yielding the desired economic impacts with regards to the financial market? currently, people have differing views in relation to the impacts of monetary policy. for instance, while asserting their tenets, monetarist vehemently support that monetary policy plays a very important role in impacting economic activities, they argue that unexpected changes in stock of money cause movements in output and growth. they further strengthen that only if the money supply rises unexpectedly can the central bank stimulate economic growth (adeolu, kehinde, & bolarinwa, 2012). the analysis of the available literature also shows that decisions on monetary policy affect the real part of the economy (ioannidis & kontonikas, 2008). from their study, found out that monetary policy affects stock prices and that there is a pass-through effect on consumption and investment spending in the real sector. this is in congruency with modigliani’s life cycle hypothesis where there is a positive relationship between consumer’s and investment spending as well as tobin’s q hypothesis, investment expenditure and prices for stocks (ewing, 2001). further, chami, cosimano, and fullenkamp (1999) established that the main policy channel through which the effects of monetary policy are transmitted is significantly different from the money and credit channels, but rather it involves change in asset prices. this is supportive of the idea that the monetary policy might be transmitted through the stock market as an additional mechanism. moreover, laopodis (2013) established that monetary policy affects the real economy through financial markets implying that these markets are essential component in transmitting effects of monetary policy actions on the real economy. several studies on the monetary policy and the financial market can also be explained with reasonable body of literature such as ajie and nenbee (2010) using co-integration and error correction modeling found that money supply and interest rate (the proxy for monetary policy) had short-run significant effects on stock prices in nigeria, in the same year (okpara, 2010) carried out same study and found that monetary policy is significant in determining stock market returns only in the long run using two stage least squared method. this study is in line with the work undertaken by adeniji, ben, and e. (2018) who applied bi-variate and multivariate var and partly in line with the study undertaken by osakwe and chukwunulu (2019) who employed the ordinary least square regression techniques. different from this results is the work of abaenewe and ndugbu (2012) this research proved monetary policy does not explain changes in equity prices in nigeria. although the literature suggests an interaction between monetary policy and the stock market, a major gap exists, however, as pitelis (2013) has noted economy, 2025, 12(2): 40-50 42 © 2025 by the authors; licensee asian online journal publishing group and as laopodis (2013) has observed and included in our previous discussion, there is no unique model that organizes the empirical findings of this relationship across several economies or different types of monetary systems. of interest therefore is to ask whether or not bull and bear market response asymmetry to monetary policy reforms exist? this may be the missing link on the variant of the monetary policy inability to exact its main targets. after the introductory section, this study is organized into four additional sections. section 2.0 reviews the existing conceptual, theoretical, and empirical literature, while section 3.0 outlines the methodological framework for the empirical investigation. in section 4.0, the empirical model is estimated, and the findings are discussed. finally, section 5.0 presents the conclusions and offers policy recommendations. 2. literature review monetary policy is deliberate manipulation of quantity, price and availability of money and credit by the monetary authorities to attain certain macroeconomic objectives relating to internal and external balance. this is achieved through controlling money supply and or interest rates so as to control the general money supply in the economy. okigbo (2008) stated that monetary policy literally made reference to all the steps which were taken to regulate the supply of money and credit in an economy. on the other hand, the financial market is a small platform that brings together surplus units and deficit units for various income generating activities. this includes financial institutions of savers who mobilize funds in the form of savings and lenders who need these funds. while financial intermediation is the payments made from one center having excess funds to another center in need. this role of transferring financial resources from the surplus units to the deficit units is what is referred to as financial intermediation. reszat (2008) classified financial markets into internal financial markets and external financial markets. in nigeria like every other countries, the central bank of nigeria has other mandates that include; to attain full employment, to have maximum sustainable growth, and stable interest and exchange rates. to achieve these objectives they regulate and interfere with the financial markets (central bank of nigeria, 2018). monetary policy influences the real economy mainly through the financial market, this appears to be which the missing connecting link through which the monetary policy and the real economic segment of the country. there are several different ways through which monetary policy impacts the financial markets. nevertheless, all possible transmission mechanisms starting from the monetary policy on the financial markets going down to the real sector of the economy stem from the monetary policy instrument. more specifically, the paper shows that in the case of emerging markets (ems) the conditions influencing financial development have mainly depended on long-term international interest rates which in turn are connected with the monetary policies of developed countries (sobrun & turner, 2015). typically, the monetary policy instrument a price in any financial market that is not directly set directly by or closely monitored by the monetary authority. for the majority of central banks with flexible foreign exchange regimes today, this instrument is a short term interest rate. in fixed a fixed exchange rate regime, a particular exchange rate serves as the instrument whereas, in monetary targeting regime, the amount of central bank money in the banking system is usually as the instrument. this research is based on the present value or discounted cash flow theory which gives much understanding in a situation where changes in monetary policies affect stock markets and their prices. the above model depicts that st = d (t+j) / r, t is specifically postulating the constant discount rate. for its simplified form it posits that the investors are free to choose between two deliberate investment options: either a stock with an expected gross return et ⌊s(t+1)+d(t+1) ⌋/st or invest in a risk-less bond with constant nominal gross rate of return 1+r within a given period of time (one period). according to the theory of arbitrage concept, if investors are to pay lesser attention to the one to pick from the two choices possible, then the return on investing in the stock or bond must be anticipate i.e., 𝐸𝑡[𝑆𝑡+1 + 𝐷𝑡+1]/𝑆𝑡 = 1 + 𝑅. when taken further, this gives rise to anticipated difference equation presented in equation 1 below; 𝑆𝑡 = 𝐸𝑡 [∑ ( 1 1+𝑅 )𝑗𝐷𝑡+𝑗 𝑘 𝑗=1 ] + 𝐸𝑡 [( 1 1+𝑅 ) 𝑆𝑡+𝑘] (1) in this context, 𝐸𝑡represents the conditional expectations operator based on information available to market participants at time t, r is the return rate used by these participants to discount future dividends, and k refers to the investor’s time horizon (or stock holding period). the standard transversality condition indicates that as the horizon k increases, the second term on the right side of equation 1 approaches zero, implying that there are no rational stock price bubbles, as demonstrated in equation 2 below: 𝑙𝑖𝑚 𝑘→∞ 𝐸𝑡 [( 1 1+𝑅 )𝑘𝑆𝑡+𝑘] = 0 (2) thus, based on the discussion by campbell and mackinlay (1996) regarding models of rational bubbles that relax the transversality condition, along with their development of the present value model using variable discount rates, we arrive at the familiar form of the present value model presented in equation 3. 𝑆𝑡 = 𝐸𝑡 [(∑ 1 1+𝑅 )𝑗𝐷𝑡+𝑗 𝑘 𝑗−1 ] (3) from equation 3, it can be inferred that a variation in monetary policy can move stock prices in two folds. the empirical studies of monetary policy interactions and financial market fluctuations can be divided into three. these will involve examining studies on developed countries, the second will be on emerging economies and the last on developing economies. andrés, mestre, and vallés (1999) explained how prices, output and the exchange rate responded to a monetary policy shock. the evidence based on the svar model confirms that the spanish economy is characterized by the efficiency of the asset price adjustment, nominal rigidities and long run monetary non-neutrality. the main source of the shock is the interest rate, while the exchange rate has a tendency to over-reverse the long-term value. also, the estimates are not characterized by a liquidity puzzle, price puzzle, or exchange rate puzzle. again, mumtaz and economy, 2025, 12(2): 40-50 43 © 2025 by the authors; licensee asian online journal publishing group zanetti (2013) analyzed the impact of monetary policy uncertainty by employing structural vector autoregression (svar), model enriched in two ways. first, it allows for time-varying variance of monetary policy shocks with a stochastic volatility model. second, it allowed exhibiting the dynamics of the interactions between the levels of the endogenous variables of the var and the time varying volatility. the results shows that nominal interest rate, output growth, and inflation fall in reaction to an increase in the volatility of monetary policy in the us. it also builds a dynamic stochastic general equilibrium model with stochastic volatility in monetary policy which gives similar results. furthermore, ma, wang, and he (2022) analyse the within and cross-sectional mechanisms and interaction between economic policy uncertainty (epu) and stock market realized volatility in g7 countries. the directional spillover indicator was then computed utilizing the monthly economic policy uncertainty index and the realized volatility series for each country. the analysis showed that the degree of the spillover effect of economic policy uncertainty on volatility of the stock markets is higher in the usa, japan, and canada and reveals regional resemblance. meanwhile, we find that economic and policy uncertainty has stronger and more persistent responses to the stock markets of france, germany as well as italy and its effects last for 3 to 18 months. more recently, yang, zhou, du, du, and zhou (2023) analyzed the link between the global oil price, stock prices, and policy interactions for china and us. the study applied time-varying parameter stochastic volatility vector autoregression model to examine the transmission of the global oil price shocks, chinese and us stock market volatility and economic policy uncertainty indices in china and the us for the period 2003-2020. the analysis established positive and significant relationship between fluctuations of the stock markets in the two countries and shifts in the international prices of oil. it was identified that the us stock market had a higher effect on the global oil market than the chinese stock market. besides, the research showed that the increase of the economic policy uncertainty steepens the oil price volatility in the global markets while the increase in oil price volatility enhances the volatility of the stock markets and economic policy uncertainty in the two countries. yoshino, taghizadeh-hesary, hassanzadeh, and prasetyo (2014) in their study on emerging economies employed vecm on tehran stock prices with respect to exogenous monetary policy shocks for the period 1998q1to2013q2. they found that monetary policy affects stock market prices through three channels: money supply, rates of exchange, and inflation. the evidence are in favour of their hypothesis that stock prices invariably increase following a change in monetary policy regime. the variance decomposition analysis further shows that after ten periods, more than half of the forecast error variance in tehran stock exchange price index originates from the us dollar–iranian rial exchange rate shocks while a less than one fifth fraction of this variance owes its source to the iranian real gdp shocks. they argue that this evidence is explained by an endogenous adjustment of stock price to monetary policy shocks. interestingly, atiş and erer (2018) examined the asymmetric responses of stock market returns and volatility to monetary policy during bull and bear markets in turkey from 2002 to 2016. the study uses markov switching model with the policy rate as the monetary policy measure. the empirical results revealed that monetary policy is more potent during a bull market environment. again, si, zhao, li, and ding (2021) investigated the fluctuating volatility interconnectedness between different forms of policy uncertainty and sectoral markets in china in time and frequency variations. base on the time frequency connectedness index method, the empirical results illustrated a highly connected network between policy uncertainty and chinese sectoral stock market especially under mid and long run horizons. most significantly, policy makers were least concerned with the monetary policy contributing the least to spillovers of the four classification types of policy uncertainty. in nigeria, babajide, isola, and olukayode (2016) who uses autoregressive distributed lag bound testing techniques with the view of analyzing the relationship between monetary policy instruments and the stock market in nigeria. the accumulation of evidence suggested that monetary policy tools affected the character of stock market in the country. partially, this study is relevant to shehu ur (2021) work, which applied garch and egarch methodologies to test the effect of monetary policy innovations on stock returns prior to the nigeria stock exchange during the global financial crisis. the empirical analysis showed that the unsystematic (unexpected) parts of policy innovations concerning money supply and monetary policy rate are negatively associated with nigeria stock exchange returns while systematic (anticipated) parts are not. in the same vein, adeniji et al. (2018) applied an empirical analysis on the impact of monetary policy shocks on stock market price volatility in nigeria using time series data from june 1999 to december 2016. two quantitative methods were used in the analysis, the autoregressive distributed lag (ardl) model and the exponential generalized conditional heteroscedasticity (egarch) model. the study discovered that monetary policy shocks affect stock market price thereafter experiencing increased volatility in nigeria. however, among the set of monetary policy indicators, interest rate on its own was significant at both the short and long run in trying to explain the variability of the stock market prices, while m1 was only significant in the short run only. osakwe and chukwunulu (2019) analyzed the relationship between monetary policy and stock market performance in nigeria for the period of 1986 to 2015 using ols regression analysis. consequently, the findings revealed that money supply and exchange rate positively influenced stock price movements and were respectively highly significant, but interest rate was insignificantly negative. in all, it emerges that variables of monetary policy explain 94 percent of the fluctuations of stock market performance in nigeria. in particular, aliyu (2021) noted that monetary policy can be used to control stock market operations, his present work proved that it has a significant positive impact on stock market performance. from the literatures reviewed, it can be deduced that most studies on financial market in nigeria were confined mainly to the stock market segment of the financial market and the methodologies which were employed were primarily var, ols and vecm. a major weakness observed concerning the previous studies is that annual data were employed except for some of them. however, this study has used monthly and quarterly data. again, the bulk of the studies utilized the stock market as the representation of the overall financial market neglecting the rest of the market segments. among all but one or two of the literatures scrutinized in this section, only two incorporate the usage of ms var. economy, 2025, 12(2): 40-50 44 © 2025 by the authors; licensee asian online journal publishing group 3. methodology hamilton (1989) markov-switching (ms) autoregressive models have become widely recognized as an effective alternative for representing key features of the business cycle. consequently, a growing number of empirical studies have adopted regime-switching models to capture the nonlinearities and asymmetries observed in various macroeconomic variables (boldin, 1996; garcia & perron, 1996; kim, nelson, & startz, 1998; krolzig, 1996; krolzig & toro, 2001).the basic specification of the markov switching model assumes that deviations of dependent variable from its mean follow a p-th order autoregressive process: ∆𝑦𝑡 −  (𝑠𝑡) = 1 (∆𝑦𝑡−1 −  (𝑠𝑡−1 ))+. . . ,2(∆𝑦𝑡−𝑝 −  (𝑠𝑡−𝑝 )) + 𝜀𝑡 (4) the errors, et are assumed to be independently and identically distributed (ii) with a mean of zero and a constant variance of σ2 while the process mean, μ is influenced by a latent variable, st. this relationship suggests that different regimes correspond to distinct conditional distributions of yt the latent variable strepresents the state of the business cycle, distinguishing between two regimes: "expansion" and "contraction." the autoregressive parameters in model (3.1) can vary depending on the state st within the markov chain. ∆𝑦𝑡 − 𝑐 (𝑠𝑡) = 1(𝑠𝑡 )∆𝑦𝑡−1 +. . . +𝑝(𝑠𝑡) + 𝜀𝑡 (5) if st can assume one of m distinct values represented by the integers 1 through m, equation 5 illustrates a mixture of m autoregressive models. in the case of two regimes, model 3.1 characterizes a "falling" state when st = 1 and a "rising" state when st = 2 for the yt variable. regime 1 is categorized as an economy in recession and can be represented as follows: ∆𝑦𝑡 − 𝑐1 (𝑠𝑡) = 11∆𝑦𝑡−1 +. . . +𝑝1∆𝑦𝑡−𝑝 + 𝜀𝑡 (6) regime 2 is classified as an economy in expansion and can be represented as: ∆𝑦𝑡 − 𝑐2 (𝑠𝑡) = 12∆𝑦𝑡−1 +. . . +𝑝2∆𝑦𝑡−𝑝 + 𝜀𝑡 (7) the latter process is an ergodic markov chain with a finite number of states, characterized by its transition probabilities.  𝑖𝑗 =  𝑟 (𝑠𝑡 = 𝑗 /𝑠𝑡−1 = 𝑖), ∑ 𝑀 𝑖=𝑗 𝑖𝑗 = 1 (8) for ∀ij =1. . , m, it is specifically assumed that st follows an ergodic markov process with m states, characterized by an irreducible transition matrix. however, fixed or constant transition probabilities are too restrictive to fully capture stock market dynamics. as a result, an extension of hamilton (1989) model allows for time-varying transition probabilities, as explored by filardo (1994) and diebold, hahn, and tay (1999). the markov switching model with time-varying transition probabilities provides more flexibility than models with fixed probabilities. for example, it can identify systematic changes in transition probabilities around turning points, better capturing complex patterns of temporal persistence and enabling the modeling of varying expected durations over time. the applied markov model enables volatility to vary across regimes, allowing it to capture the time-varying volatility characteristic of stock markets, which is an important stylized fact in financial markets. in this regard, the model incorporates filardo (1994) framework. 𝑃𝑖𝑗,𝑡 = 𝑃𝑟[𝑅𝑡 = 𝑗/𝑅𝑡 = 𝑖, 𝑍𝑡−1 = 𝑒𝑥𝑝(𝜆𝑖,𝑗,0+𝑍′𝑡−1𝜆𝑖,𝑗,1) 1+𝑒𝑥𝑝(𝜆𝑖,𝑗,0+𝑍′𝑡−1𝜆𝑖,𝑗,1) (9) where: 1...,2,1;...,2,1 −== mjmi and  − =− =−==== 1 1 ,,,1,,, ;...,2,11],/[ m j tjitttrtmji mipzirmrpp m represents the number of regimes, and rt is a first-order markov variable. zt is a vector of economic variables that drive the transition between regimes. the study applies filardo (1994) time-varying probabilities to analyze the effect of oil price shocks on stock market performance, modeled under two distinct regimes. transitions between these regimes are determined by a probability process. regime 1: ....................................................... )'exp(1 )'exp( ]1/1[ 11 110 1 1110 1 j n j t j t n j ttr z z rrp     = − −= − ++ + === (10) regime 2: ................................................ )''exp(1 )'exp( ]2/2[ 21 120 21 120 1 j n j t j n j t ttr z z rrp     = − = − − ++ + === (11) the probability of staying in a low stock performance regime is determined by the previous regime, which could either be low or high stock performance, while the probability of transitioning to a high stock performance regime is similarly based on whether the prior regime was low or high stock performance. zt is a vector of j macroeconomic and policy-related variables used to forecast the future trajectory of stock performance. this approach aligns with the arbitrage pricing theory, which posits that mispriced securities may create short-term risk-free profit opportunities. by allowing transition probabilities to fluctuate over time, we can better understand the factors driving shifts between the low stock performance regime (r t -1, r t-1) and the high stock performance regime (rt=2), as well as the reverse transitions. the key parameters that influence the transition probabilities between regimes are the coefficients λ. evaluating the sign of these coefficients is crucial. for example, if the coefficient 11λis positive, the associated economic factor z significantly increases the probability of staying in the high stock performance regime (regime 1). on the other hand, if the coefficient is negative, the corresponding macroeconomic variable z reduces the likelihood of remaining in the low stock performance regime and raises the probability of transitioning between high and low stock performance regimes (regime 2). similarly, the coefficient 12λ reflects the effect of the economy, 2025, 12(2): 40-50 45 © 2025 by the authors; licensee asian online journal publishing group exogenous variable z on the probability of remaining in the high stock performance regime (regime 2) or shifting to the low stock performance regime (regime 1), depending on whether this coefficient is positive or negative, respectively. the period of investigation spanned 1990q1 to 2023q4 published time series data which give numerical values about the variables under study will be collected from relevant secondary sources which include; national bureau of statistics (nbs) publications, nigeria stock exchange (nse). publications, world bank and international financial statistics (ifs), and central bank of nigeria (cbn) annual reports and statistical bulletin (various issues). 4. results and findings 4.1. statistical properties of variable the result of the descriptive statistics presented in appendix 1 shows evidence of significant variations as shown by the huge difference between the minimum and maximum values for all variables except for m2 which has lesser variation. the study utilised skewness, kurtosis and jarque-bera statistics to test for normality of the data series. the skewness test indicates that some of the variables are negatively skewed while some are positively skewed. the exrate is the least skewed among the variables which implies that information in the variables has a long tail in the negative direction. from the kurtosis statistics, the study observed all variables are leptokurtic which portrays the asymmetry of the distribution. jarque-bera statistic is the most encompassing normality test which further reinforced the earlier tests by showing that the study can reject the null hypothesis of normality for all the variables because as seen the test statistic for all variables is not close to zero. the average for the variables is greater than the standard deviation except for tbills and realgdp. this indicates that all observations are closer to the mean with the exception of tbills and realgdp. it is important to mention that the descriptive statistics only provides a historical background for the behaviour of the time series data as such information obtain cannot be used to make a general inference. the markov switching vector autoregressive model in regime 1 presented in the table 1 shows that the lag of interest rate has significant effects on interest rate, the lag of ipi is also significant in explaining ipi. also, the lag of m2 significantly affected m2, also the lag of allshr has significant effects on allshr. unlike regime 1, in regime 2 the lag of exr has significant effects in exr whereas the lag of intr is has no significant effects in intr. the lag of ipi has significant effects on ipi. however, the lag of m2 and allshr has no significant effects on m2 and allshr. table 1. var estimation. exr intr ipi m2 allshr regime 1 exr 0.120 0.001 0.003 0.005 0.008 0.011 -0.002 -0.005 0.245*** -0.103 intr 0.006 0.018 0.330*** -0.068 -0.018 -0.006 0.011 0.006 -0.030 0.157 ipi -0.221 0.074 0.020 -0.049 0.213*** 0.317*** -0.017 0.008 0.281 0.151 m2 0.537 0.578 -0.147 0.258 -0.094 0.061 0.328*** 0.337*** 0.252 -1.750** allshr -0.04 -0.082 -0.034 0.062 0.012 0.012 0.001 -0.009** 0.254*** 0.076 regime 2 exr -0.084 3.132*** 0.063 -0.003 -0.009 -0.124 0.089*** -0.016 0.427 -0.913 intr 2.076 11.466 -0.085 -1.897 -1.038* -0.304 0.076 -0.121 0.640 -7.418 ipi 29.213 -11.446 -2.533 1.684 5.351** -0.419 -0.750 0.044 -16.200 8.474 m2 6.320 -0.962 10.487 -10.605 3.407 -1.520 1.772 1.297 17.017 -20.234 allshr 7.368 0.115 -0.449 -0.008 0.035 -0.045 -0.154 0.0248 -2.360 0.206 note: *** indicates significant at 1% (2.58), ** at 5% (1.96), * at 10% (1.65). 4.2. transition probabilities the constant markov transition probabilities and expected durations for sample 1990q1 to 2023q4 is presented below. note that p(i,k) = 𝑃(𝑠(𝑡)) = 𝑘|𝑠(𝑡−1 = 𝑖) where row = i and column = k 𝑃𝑖𝑗 = [ 𝑃11 𝑃12 𝑃21 𝑃22 ] = [ 0.923162 0.076838 1.000000 4.91𝐸 − 11 ] hence 𝑃11 = 0.923162, 𝑎𝑛𝑑 𝑃22 = 4.91𝐸 − 11. 𝑊ℎ𝑒𝑟𝑒; 𝑃11 + 𝑃12 = 1, 𝑃21 + 𝑃22 = 1 constant expected durations: 1 2 13.01439 1.000000 the transition probabilities output shows the probability of the stock market being in state 1 or state 2 at time t given its state at time t-1. the constant transition probabilities indicate that when the stock market is in state 1, there is a 92.32% probability it will remain in that state in the next period and a 7.68% probability it will transition economy, 2025, 12(2): 40-50 46 © 2025 by the authors; licensee asian online journal publishing group to state 2. on the other hand, when the stock market is in a state 2, there is a very low probability of 4.91e-11 (essentially zero) that it will remain in that state in the next period, and a 100% probability it will transition to state 1. the expected durations provide the average length of time the stock market is expected to remain in each state before transitioning to the other state. the expected duration for state 1 is 13.01 quarters, while the expected duration for state 2 is 1 quarter. these transition probabilities and expected durations suggest that the stock market is more likely to remain in state 1 for an extended period, and if it transitions to state 2, it is likely to return to a state 1 relatively quickly. this asymmetric response of the stock market to both states may be due to the influence of monetary policy, as the var model suggests. the probability of being in state 1 (recession economy that is the bear market period) as indicated in figure 1 is relatively high during the period of 2009 to 2013, but it gradually decreases afterwards. also, the probability of being in state 2 (expansion economy that is the bull market period) is relatively low during the period of 2009 to 2013, but it gradually increases afterwards. consequently, from around 2016 onwards, the probability of being in state 2 becomes higher than the probability of being in state 1, indicating that the economy is more likely to be in an expansion state than a recession state during this period. in all, the smoothed regime probabilities suggests that the economy went through a period of recession during the aftermath of the 2008 financial crisis, but it gradually recovered and shifted towards an expansion state in the following years. figure 1. markov switching probabilities. as indicated in the figure 2a, the response of nasi to intr (monetary policy) shocks is mostly positive, except for the second period where it is negative. this suggests that during state 1, monetary policy has a positive impact on stock market volatility, except for the immediate response. however, we also see that the magnitudes of the responses are relatively small. the largest response occurs in period 3, where the increase in stock market volatility due to monetary policy shock is around 0.009. in contrast, the smallest response occurs in period 10, where the increase in stock market volatility due to monetary policy shock is only 0.000394. in all, the regime 1 irf suggests that there is a slightly positive reaction of stock market volatility to changes in monetary policy, but the magnitudes of the responses are relatively small. economy, 2025, 12(2): 40-50 47 © 2025 by the authors; licensee asian online journal publishing group regime dependent irf figure 2a. regime dependent irf for regime 1. again, as indicated in figure 2b in regime 2, an increase in monetary policy shock (intr) initially results in a positive impact on stock market volatility (nasi). however, this effect is short-lived, as volatility quickly declines into negative territory in the following period. the negative response of stock market volatility to monetary policy in this regime suggests that contractionary monetary policy can negatively affect the stock market during bear markets. conversely, an increase in monetary policy shock also leads to an initial positive impact on stock market volatility in the first period, but this effect strengthens in subsequent periods and lasts longer. the positive response of stock market volatility to monetary policy in this regime indicates that expansionary monetary policy can have a stimulating effect on the stock market during bull markets. this supports one view of how monetary policy affects the stock market, which suggests that an increase in the money supply leads to higher stock prices, thereby stimulating both the stock market and the wider economy. since stock prices are influenced by expected dividends and interest rates, any unexpected changes in monetary policy are likely to impact stock prices either directly through the interest rate channel or indirectly by altering the factors that affect dividends. the findings of this study align with those of zare et al. (2013). figure 2b. regime dependent irf for regime 2. 4.3. diagnostic checks the reliability of any estimated econometric model is based on passing some diagnostic check. the most known diagnostic check in var framework are the serial correlation and normality test. this study employs the breusch-godfrey test for serial correlation and the ar roots test for normality. the result for the model estimated for nigeria is presented with table 2 for stability test as well as figure 3 and table 3 for serial correlation test of the model. the result of the test indicates no serial correlation and also passed the normality test. table 2. stability test result. root modulus 0.714 0.714 0.242 0.242 0.206 0.206 0.046 0.046 economy, 2025, 12(2): 40-50 48 © 2025 by the authors; licensee asian online journal publishing group no root lies outside the unit circle. var satisfies the stability condition. figure 3. inverse root polynomial. the result of the inverse root as illustrated in figure 3 indicated that no root lies outside the unit circle as such the var satisfies the stability condition. table 3. serial correlation. lags q-stat prob. adj q-stat prob. df 1 1.553 ---1.565 ------ 2 12.243 0.727 12.428 0.714 16 note: *test is valid only for lags larger than the var lag order. df is degrees of freedom for (approximate) chi-square distribution. from the table 3, probability is greater than 0.5 and the rule states that if probability is less than 0.5 there is serial correlation and if probability is greater than 0.5 there is no serial correlation. therefore, in this case since probability is greater than 0.5 there is no case of serial correlation. 5. discussion of findings in alignment with the study's objective to explore the asymmetric response of stock market volatility to monetary policy during bull and bear market periods using the markov switching vector autoregressive framework, the study analyzed stock market volatility during both bullish and bearish phases by utilizing the aggregate stock market indices from the nigeria stock exchange (nse) specifically, the all-share index—and the interest rate as a relevant monetary policy indicator. to enhance the empirical findings, additional control variables were included in the model, such as money supply (m2), the spot exchange rate (exrate), and the industrial production index (ipi). the results indicate a slightly positive response of stock market volatility to monetary policy shocks, though the magnitude of these responses is relatively small in regime 1. in contrast, regime 2 suggests that an increase in monetary policy shock initially has a positive impact on stock market volatility. however, the effect is brief, with volatility quickly shifting to negative territory in the second period. the empirical results from the markov-switching analysis also suggest that monetary policy is more effective during bear market periods (regime 1) than during bull markets (regime 2), thus reinforcing the estimates of asymmetry. these findings align with previous studies by chen and clements (2007); kurov (2010); jansen and tsai (2010) and konrad (2009) which demonstrated that monetary policy tends to be more effective in bear markets. the negative response of stock market volatility to monetary policy in this regime indicates that contractionary monetary policy may adversely impact the stock market during bear phases. this aligns with the research of adeniji et al. (2018) and laopodis (2013). furthermore, these findings support the expectations of the discounted cash flow model theory, which posits that changes in monetary policy can influence stock returns. specifically, there is a direct effect on stock returns due to changes in the discount rate used by market participants. a more restrictive monetary policy raises the capitalization rate for firms' future cash flows, which causes a decrease in stock prices. 6. conclusion and recommendation this study examined the relationship between monetary policy dynamics and financial market volatility in nigeria. this relationship is a 2-way relationship as one affects the other and also the latter has effects on the former. information from the financial market is crucial for both market participants and the central bank. the economy, 2025, 12(2): 40-50 49 © 2025 by the authors; licensee asian online journal publishing group central bank seeks to understand how its monetary policy actions influence financial markets, while market participants use this information to evaluate stock prices and manage their portfolios. in theory, stock prices reflect the expected present value of future net cash flows. as a result, an expansionary monetary policy typically boosts future cash flows or lowers the discount rates applied to them, leading to a positive relationship with stock prices. this study explored the dynamics of monetary policy and financial market volatility in nigeria. using markov switching vector autoregressive model from 1990q1 to 2023q4. it was discovered that there is slightly positive response of stock market volatility to monetary policy shocks, but the magnitudes of the responses are relatively small during bear market periods. whereas bull market period suggests that an increase in monetary policy shock leads to an initial positive impact on stock market volatility which is short lived and then later becomes negative. consequent upon this findings, it is well established that financial markets are highly responsive to economic policies, so the government and the central bank of nigeria (cbn) must exercise caution when formulating and implementing these policies. to mitigate the impact of economic policies on the stock market and lessen the risk of volatility, it is recommended that greater emphasis be placed on the formulation of monetary policy. list abbreviation (nbs) national bureau of statistics, (nse) nigeria stock exchange, world bank and international financial statistics (ifs) and (cbn) central bank of nigeria annual reports and statistical bulletin. references abaenewe, z. c., & ndugbu, m. o. 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(2013). monetary policy and stock market volatility in the asean5: asymmetries over bull and bear markets. procedia economics and finance, 7, 18-27. https://doi.org/10.1016/s2212-5671(13)00213-x appendix appendix 1. descriptive statistics. variables intr exchr ipi m2 allshr mean 15.56 95.8 789 12.4 356 median 14.27 99.8 809 12.6 347 maximum 30.23 206 217 16.1 777 minimum 5.91 7.60 145 8.20 313 std deviation 5.23 57.60 535 2.26 258 skewness 0.69 0.001 0.61 0.02 0.15 kurtosis 3.27 2.09 2.72 1.70 1.44 jaque-bera 10.60 4.50 8.28 8.98 13.5 probability 0.00 0.11 0.02 0.01 0.001 sum 199 123 1.02 203 455 sum sq develop 350 421 3.63 130 8.43 observation 128 128 128 128 128 asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. https://doi.org/10.1016/j.jbankfin.2009.07.010 https://doi.org/10.1002/ijfe.2274 https://doi.org/10.1080/09765239.2010.11884920 https://www.researchgate.net/publication/272415321_the_asymmetric_effects_of_investor_sentiment_and_monetary_policy_on_stock_prices https://www.researchgate.net/publication/272415321_the_asymmetric_effects_of_investor_sentiment_and_monetary_policy_on_stock_prices https://doi.org/10.1002/fut.20503 https://doi.org/10.1016/j.qref.2021.08.006 https://doi.org/10.1080/15339114.2014.985458 https://doi.org/10.1016/s2212-5671(13)00213-x 26 © 2025 by the authors; licensee asian online journal publishing group economy vol. 12, no. 2, 26-39, 2025 issn(e) 2313-8181: / issn(p) 2518-0118: doi: 10.20448/economy.v12i2.6778 © 2025 by the authors; licensee asian online journal publishing group role of digital tax platforms adoption in enhancing revenue generation and capital projects funding in emerging markets muyiwa emmanuel dagunduro1 gbenga ayodele falana2 israel s. akinadewo3 oluyinka isaiah oluwagbade4 gbenga olanrewaju akinboboye5 ( corresponding author) 1,2,4,5department of accounting, college of social and management sciences, afe babalola university, ado-ekiti, ekiti state, nigeria. email: dagundurome@pg.abuad.edu.ng email: falanaga@pg.abuad.edu.ng email: oluwagbadeoi@abuad.edu.ng email: akinboboyegbenga@pg.abuad.edu.ng 3department of accounting, college of social and management sciences, osun state university, ilesa, osun state, nigeria. email: omoeri_akinadewo@unilesa.edu.ng abstract tax revenue plays a significant role in funding government activities, especially in emerging economies where public investment is essential for infrastructure development and economic progress. this paper assessed the effectiveness of digital tax platforms, specifically electronic tax filing, automated tax payment systems, and blockchain-based tax solutions on revenue generation and capital projects funding in nigeria. this study employed survey research design using primary data collected via structured questionnaires. the sample included 4,352 individuals comprising tax officials from firs, federal government officials in finance and infrastructure, and it experts involved in digital tax platforms. a multistage sampling method, combining purposive and random techniques, was used to arrive at 384 respondents as sample size. data analysis involved descriptive statistics and multivariable regression. this found that digital tax platforms which comprised of electronic tax filing, automated tax payment systems, and blockchain-based tax solutions had a positive and significant effects on revenue generation and capital projects funding in nigeria. this study concluded that digital tax platforms significantly improve both revenue generation and capital project funding in nigeria. it was therefore recommended that the government should expand and modernize its digital tax infrastructure nationwide to ensure broader adoption among taxpayers and administrators. keywords: automated tax payment systems, blockchain-based tax solutions, capital projects funding, digital tax platforms, electronic tax filing, revenue generation. contents 1. introduction ...................................................................................................................................................................................... 27 2. literature review and hypothesis development ...................................................................................................................... 27 3. data and methods ............................................................................................................................................................................ 31 4. data analysis and discussion of findings .................................................................................................................................. 33 5. conclusion and recommendations ............................................................................................................................................... 37 references .............................................................................................................................................................................................. 37 https://www.doi.org/10.20448/economy.v12i2.6778 https://orcid.org/0000-0002-1177-7101 https://orcid.org/0000-0001-8512-6769 https://orcid.org/0000-0002-2094-6843 https://orcid.org/0000-0001-8453-4728 https://orcid.org/0009-0003-3937-7235 economy, 2025, 12(2): 26-39 27 © 2025 by the authors; licensee asian online journal publishing group citation: dagunduro, m. e., falana, g. a., akinadewo, i. s., oluwagbade, o. i., & akinboboye, g. o. (2025). role of digital tax platforms adoption in enhancing revenue generation and capital projects funding in emerging markets. economy, 12(2), 26-39. 10.20448/economy.v12i2.6778 history: received: 22 april 2025 revised: 8 may 2025 accepted: 5 june 2025 published: 16 june 2025 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this research did not receive any dedicated funding or financial assistance. institutional review board statement: not applicable. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. the corresponding author can make the study data available upon reasonable request. data availability statement: the corresponding author can make the study data available on reasonable request. competing interests: the authors declare that there is no competing interests. authors’ contributions: all authors equally participated in the conception and design of the study. they have all reviewed and approved the final version of the manuscript for publication. contribution of this paper to the literature this study provides empirical evidence on the efficacy of digital tax platforms in enhancing government revenue and public investment in a developing country like nigeria. it bridges the gap between technological innovation and public finance performance, contributing to both academic and practical understanding of digital transformation in tax administration. 1. introduction tax revenue is a critical source of government financing, particularly in emerging markets where infrastructural development and economic growth heavily depend on public investment (awotomilusi, oso, oluwagbade, & dagunduro, 2023; dagunduro, abbood, dakhil, & falana, 2025). however, traditional tax collection methods in many developing economies, including nigeria, are often characterized by inefficiencies such as tax evasion, corruption, inadequate record-keeping, and weak enforcement mechanisms (okoye & akenabor, 2023). in response to these challenges, governments worldwide are increasingly leveraging digital tax platforms to enhance revenue generation, improve tax compliance, and streamline the allocation of funds for capital projects (dakhil, dagunduro, abbood, & falana, 2025; falana, dakhil, abbood, & dagunduro, 2024; world bank, 2023). the adoption of digital tax platforms, including electronic tax filing (e-filing), automated tax payment systems, and blockchain-based tax solutions, has shown significant promise in reducing revenue leakages and increasing government tax revenues in various economies (akinadewo, kayode, dagunduro, & akinadewo, 2023; aluko, igbekoyi, dagunduro, falana, & oke, 2022; organisation for economic co-operation and development (oecd), 2023). in recent years, nigeria has made considerable efforts to digitize its tax system, particularly through the introduction of the taxpro-max platform by the federal inland revenue service (firs) and various state-level etax initiatives (federal inland revenue service (firs), 2023). these digital innovations aim to simplify tax compliance, expand the tax base, and increase voluntary tax payments. empirical evidence suggests that digital tax systems improve revenue mobilization by reducing bureaucratic bottlenecks and encouraging tax compliance among individuals and businesses (adebayo & yusuf, 2024; lawal, igbekoyi, & dagunduro, 2024). however, despite these advancements, nigeria still faces challenges such as digital illiteracy, inadequate technological infrastructure, and taxpayer resistance to digital tax reforms (eze & nwankwo, 2024; ige, igbekoyi, & dagunduro, 2023). this study seeks to investigate the extent to which digital tax platforms have contributed to revenue generation and the financing of capital projects in nigeria. while existing studies have examined the general relationship between taxation and economic development, limited research has focused on the specific impact of digital tax platforms on revenue mobilization and capital project funding in emerging markets (agwu, olanrewaju, & okonkwo, 2024). moreover, studies in developed economies have highlighted the efficiency of digital tax systems in improving revenue collection, but their applicability to developing economies with weaker technological infrastructure remains underexplored (international monetary fund (imf), 2023). this study, therefore, aims to bridge this gap by providing empirical evidence on how digital tax platforms influence government revenue generation and capital expenditure in nigeria. this paper contributes to the existing literature by assessing the effectiveness of digital tax platforms in enhancing tax compliance, increasing tax revenue, and improving capital project funding in nigeria. by examining the challenges and opportunities associated with digital tax adoption, this study offers valuable insights for policymakers, tax administrators, and stakeholders in emerging markets. the findings are expected to inform strategies for optimizing digital tax infrastructure and leveraging technology for sustainable fiscal development. 2. literature review and hypothesis development this section serves as a critical foundation for the research by summarizing and analyzing existing studies related to the research topic. this section identifies key theories, concepts, and empirical findings from prior research, thereby contextualising the study within the broader academic discourse. these hypotheses guide the research methodology and help in investigating the relationship between the variables under study. the section provides a clear rationale for the study’s objectives and how it contributes to advancing knowledge in the field. 2.1. theoretical framework this study was rooted in the technology acceptance model (tam) and public finance theory. the technology acceptance model (tam) is a framework used to assess how customers' attitudes influence the adoption of new technology. developed by davis (1989) at the university of michigan's graduate school of business administration, the model suggests that the likelihood of adopting technology is determined by two key factors: perceived ease of use and perceived usefulness (davis, 1989). recent studies have applied the technology acceptance model to examine the impact of digital tax platforms on revenue generation and capital expenditure. wulandari and dasman (2023) investigated the correlation between digital taxation systems, tam, and taxpayer compliance, https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ economy, 2025, 12(2): 26-39 28 © 2025 by the authors; licensee asian online journal publishing group with internet understanding as a mediating variable. the research found that the tax digitization system positively influences internet understanding, and the technology acceptance model significantly affects taxpayer compliance. however, the direct effect of the tax digitization system on taxpayer compliance was positive but not significant. umar, bappi, and james (2023) examined the effect of information and communication technology (ict) on revenue generation in the gombe state internal revenue service. the study adopted a technology acceptance model as its theoretical framework. through survey research and analysis using spss, the findings revealed that ict infrastructure availability significantly enhances revenue collection efficiency. abdulkadir, bello, and yusuf (2024) examined the impact of the unified theory of acceptance and use of technology (utaut) on tax professionals' responses to digitalization and automation in tax administration processes in sub-saharan africa. the study found that automating tax administration processes positively affects revenue optimization. the technology acceptance model has proven to be highly relevant and applicable in understanding the adoption of digital tax platforms, particularly in the context of revenue generation and capital expenditures in emerging economies. in emerging markets, where digital infrastructure may still be developing, tam provides valuable insights into how taxpayers and government agencies perceive the utility of digital tax systems. for instance, wulandari and dasman (2023) demonstrated that digital tax systems, when perceived as useful and easy to use, positively influence taxpayer compliance, which directly impacts revenue generation. moreover, umar et al. (2023) highlighted that the adoption of ict and digital tax platforms by revenue services in gombe state, nigeria, significantly improved the efficiency of revenue collection. this efficiency is critical for capital expenditure funding, as increased tax revenue can be allocated to essential infrastructure and development projects. despite its applicability, tam has been critiqued for a few limitations. first, it largely focuses on individual perceptions and may overlook organizational and contextual factors, which can be critical in governmental and institutional settings (venkatesh, morris, davis, & davis, 2003). for example, in the case of capital expenditure, the decision to invest in digital tax systems may also depend on the political climate, regulatory frameworks, and government capacity, factors that tam does not directly address (venkatesh et al., 2003). second, tam assumes that user behavior is rational and uniform, which may not always be the case, especially in the context of emerging economies where there may be resistance to technological change or lack of awareness (gefen & straub, 2000). finally, while tam effectively captures the initial acceptance of technology, it often fails to account for the longterm engagement and evolving user satisfaction with the technology (venkatesh & bala, 2008). these critiques suggest that while tam provides valuable insights into technology adoption, it should be used in conjunction with other frameworks to capture the broader socio-economic and political dynamics that influence digital tax systems' impact on revenue generation and capital expenditures. figure 1 illustrates the process by which individuals adopt and use new technology. it begins with external variables that influence two key perceptions: perceived usefulness (the belief that technology will improve performance) and perceived ease of use (the belief that using the technology will require minimal effort). these perceptions shape the user’s attitude toward using the technology, which in turn affects their behavioral intention to use it. ultimately, this intention leads to the actual use of the system. tam is widely used to understand and predict user behavior toward technology adoption. figure 1. technology acceptance model (tam). public finance theory has evolved through the contributions of numerous economists and does not have a single specific founder. early contributions to the field can be traced to smith (1776) who in the wealth of nations laid the foundation for the theory of taxation and government expenditures, emphasizing the importance of equitable and efficient taxation in fostering national prosperity. smith's ideas on taxation and government spending were pivotal in shaping the understanding of public finance. later, musgrave (1959) further developed the field by analyzing the role of government in resource allocation, stabilization, and redistribution of wealth, which is often considered the modern foundation of public finance theory. musgrave's work helped establish a more comprehensive understanding of the government's role in managing the economy and distributing resources for societal welfare. public finance theory focuses on how governments raise and allocate funds to meet the needs of the public, including revenue generation through taxes, expenditure management, and debt administration. this field addresses crucial issues such as the effectiveness of taxation policies, government budgetary allocations, and the efficiency of government spending to ensure societal well-being (musgrave, 1959). the insights from both smith and musgrave continue to shape modern public finance practices, including the design and implementation of fiscal policies aimed at achieving economic stability and social equity. these contributions remain essential in understanding the role of government in financing public goods and services. economy, 2025, 12(2): 26-39 29 © 2025 by the authors; licensee asian online journal publishing group several recent studies have applied public finance theory to examine the impact of digital technologies on revenue generation and capital expenditure. okiakpe, empere, and etale (2024) investigated how public sector capital expenditure influences tax revenue generation, specifically petroleum profit tax (ppt), in nigeria. guided by public finance and keynesian theories, the study utilized a quasi-experimental design and analyzed secondary data from the national bureau of statistics and the central bank of nigeria. the findings revealed significant positive relationships between capital expenditures on road construction, power, and security with ppt, underscoring the role of public investment in enhancing tax revenues. iorlaha (2024) conducted a conceptual and theoretical review of nigeria's tax reforms and their impact on revenue generation. the study examined reforms such as the 2012 and 2017 national tax measures and the 2017 voluntary asset and income declaration scheme (vaids), analyzing them through the lenses of the laffer curve theory and behavioral economics theory. the review found that while tax reforms positively influenced revenue generation, challenges like infrastructure deficits and digital literacy gaps persisted, suggesting the need for a comprehensive approach integrating policy, technology, and behavioral insights. nwolu, akani, and ironkwe (2024) examined the impact of digital technologies on tax revenue in nigeria. employing a mixed-method research design, the study focused on the management staff of the federal inland revenue service in abuja. the analysis indicated that digital technologies significantly influenced companies' income tax and capital gains tax revenues. public finance theory is highly relevant in understanding the effect of digital tax platforms on revenue generation and capital expenditures in emerging economies. this theory emphasizes the role of government policies, taxation, and public expenditure in economic stability and development (musgrave & musgrave, 2022). digital tax platforms, as an extension of modern public finance mechanisms, streamline tax collection, reduce leakages, and improve compliance, leading to increased government revenue (tanzi, 2023). in emerging economies, where informal economic activities and tax evasion are prevalent, the adoption of digital tax platforms enhances transparency and minimizes revenue losses (bird & zolt, 2023). moreover, increased tax revenue from digital platforms enables governments to fund critical capital expenditures, such as infrastructure, education, and healthcare, which are essential for economic growth and social welfare (fjeldstad & moore, 2023). thus, public finance theory provides a strong foundation for evaluating how digitalization in tax administration supports sustainable revenue generation and efficient public spending in developing nations. despite its relevance, public finance theory faces several critiques when applied to digital tax platforms in emerging economies. first, the theory assumes that increased tax revenue automatically translates into improved public services, but in many developing countries, corruption and inefficient governance hinder the effective allocation of resources (gupta & tareq, 2023). second, while digital tax platforms enhance compliance, they may disproportionately burden small businesses and informal sector operators who lack the digital literacy or resources to comply, potentially leading to reduced economic participation (moore, prichard, & fjeldstad, 2023). third, public finance theory often overlooks the socio-political dynamics influencing tax policies, such as resistance from powerful interest groups that benefit from tax loopholes (besley & persson, 2023). these limitations suggest that while public finance theory provides valuable insights into the benefits of digital tax platforms, it must be supplemented with governance and institutional frameworks to ensure equitable and effective revenue utilization. 2.2. role of digital tax platforms in enhancing revenue generation and capital projects funding the empirical studies collectively explore the relationship between tax revenue and government expenditure, particularly capital expenditure, across different national contexts. while they vary in scope and methodology, common patterns and divergences emerge regarding how tax income affects public investment and economic growth. craig, adetola, and maminu (2020) investigated tax revenues and capital expenditures in the nigerian economy, analyzing the effect of oil and non-oil tax revenues on capital expenditure using secondary data and linear regression. the study found that non-oil revenue had a significant positive impact on capital expenditure, suggesting the growing importance of diversifying revenue sources. in contrast, oil tax revenues and total tax revenues did not show a statistically significant relationship with capital expenditure, pointing to volatility and overdependence on oil-based revenues in nigeria. maharani, romli, and meiriasari (2021) studied the south sumatra provincial government in indonesia using multiple linear regression to examine the impact of local taxes, general allocation funds, and special allocation funds on capital expenditure. the findings showed that only general allocation funds positively influenced capital expenditure, while local taxes and special allocation funds did not. this suggests that intergovernmental fiscal transfers played a more critical role in driving public investment than local tax revenues in that region. gurdal, aydin, and inal (2021) examined the broader fiscal dynamics in g7 countries using panel causality tests. the study discovered a unidirectional causality from tax revenue to government expenditure and a bidirectional causality between economic growth and government expenditure. however, tax revenue did not cause economic growth in the time domain. in the frequency domain, a bidirectional causality was observed between tax revenue and economic growth, especially in the long run. this implies that tax policy is effective when aligned with broader macroeconomic goals, though its short-term effects can be limited. alim, setiyantono, and zakiah (2021) focused on indonesia over a 20-year period, applying the var model and granger causality test to determine the relationship between tax income and government spending. the findings revealed a short-term relationship between the two variables but no long-term equilibrium. moreover, government expenditure showed instability over time, and no strong causal link was found. this suggests potential inefficiencies in fiscal policy implementation and instability in revenue allocation patterns. craig et al. (2020) and maharani et al. (2021) both identified that certain revenue types (non-oil in nigeria, general allocation funds in indonesia) are more effective in financing capital expenditure, while other sources (oil revenues, special funds, and local taxes) show limited impact. gurdal et al. (2021) and alim et al. (2021) extended the discussion to include economic growth and broader expenditure patterns, revealing that the strength and direction of the relationship between tax revenue and spending vary significantly by region and economic stability. while craig et al. (2020) and maharani et al. (2021) showed positive but selective effects on capital expenditure, alim et al. (2021) findings indicated instability and weak long-term alignment, and gurdal et al. (2021) analysis suggested that fiscal relationships are sensitive to time horizons and economic maturity. economy, 2025, 12(2): 26-39 30 © 2025 by the authors; licensee asian online journal publishing group malhotra, mishra, and vyas (2022) examined the tax increment financing (tif) model in indian cities, especially within the smart cities mission. the study emphasized how tif could empower urban local bodies (ulbs) to leverage future tax revenues and urban land value appreciation to finance infrastructure sustainably. the tif model was presented as both theoretically and practically viable, particularly in contexts where current tax revenues are insufficient. case studies from other countries supported the feasibility of adopting this innovative financing strategy in india. akinola and akinrinola (2023) analyzed the effects of tax revenue and infrastructure investment (using gross capital formation) on economic growth in nigeria. using the ardl model, they found a significant long-run relationship, especially highlighting the positive role of the petroleum profit tax (ppt). however, gross capital formation (gcf) and company income tax (cit) had no significant impact, suggesting inefficiencies in how these components contribute to growth. vat was only marginally significant. aisien, otusanya, and ala-peters (2024) explored the relationship between tax revenue mobilization and infrastructural development in nigeria using ols regression. the study found that cit, vat, and capital gains tax significantly contributed to infrastructure development, while ppt did not. this contrasts with akinola and akinrinola (2023) where ppt was a key growth driver. the findings underscore differences in tax effectiveness depending on whether the goal is gdp growth or physical infrastructure development. aworetan, alade, and agbaje (2024) assessed the granger causality between tax revenue, foreign aid, and capital expenditures in southwestern nigerian states. the results showed that tax revenue had a significant causal relationship with capital expenditure, while foreign aid did not, suggesting that internally generated revenue, rather than external aid, drives sustained capital investment at the subnational level. ajagun, kehinde, and jinadu (2025) evaluated the impact of oil and non-oil tax revenues on capital expenditure in nigeria. both revenue types were found to positively affect capital expenditure, supporting the idea that a diversified revenue base contributes to development financing. the study complements the findings of aworetan et al. (2024) by reinforcing the link between tax revenues and capital spending. aisien et al. (2024); aworetan et al. (2024) and aisien et al. (2024) confirm the significant effect of tax revenue on capital/infrastructure spending, reinforcing a pattern of reliance on internal revenue generation. akinola and akinrinola (2023) distinguish between infrastructure as a growth driver and tax revenue as a standalone growth input. interestingly, while ppt was significant for economic growth, it was not significant for infrastructure in aisien et al. (2024) highlighting a mismatch in fiscal transmission mechanisms. malhotra et al. (2022) introduce a futuristic dimension to the conversation through the tif model, offering an alternative to traditional tax-based funding. this study bridges the gap between theory and practice by integrating land value capture and municipal bonds, suggesting that innovative tools are essential when conventional tax systems fail to deliver sufficient surplus. while studies like akinola and akinrinola (2023) and ajagun et al. (2025) focused on national-level analysis, aworetan et al. (2024) and malhotra et al. (2022) draw attention to state and municipal challenges. these studies emphasize that subnational governments often struggle with inadequate fiscal autonomy and highlight the potential of localized solutions like tif or improving internal revenue mobilization. amaglobeli, crispolti, and klemm (2023) investigated the effect of digital tax reporting on revenue mobilization in developing countries, employing a survey research design and analyzing the data using linear regression. the findings revealed a positive relationship between digital tax reporting and revenue mobilization, indicating that enhanced tax administration capabilities are facilitated by advanced reporting systems. similarly, mbise and baseka (2022) investigated how digital tax reporting influences tax compliance, focusing on smes. using a survey research design and regression analysis, the study found a significant positive effect of digital tax reporting on tax compliance, emphasizing improvements in efficiency and accuracy due to digital platforms. edori (2023) focused on the ease of tax compliance with electronic tax services, such as e-registration, e-tax payment, and e-filing. using data from 106 participants analyzed through pearson product-moment correlation, the study demonstrated that these e-tax services significantly improved the ease of tax compliance. strong correlations were observed between e-registration, e-filing, and ease of compliance, indicating that these services have made it easier for taxpayers to manage their tax obligations. however, abdulkadir and alabede (2022) offered a nuanced perspective, revealing that although digital tax awareness and perceived ease of use positively affected compliance attitudes, poor service quality hindered overall compliance. this suggests that while digital tools can improve tax processes, the effectiveness of these tools is contingent upon their quality and user experience, particularly in informal sectors where digital literacy remains a barrier. building on the theme of technological advancement, manani and mose (2024) emphasized the role of blockchain-related features, such as data immutability and information transparency, in strengthening revenue administration in nairobi city county. the findings echoed the importance of secure and transparent data management in improving public efficiency. similarly, sutarman, juliastuti, yati, and pasha (2025) focused specifically on blockchain’s application in tax administration, finding that it enhanced transparency, reduced data manipulation, and supported accurate tax reporting and smart contractenabled automation. studies conducted by craig et al. (2020) and akinola and akinrinola (2023) emphasized the growing importance of non-oil revenues for capital expenditure in nigeria, yet the role of digital tax platforms in optimizing revenue generation remains underexplored. while these studies show a significant impact of non-oil taxes on capital spending, the potential for digital tax platforms to enhance the efficiency and transparency of tax collection processes, particularly in increasing non-oil tax contributions, is largely missing from the discussion. this research gap highlights the need to explore how digital platforms can transform tax administration to generate more stable and predictable revenue streams for capital projects. furthermore, studies such as those by aworetan et al. (2024) and aisien et al. (2024) point to the significant role of internal revenue in funding infrastructure projects, yet they do not consider how digital tax platforms can enhance this process. although these studies acknowledge the importance of tax revenues in capital expenditure, they do not delve into the specific mechanisms through which digital tax systems might improve revenue mobilization, particularly in a developing country context like nigeria. this study intends to fill this gap by investigating how digital tax platforms can streamline tax reporting, improve tax compliance, and ultimately lead to more effective funding for capital projects. finally, while studies by amaglobeli et al. (2023) and mbise and baseka (2022) explore the broader impact of digital tax reporting on tax economy, 2025, 12(2): 26-39 31 © 2025 by the authors; licensee asian online journal publishing group mobilization and compliance, their focus is often on the national level or smaller enterprises like smes. however, little attention has been paid to the effect of digital platforms on the broader fiscal health of governments, particularly in funding capital projects through efficient revenue generation. this study seeks to bridge this gap by analyzing how digital tax platforms can be leveraged not only for improved tax compliance but also for financing critical public sector investments and capital projects, thus providing a comprehensive framework for using digital solutions in enhancing government revenue and infrastructure funding. based on the above facts, it was therefore hypothesized that: ho1: digital tax platforms adoption has no significant effect on revenue generation and capital projects funding in nigeria. 2.3. conceptual framework figure 2 illustrates the relationship between digital tax platforms (independent variable) and revenue generation and capital projects funding (dependent variable) while grounding the study in the technology acceptance model (tam) and public finance theory as theoretical foundations. the independent variable, digital tax platforms, is measured through three key components: electronic tax filing, automated tax payment systems, and blockchain-based tax solutions. these elements represent advancements in tax administration aimed at improving efficiency, compliance, and transparency. the arrows indicate the influence of these digital tax solutions on revenue generation and capital project funding. the dependent variable, revenue generation and capital projects funding, reflects the outcomes of implementing digital tax systems, emphasizing increased tax revenue, better financial management, and improved public infrastructure funding. the technology acceptance model (tam) explains the adoption of digital tax systems by taxpayers and institutions. at the same time, public finance theory provides an economic perspective on how tax policies and digitalisation contribute to government revenue and expenditure efficiency. figure 2. conceptual framework. 3. data and methods this study adopted a survey research design, utilizing primary data collected through the distribution of a structured questionnaire, which was developed in line with the study’s objectives. the survey research design was chosen for its effectiveness in collecting data from a large and diverse population, ensuring a broad representation of key stakeholders involved in the digital tax platform ecosystem. the target population consisted of 4,352 individuals, including 3,145 tax officials from the federal inland revenue service (firs), as of december 31, 2023, based on firs data. additionally, 638 federal government officials responsible for budgeting, financial planning, and infrastructure development, as well as 569 technology and it experts involved in the development, implementation, and maintenance of digital tax platforms, were included. the technical expertise of these it professionals is crucial for understanding the infrastructure, capabilities, and limitations of existing tax technologies and for identifying opportunities to enhance tax collection and revenue generation through technological innovations. by focusing on tax officials, government policymakers, and technology experts, the study aims to gather comprehensive insights from different perspectives, allowing for a well-rounded analysis of how digital tax platforms impact revenue generation and capital project funding. the inclusion of it professionals is particularly significant as their expertise is vital for assessing the technological aspects of tax systems and identifying potential areas for improvement and innovation. the study used a multistage sampling approach that combined purposive and simple random sampling techniques. purposive sampling was employed to target individuals or units directly or indirectly involved in digital platforms and tax revenue administration. following this, simple random sampling was applied to assign a cluster sample. this approach helped reduce bias and enhanced the generalizability of the findings. to determine the appropriate sample size for the population, with a 95% confidence level and a margin of error of 0.05, the researcher applied the fisher, laing, and stoeckel (1983) formula. the formula used is. n = [z² * p (1-p) / e²]. n = [1.962. 0.5(1-0.5)/0.052]. n = 384.16. economy, 2025, 12(2): 26-39 32 © 2025 by the authors; licensee asian online journal publishing group where: n = the required sample size, z = the z-score corresponding to the desired confidence level (for a 95% confidence level, z ≈ 1.96), p = the estimated proportion of the population (0.5, chosen for maximum sample size) e = the margin of error. table 1 presents the population of the study along with the sample proportion drawn from it. it outlines the total number of individuals or entities considered in the research and specifies how the sample was distributed or selected across different groups or categories, ensuring representativeness and reliability in the findings. table 1. population and sample proportion. strata targeted population sample proportion tax officials 3,145 277 federal government officials 638 56 technology and it experts 569 51 total 4,352 384 the study employed both descriptive and inferential analysis techniques for data evaluation. descriptive statistics, including measures of central tendency (mean) and dispersion (standard deviation), were used to summarize the data. additionally, ordinary least square (ols) regression analysis was performed to assess the statistical significance of the relationships between the independent variables and the dependent variables. 3.1. reliability and validity of research instrument in table 2, reliability was assessed using cronbach's alpha. revenue, capital, e-filling, autopayment and blockchain were shown by the cronbach's alpha test scores of 0.7986, 0.8008, 0.7893, 0.7922, and 0.7971, suggesting that the survey is suitable for high-stakes evaluations. overall, the test's dependability was 83%. this indicates good internal consistency among the items. table 2. cronbach's alpha. item alpha revenue generation 0.7986 capital projects funding 0.8008 electronic tax filing 0.7893 automated tax payment systems 0.7922 blockchain-based tax solutions 0.7971 overall test 0.8295 3.2. model specification to create an econometric model where the independent variable is digital tax platforms (which includes electronic tax filing, automated tax payment systems, and blockchain-based tax solutions), and the dependent variables are revenue generation and capital projects funding. this study developed two separate models to reflect relationships. 3.2.1. econometric model for revenue generation revenue generation (rg) is influenced by the adoption of digital tax platforms (dtp), which include. electronic tax filing (etf). automated tax payment systems (atps). blockchain-based tax solutions (bts). the relationship was represented as: 𝑅𝐺 = 𝛽0 + 𝛽1𝐸𝑇𝐹 + 𝛽2𝐴𝑇𝑃𝑆 + 𝛽3𝐵𝑇𝑆 + 𝜖 where: rg = revenue generation (measured by the total revenue generated from taxes). etf = electronic tax filing (a measure of adoption or frequency of usage of e-filing). atps = automated tax payment systems (a measure of usage or adoption level of automated systems). bts = blockchain-based tax solutions (a measure of blockchain adoption in tax collection). β0 = intercept (constant term). β1, β2, β3 = coefficients for each independent variable (measures of impact of each digital platform on revenue generation). ϵ\epsilon = error term (captures unobserved factors affecting revenue generation). 3.2.2. econometric model for capital projects funding the model for capital projects funding (cpf) was defined as a function for the adoption of digital tax platforms (dtp). 𝐶𝑃𝐹 = 𝛼0 + 𝛼1𝐸𝑇𝐹 + 𝛼2𝐴𝑇𝑃𝑆 + 𝛼3𝐵𝑇𝑆 + 𝜈 where: cpf = capital projects funding (measured by the availability of funds for capital projects). etf = electronic tax filing. atps = automated tax payment systems. bts = blockchain-based tax solutions. α0 = intercept (constant term). α1, α2, α3 = coefficients for each independent variable (measures of the impact of each platform on capital projects funding). ν = error term (captures unobserved factors affecting capital projects funding). economy, 2025, 12(2): 26-39 33 © 2025 by the authors; licensee asian online journal publishing group 3.3. data analysis techniques this study employed both descriptive statistics (mean, median, variance, standard deviation, skewness, and kurtosis) and inferential statistics (regression, correlational analysis, and others) to analyse the data. 4. data analysis and discussion of findings this section presents the analysis's findings, as well as their implications. 4.1. demographic information table 3 displays demographic statistics in percentages and frequencies according to the respondents' backgrounds. there were 384 responses. 25.52% of respondents were government officials, while 24.22% of the sample were tax officials. technology/it experts are the smallest group at 22.40%. 27.86% of respondents did not specify their roles. on the other hand, the highest number of respondents (29.69%) work at the federal inland revenue service (firs), while 27.60% of participants are from agencies or organisations not explicitly listed. the ministry of finance accounts for 23.18%, and the ministry of budget and national planning accounts for 19.53% of respondents. similarly, 24.48% of the respondents had under 5 years of experience. while 19.53% had between 6 to 10 years of experience. a good spread exists across the mid-experience ranges (11–20 years), with each range contributing around 20% of the sample. about 35.42% of respondents have over 20 years of experience, indicating a mature and experienced sample. conversely, 26.04% of the samples were not too familiar with tax digitalization. while 25.78% of the samples were somewhat familiar with digital tax platforms, 23.96% were familiar with tax digitalization. 24.22% of respondents were experienced in using digital tax platforms. in the same vein, 50. 52% of the sample participated in the development, implementation, or maintenance of a digital tax platform, while 49.48% did not participate in the development of digital tax platforms. also, 23.96% of the firms sampled fully implemented digital tax platforms. while 25% of firms sampled partially implemented tax platforms, 25.26% were in the process of implementation. however, 25.78% did not implement digital platforms yet. in terms of objectives, 17.97% of the sampled respondents stated that improving tax collection efficiency was the main goal of setting up digital tax platforms in their firms. while 16.41% of respondents asserted that enhancing revenue generation informed digitalization of tax in their firms. 15.63% of the respondents opined that to facilitate easier tax filing for taxpayers, informed digitalization tax platforms in their organisations. 15.89% of respondents indicated that improving transparency in tax processes formed the basis of tax platforms' digitalization. 20.57% of the sampled respondents stated that reducing corruption and fraud was the main objective of using digital tax platforms in their organisations. 13.54% of the respondents did not specify. furthermore, 30.21% of the respondents emphasised that digital tax platforms did not contribute to the funding of capital projects. while 22.92% and 23.7% stated that digital tax platforms contributed to the funding of capital projects to a small and moderate extent. 23.18% of the sample stated that digital tax platforms contributed to the funding of capital projects to a great extent. in terms of challenges encountered during the use of the digital tax platform, 16.67% of the sampled respondents stated that they encountered a lack of technical infrastructure during digital tax platform adoption. 14.84% stated that poor internet connectivity contributed to the challenges of the digital tax platform. while 16.41% opined that limited training and capacity building was the bane of digital tax, 18.75% of the respondents suggested that resistance to change from employees or taxpayers accounted for these challenges. again, 14.58% of the respondents stated there was limited awareness among taxpayers, while 18.75% did not specify. however, 28.13% of the respondents believed the adoption of digital tax platforms would enhance the sustainability of funding for capital projects. while 31.77% of the respondents did not believe the adoption of digital tax platforms would enhance the sustainability of funding for capital projects, 40.10% of the respondents were indifferent. table 3. frequency distributions. role frequency percent cumulative percent 1 93 24.22% 24.22% 2 98 25.52% 49.74% 3 86 22.40% 72.14% 4 107 27.86% 100.00% total 384 100.00% organisation 1 114 29.69% 29.69% 2 89 23.18% 52.86% 3 75 19.53% 72.40% 4 106 27.60% 100.00% total 384 100.00% experience 1 94 24.48% 24.48% 3 75 19.53% 44.01% 4 79 20.57% 64.58% 5 136 35.42% 100.00% total 384 100.00% familiarity level 1 100 26.04% 26.04% 2 99 25.78% 51.82% 3 92 23.96% 75.78% 4 93 24.22% 100.00% total 384 100.00% participation 1 194 50.52% 50.52% economy, 2025, 12(2): 26-39 34 © 2025 by the authors; licensee asian online journal publishing group 2 190 49.48% 100.00% total 384 100.00% adoption status 1 92 23.96% 23.96% 2 96 25.00% 48.96% 3 97 25.26% 74.22% 4 99 25.78% 100.00% total 384 100.00% objective 1 69 17.97% 17.97% 2 63 16.41% 34.38% 3 60 15.63% 50.00% 4 61 15.89% 65.89% 5 79 20.57% 86.46% 6 52 13.54% 100.00% total 384 100.00% contribution level 1 116 30.21% 30.21% 2 88 22.92% 53.13% 3 91 23.70% 76.82% 4 89 23.18% 100.00% total 384 100.00% challenge 1 64 16.67% 16.67% 2 57 14.84% 31.51% 3 63 16.41% 47.92% 4 72 18.75% 66.67% 5 56 14.58% 81.25% 6 72 18.75% 100.00% total 384 100.00% belief level 1 108 28.13% 28.13% 2 122 31.77% 59.90% 3 154 40.10% 100.00% total 384 100.00% 4.2. descriptive statistics in table 4, the means range from 2.87 to 2.94, indicating that respondents generally provided moderate to slightly above-average ratings for the items under study. this indicates neutral to slightly positive perceptions of the listed digital tax platform features. in terms of dispersion, the standard deviations range from 0.70 to 0.77, showing moderate variability in responses. there is no extreme spread, which supports the reliability indicated by your cronbach’s alpha. however, the minimum is 0, and maximums are all slightly below or equal to 5, which suggests respondents used scale-like measurement. table 4. descriptive statistics. variable obs. mean std. dev. min. max. revenue generation 384 2.930 0.747 0 4.571 capital projects funding 384 2.924 0.769 0 5.000 electronic tax filing 384 2.879 0.704 0 4.285 automated tax payment systems 384 2.874 0.723 0 4.571 blockchain-based tax solutions 384 2.941 0.756 0 4.429 4.3. test of variable the outcomes of both preand post-estimation tests to guarantee the reliability and validity of the study's findings for models 1 and 2, respectively. 4.3.1. model 1’s correlation analysis table 5 shows the results of a pairwise correlation coefficient test performed on independent variables. the test results indicated a significant positive association between revenue generation and electronic tax filing, automated tax payment systems and blockchain-based tax solutions, respectively. while the coefficient values range from 0.4523 to 0.5449 and a p-value of 0.0000, these findings suggest that as one part of digital tax infrastructure improves, others tend to follow suit. the moderate and significant correlations indicate that the variables are connected but not collinear, making them appropriate for further multivariate analysis. table 5. model 1’s correlation analysis. variable revenue generation electronic tax filing automated tax payment systems blockchain-based tax solutions revenue generation 1.0000 electronic tax filing 0.4523* 1.0000 automated tax payment systems 0.5449* 0.5064* 1.0000 blockchain-based tax solutions 0.4882* 0.5343* 0.4846* 1.0000 economy, 2025, 12(2): 26-39 35 © 2025 by the authors; licensee asian online journal publishing group 4.3.2. model 1’s post-estimation test also, based on the results of the previous correlation investigation, the degree of multicollinearity in the data distribution was estimated using the variance inflation factor (vif) analysis. in this regard, there is no multicollinearity since the mean vifs of these variables are 1.53. likewise, the constant variance of residuals with fitted values was evaluated using the breusch-pagan/cook-weisberg test. with a chi-square of 2.95 and a p-value of 0.0860, the results demonstrated significant evidence of homoscedasticity. to ascertain whether the variables have a normal distribution, the skewness/kurtosis tests for normality test were employed. since the p-value of 0.3058 was more than the 0.05 significant level, the null hypothesis of normalcy was accepted. similarly, the durbin-watson test, which has values between 0 and 4, finds autocorrelation in data distributions. a score of 2.0617 implies marginally positive autocorrelation in residuals, whereas a value of 2 indicates no autocorrelation. according to the study's findings, autocorrelation does not exist. table 6. estimation test results. test f-statistics p-value breusch-pagan / cook-weisberg test for heteroscedasticity 2.95 0.0860 skewness/kurtosis tests for normality 2.37 0.3058 durbin-watson d-statistic 2.0617 vif 1.53 4.3.3. model 2’s correlation analysis the findings of a pairwise correlation coefficient test on independent variables are displayed in table 7. the test results showed that capital project funding was significantly positively correlated with automated tax payment systems, blockchain-based tax solutions, and electronic tax filing, respectively. these results imply that when one aspect of the digital tax infrastructure gets better, others tend to follow suit, even though the coefficient values range from 0.4523 to 0.5434 and the p-value is 0.0000. the variables are suitable for additional multivariate analysis since the moderate and significant correlations show that they are related but not collinear. autocorrelation in data distributions is also detected by the durbin-watson test, which has values ranging from 0 to 4. while a score of 2 denotes no autocorrelation, a score of 2.0617 suggests slightly positive autocorrelation in the residuals. the results of the investigation show that there is no autocorrelation. table 7. model 2’s correlation analysis. variable capital project funding electronic tax filing automated tax payment systems blockchain-based tax solutions capital project funding 1.0000 electronic tax filing 0.5434* 1.0000 automated tax payment systems 0.4715* 0.5064* 1.0000 blockchain-based tax solutions 0.4566* 0.5343* 0.4846* 1.0000 4.3.4. model 2’s post-estimation test in table 8, the variance inflation factor (vif) analysis was used to quantify the degree of multicollinearity in the data distribution based on the findings of the prior correlation inquiry. given that these variables mean vifs are 1.53, multicollinearity is not present in this context. similarly, the breusch-pagan/cook-weisberg test was used to assess the constant variance of residuals with fitted values. with a p-value of 0.6914 and a chi-square of 0.16, the results showed strong evidence of homoscedasticity. the skewness/kurtosis tests for normality were used to determine whether the variables had a normal distribution. the null hypothesis of normalcy was accepted because the p-value of 0.6886 was greater than the 0.05 significant level. the durbin-watson test, which has values between 0 and 4, can also identify autocorrelation in data distributions. a score of 1.9685 indicates somewhat positive autocorrelation in the residuals, whereas a score of 2 indicates no autocorrelation. the investigation's findings indicate that autocorrelation does not exist. table 8. estimation test results. test f-statistics p-value breusch-pagan / cook-weisberg test for heteroscedasticity 0.16 0.6914 skewness/kurtosis tests for normality 0.75 0.6886 durbin-watson d-statistic 1.9685 vif 1.53 4.4. digital tax platforms adoption and revenue generation as shown in table 9, the linear regression model, with revenue generation as the dependent variable (y) and digital tax platform adoption as the independent variable (x), has an f-statistic of 76.26 and a p-value of 0.0000. the f-statistics are significant (p < 0.05), indicating that the model explains a significant portion of the variation in revenue generation. the r-squared of 0.376 (37.6%) indicates that 37.6% of the variance in revenue generation is explained by the model. similarly, the coefficient of electronic tax filing is 0.153 (p = 0.005). this indicates that a one-unit increase in electronic filing relates to a 0.153-unit increase in income, assuming all other variables remain constant. the automated tax payment systems coefficient is 0.368 with a p-value of 0.000. this implies that a one-unit increase in automated tax payment results in a 0.368 rise in revenue. the blockchain’s coefficient is 0.236 with a p-value of 0.000. this suggests that a unit increase in blockchain use corresponds to a 0.236 increase in revenue creation. while automated tax payment systems had the strongest effect on revenue, electronic filing, automated payment, and blockchain solutions are significant contributors to revenue generation. economy, 2025, 12(2): 26-39 36 © 2025 by the authors; licensee asian online journal publishing group 4.5. digital tax platforms adoption and capital projects funding in table 9, the f-statistics for the linear regression model with capital project funding as the dependent variable (y) and digital tax platform adoption as the independent variable (x) is 72.99, with a p-value of 0.0000. the f-statistics are substantial (p < 0.05), suggesting that the model explains a large percentage of the volatility in income creation. the model explains 36.6% of the variance in revenue generation (r-squared = 0.366). similarly, the coefficient for electronic tax filing is 0.376 (p=0.000). this means that a one-unit increase in electronic filing corresponds to a 0.376-unit gain in capital project funding, providing all other factors are unchanged. the automated tax payment systems coefficient is 0.229 and has a p-value of 0.000. this means that a one-unit increase in automated tax payment results in a 0.229 rise in capital project funding. the blockchain’s coefficient is 0.171 with a p-value of 0.000. this shows that a unit increase in blockchain adoption equates to a 0.171 rise in capital project funding. while electronic tax filing had the strongest effect on capital projects, all predictors are significant contributors to capital project funding. table 9. multivariable regression analysis. variable coef. std. err. t p>t [95% conf interval] revenue generation electronic tax filing 0.153 0.054 2.840 0.005 0.047 0.259 automated tax payment systems 0.368 0.051 7.240 0.000 0.268 0.468 blockchain-based tax solutions 0.236 0.045 4.750 0.000 0.138 0.333 _cons 0.739 0.150 4.920 0.000 0.444 1.035 capital project funding electronic tax filing 0.376 0.056 6.710 0.000 0.266 0.486 automated tax payment systems 0.229 0.053 4.350 0.000 0.126 0.333 blockchain-based tax solutions 0.171 0.051 3.320 0.001 0.070 0.272 _cons 0.679 0.156 4.350 0.000 0.372 0.985 equation obs. parms rmse r-sq f p-value revenue 384 4 0.592 0.376 76.260 0.000 capital 384 4 0.615 0.366 72.990 0.000 4.6. discussion of findings this multivariable regression analysis conducted found that digital tax platforms which comprised of electronic tax filing, automated tax payment systems, and blockchain-based tax solutions had a positive and significant effects on revenue generation and capital projects funding in nigeria. the study found strong evidence that when nigeria uses digital tax technologies like online filing, automated payments, and blockchain, it sees improvements in collecting more taxes (revenue generation) and is better able to fund public infrastructure or development projects (capital projects funding). this suggests that embracing digital tax innovations can enhance the financial performance and public service delivery of the government. the findings align with tivde (2024) who reported that electronic taxation platforms significantly boosted total tax revenue, particularly in company income tax (cit), value added tax (vat), and capital gains tax (cgt). similarly, etale, bingilar, and ifurueze (2021) found that e-tax clearance certificates, electronic filing, and e-tax identification improved corporate income tax revenue, supporting the idea that digital tax systems enhance revenue collection. uguagu, ayodele, and ajayi (2023) showed that electronic tax systems reduced tax evasion and increased revenue. mas’ud, mohammed, and gimba (2023) emphasized that the strategic use of e-tax data by state internal revenue services improved states' per capita internally generated revenue. falana et al. (2024) found that digital payment platforms and technical expertise significantly improved tax compliance in the southwest informal sector. dakhil et al. (2025) concluded that both voluntary tax compliance and enforcement strategies enhanced tax revenue generation. dagunduro et al. (2025) revealed that electronic systems such as e-filing, billing, and payments had a positive effect on informal sector tax compliance in nigeria. however, contrasting evidence from akinadewo et al. (2023) indicated that while qualified personnel and tax law enforcement improved revenue generation, ict had an inverse and insignificant impact on revenue in kano and ekiti states. similarly, ashafoke and obaretin (2023) found that although there was a positive relationship between tax e-commerce and revenue generation, it was statistically insignificant. only digital advertising among various digital tax channels showed a significant positive effect, suggesting that not all digital tax innovations equally enhance revenue. the positive and significant impact of digital tax platforms such as electronic tax filing, automated payment systems, and blockchain solutions on revenue generation and capital project funding aligns with the technology acceptance model (tam). this model posits that perceived usefulness and ease of use are critical factors influencing the adoption of new technologies. in the nigerian context, the adoption of e-taxation systems has been associated with increased efficiency in tax collection and public financial management. for instance, tivde (2024) found that the introduction of electronic taxation platforms led to a statistically significant increase in total tax revenue collection in nigeria, highlighting the perceived usefulness of these technologies among tax officials and stakeholders. furthermore, the ease of use associated with these digital platforms has facilitated their adoption. ezeala, opara, and omaliko (2024) reported that electronic tax systems significantly improved revenue generation concerning personal and company income taxes in anambra state, nigeria. this improvement suggests that users find these systems user-friendly, which is consistent with the tam's emphasis on ease of use as a determinant of technology adoption. from the perspective of public finance theory, which emphasizes efficient revenue generation and allocation for public goods and services, the findings showed the fiscal benefits of digital tax platforms. the integration of digital technologies into tax administration has enhanced transparency and accountability, key principles in public finance. according to akinyosoye, adesoga, olubisi, and nwankwere (2024) tax digitalization dimensions had a positive and significant effect on revenue generation, with online payment systems being the most effective predictor. this enhancement in revenue collection capacity enables better funding for capital projects and public services, aligning with the theory's focus on optimal resource allocation. moreover, the adoption of blockchain-based tax solutions economy, 2025, 12(2): 26-39 37 © 2025 by the authors; licensee asian online journal publishing group contributes to reducing tax evasion and fraud, further strengthening the integrity of the tax system. the increased revenue from these digital platforms allows for more effective allocation of public resources towards infrastructure development, promoting economic growth and social welfare central goals of public finance theory. the successful implementation of digital tax technologies in nigeria is both behaviorally justified, as per the tam, and fiscally sound, in line with public finance theory. the adoption of these platforms reflects user acceptance driven by perceived benefits and leads to improved financial outcomes, supporting efficient governance and public service delivery. 5. conclusion and recommendations this study employed multivariable regression analysis to examine the impact of digital tax platforms comprising electronic tax filing, automated tax payment systems, and blockchain-based tax solutions on revenue generation and capital project funding in nigeria. the results revealed a positive and statistically significant relationship between the adoption of these digital tax innovations and improved government revenue as well as the capacity to finance infrastructure and development projects. the study underscores the transformative potential of digital technologies in strengthening public financial management and enhancing service delivery. the study concluded that digital tax platforms significantly improve both revenue generation and capital project funding in nigeria. technologies such as e-filing, automated payment systems, and blockchain increase tax collection efficiency, reduce leakages, and promote accountability in public finance. these innovations enable the government to mobilize more domestic resources and allocate them more effectively towards development goals. it was therefore recommended that the government should expand and modernize its digital tax infrastructure nationwide to ensure broader adoption among taxpayers and administrators. secondly, continuous training and capacity development programs for tax officials and it staff should be institutionalized to optimize the use of digital platforms. furthermore, clear guidelines on the implementation and oversight of digital tax platforms, especially blockchain systems, should be enacted to boost trust and compliance. lastly, efforts should be intensified to sensitize the public to the benefits and use of digital tax systems to foster voluntary compliance. this study provides empirical evidence on the efficacy of digital tax platforms in enhancing government revenue and public investment in a developing country context. it bridges the gap between technological innovation and public finance performance, contributing to both academic and practical understanding of digital transformation in tax administration. the integration of blockchain technology into the tax ecosystem is highlighted as a key innovation that strengthens transparency and accountability. the findings reinforce the technology acceptance model (tam) by showing that perceived usefulness and ease of use drive the adoption of digital tax platforms. it supports the public finance theory, demonstrating how improved revenue mechanisms enable efficient public spending and infrastructure development. for practitioners, the study advocates for an increased role of digital accounting tools and automation in public sector financial management, ensuring accuracy, real-time reporting, and enhanced audit trails. policy makers are encouraged to prioritize digital transformation policies in tax administration, recognizing its role in improving fiscal sustainability and development financing. there is a need for collaborative policy formulation involving tax authorities, it experts, and financial planners to create an ecosystem that supports innovation and compliance. policies should also promote inter-agency data integration and interoperability to ensure seamless information flow and improved service delivery. future research could investigate the sector-specific impacts of digital tax platforms on different industries (e.g., manufacturing, agriculture, digital economy). cross-country comparisons in sub-saharan africa can offer deeper insights into the regional effectiveness of digital tax technologies. tracking changes over time would help in understanding the long-term effects of digital tax implementation on fiscal performance and economic development. further studies could explore how digital platforms influence taxpayer attitudes, trust, and compliance behavior. references abdulkadir, i., bello, s., & yusuf, a. 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(2023). the correlation between digital taxation systems, the technology acceptance model (tam), and taxpayer compliance: the role of internet understanding as a mediating variable. journal of taxation and public administration, 15(4), 45-60. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. 18 © 2025 by the authors; licensee asian online journal publishing group economy vol. 12, no. 2, 18-25, 2025 issn(e) 2313-8181: / issn(p) 2518-0118: doi: 10.20448/economy.v12i2.6777 © 2025 by the authors; licensee asian online journal publishing group internal corporate social responsibility and employees’ performance of selected deposit money banks in ado-ekiti, nigeria anthony kolawole israel1 akinola emmanuel taiwo2 obamoyegun oluwaponmile joseph3 oziegbe tope rufus4 akintunde samuel akinrinola5 ( corresponding author) 1department of special needs education, adeyemi federal university of education, ondo, ondo state, nigeria. email: anthonyik@afuedondo.edu.ng 2division of statistics and records, adeyemi federal university of education, ondo, ondo state, nigeria. email: marshallakinola@gmail.com 3department of audit, adeyemi federal university of education, ondo, ondo state, nigeria email: joseobas@gmail.com 4department of economics, adeyemi federal university of education, ondo, ondo state, nigeria. email: oziegbetr@afuedondo.edu.ng 5department of social studies, adeyemi federal university of education, ondo, ondo state, nigeria. email: akintundesa@afuedondo.edu.ng abstract this study examines the impact of internal corporate social responsibility (icsr) on employee performance in selected deposit money banks in ado-ekiti, nigeria. four research objectives, research questions and five hypotheses were considered for the study respectively. four key components of icsr which are skill development, working conditions, empowerment, and employment stability were analyzed in relation to employee performance metrics such as job satisfaction, commitment, and engagement. a descriptive and explanatory research design was adopted, and data were collected from a sample of 303 bank employees using stratified and simple random sampling techniques. the statistical package for social sciences (spss) was used for data analysis, employing both descriptive statistics and multiple regression analysis to test five hypotheses. the study is anchored on stakeholder theory and social exchange theory, which explains the relationship between organizational care and employee outcomes. results showed that all icsr variables significantly and positively influence employee performance, with empowerment having the strongest effect and employment stability the least. the study concludes that strategic investment in internal csr initiatives leads to enhanced employee outcomes. it recommends that banks adopt consistent skill development programs, prioritize healthy work environments, involve employees in decision-making, and ensure job stability through transparent employment practices. keywords: deposit money banks, employee performance, employment stability, employment stability, empowerment, internal corporate social responsibility, skill development. contents 1. introduction ...................................................................................................................................................................................... 19 2. literature review ............................................................................................................................................................................ 20 3. methodology ..................................................................................................................................................................................... 21 4. findings and discussion ................................................................................................................................................................. 24 5. conclusion ......................................................................................................................................................................................... 24 6. recommendations ............................................................................................................................................................................ 24 references .............................................................................................................................................................................................. 24 https://www.doi.org/10.20448/economy.v12i2.6777 https://orcid.org/0000-0002-1137-8645 https://orcid.org/0009-0003-8753-9980 economy, 2025, 12(2): 18-25 19 © 2025 by the authors; licensee asian online journal publishing group citation | israel, a. k., taiwo, a. e., joseph, o. o., rufus, o. t., & akinrinola, a. s. (2025). internal corporate social responsibility and employees’ performance of selected deposit money banks in adoekiti, nigeria. economy, 12(2), 18-25. 10.20448/economy.v12i2.6777 history: received: 15 april 2025 revised: 8 may 2025 accepted: 11 june 2025 published: 16 june 2025 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this research is supported by the tertiary education trust fund (tetfund), which provided support for the research through institution-based research (ibr). institutional review board statement: ethical approval for this study was obtained from the ethical committee of adeyemi federal university of education, ondo, nigeria.. sequel to the need to provide the date and reference number. kindly find below, the required information: date: 25th june, 2024 (ref. no. tetf/dr&d/univ/ondo/ibr/2024/vol.i). kindly help update the portion. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. this study followed all ethical practices during writing. data availability statement: the corresponding author may provide study data upon reasonable request competing interests: the authors declare no competing interests. authors’ contributions: all authors contributed equally to the conception and design of the study. all authors have read and agreed to the published version of the manuscript. acknowledgement: the authors wish to express their sincere gratitude to the directorate of academic planning; division of statistics and records; department of special needs education; department of audit; and department of social studies at adeyemi federal university of education, ondo, nigeria, for their support and approval in conducting this study. we also appreciate the invaluable guidance from the university management. special thanks are extended to the respondents, facilitators, and leadership of the participating deposit money banks for their cooperation and contributions to the success of this research. contribution of this paper to the literature this study uniquely examines the nuanced impact of four specific icsr components (skill development, working conditions, empowerment, and employment stability) on distinct employee performance metrics (job satisfaction, commitment, and engagement) within the nigerian deposit money bank context in adoekiti. prior research in this region has not offered this specific, disaggregated analysis. 1. introduction organizations, whether formal or informal structures, are established with the fundamental purpose of achieving specific, predetermined goals (jiang, lepak, hu, & baer, 2012) and therefore, the attainment of these goals is often measured in terms of performance or success (akinola, akinbode, & fagbohungbe, 2018; muduli, 2015). performance indicators vary from one organization to another; nevertheless, one important resource that is consequential to the attainment of performance outcomes is often identified as the most valuable organizational asset-people (armstrong, 2009). the most valuable organizational asset-employees is one of the key determinants of the success or performance desired in an organizational setting, and this therefore supports the idea that the performance of an organization is contingent on the performance of its people (bakotić, 2016; owoeye, oyeniyi, & adesola, 2020). as remarked by savaneviciene and stankeviciute (2012) performance at the organizational level can be explained as distal outcomes, and its attainment is made possible via proximate outcomes performance at the employee level. the attainment of the overall organizational performance that is contingent on outcomes attained at employee levels makes employees an important asset to the organization (savaneviciene & stankeviciute, 2012). using employees as a unit of analysis, therefore, provides a platform for understanding proximate outcomes which are often conceptualized in literature as employee attitudinal and behavioural outcomes via which performance at the organizational level is attained (savaneviciene & stankeviciute, 2012). employee attitudinal and behavioural outcomes may comprise variables relating to commitment, engagement, trust, job satisfaction, and others; these variables have been identified as the contents of the 'black box' through which the relationship between organizational systems and performance outcomes is explained (azim, 2016; savaneviciene & stankeviciute, 2012). as noted in the literature, a theoretical lens of stakeholder theory provides a clear understanding that the support of non-financial stakeholders will be guaranteed and obtained when there is a perception of corporate social responsibilities (aguilera, rupp, williams, & ganapathi, 2007; albasu & nyameh, 2017). employees, therefore, are internal stakeholders in an organizational setting that need the firm's attention in terms of internal corporate social responsibilities, and a positive perception of internal corporate social responsibility (csr) towards meeting their expectations and needs may generate positive attitudinal and behavioural outcomes (chen, zhang, & vogel, 2018; motilewa & worlu, 2019; obeidat, al-suradi, masa’deh, & tarhini, 2018). internal corporate social responsibility has been identified as tools and practices used by organizations to influence the well-being of employees, and it has been remarked in the literature that these practices are assumed to have an effect on performance-related outcomes (motulewa & worlu, 2015; obeidat et al., 2018). this assumption has led to studies investigating the effect that corporate social responsibility has on performance-related outcomes. for instance, usman and amran (2015) investigated the effect of csr on financial performance in manufacturing companies in nigeria. in a similar vein, the studies carried out by shabbir and wisdom (2020); albasu and nyameh (2017); mohammed, ibrahim, and dabo (2016) and adeneye and ahmed (2015) were investigated to examine the effect of csr on performance at various organizational levels. while these studies were carried out to determine performance at profit-making organizations, evidence of icsr on performance-related outcomes at the employee level in for-profit making entities has remained limited in the nigerian context. this, therefore, creates a contextual gap that needs to be empirically investigated. csr is a management tool that is examined based on its two major components: internal and external (mgbame, osazuwa, & otuya, 2017). while studies have registered evidence of a positive association between external csr on performance-related outcomes, studies on the effect of internal csr on performance outcomes have generated inconsistent evidence. for example, the study of obeidat et al. (2018) found that internal https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ economy, 2025, 12(2): 18-25 20 © 2025 by the authors; licensee asian online journal publishing group dimensions of internal csr such as employment stability and skill development did not have a meaningful contribution to performance-related outcomes such as job satisfaction, while work-life balance, work condition, and empowerment significantly contributed to performance-related outcomes. similarly, al-samman and al-nashmi (2016) found an insignificant effect of csr on non-financial organizational performance, and therefore, the inconsistency of findings of the csr-performance relationship becomes a gap that demands the need for empirical investigation. in most of the studies carried out on the effect of csr on performance-related outcomes, the organization has been examined as the unit of analysis where performance outcomes were investigated (mgbame et al., 2017; shabbir & wisdom, 2020) however, few studies have examined performance outcomes using employees as a unit of analysis (albasu & nyameh, 2017; obeidat et al., 2018). meanwhile, it has been noted in the literature that using the employee as a unit of analysis will provide a means where performance outcomes at the organizational level can be understood via performance at the employee level (savaneviciene & stankeviciute, 2012). therefore, using the employee level as a unit of analysis remains unexamined in the nigerian context, especially in for-profit making organizations such as deposit money banks. this, therefore, creates a gap that demands the need for empirical investigation. this study aims to address these gaps by investigating the effect of internal corporate social responsibility on employee performance in selected deposit money banks in ekiti state, nigeria. 1.1. research objectives the main objective is to investigate the effect of internal corporate social responsibility on employee performance in selected deposit money banks in ekiti state, nigeria. specifically, this study: i. examined the effect of skill development, ii. investigated the effect of working conditions, iii. established the effect of empowerment, and iv. investigated the effect of employment stability on employee performance in these banks. 1.2. research questions i. what is the effect of internal corporate social responsibility on employee performance? ii. how does skill development affect employee performance? iii. how do working conditions influence employee performance? iv. what is the impact of empowerment on employee performance? v. how does employment stability affect employee performance? 1.3. research hypotheses h01: internal corporate social responsibility has no significant effect on employee performance. h02: skill development has no significant effect on employee performance. h03: working conditions have no significant effect on employee performance. h04: empowerment has no significant effect on employee performance. h05: employment stability has no significant effect on employee performance. 1.4. definition of operational terms internal csr (icsr): encompasses organizational activities aimed at enhancing employee welfare, specifically: training, good work conditions, job security, and involvement in decision-making employee performance: refers to the attitudinal and behavioral outcomes of employees, including job satisfaction, engagement, and commitment. skill development: denotes organizational efforts focused on training and improving the technical and interpersonal skills of employees. employment stability: represents the degree to which employees perceive job security within the organization. empowerment: involves employees' participation in decision-making processes and their autonomy in executing their job duties. working condition: describes the physical and psychosocial environment in which employees perform their work. 2. literature review 2.1. conceptual review corporate social responsibility (csr) is broadly classified into external and internal dimensions. while external csr addresses social, environmental, and community-related obligations, internal csr focuses on initiatives that improve employees’ welfare within the organization (mory, wirtz, & göttel, 2016). internal csr practices typically include skill development, work-life balance, health and safety, employment stability, and empowerment. these initiatives are essential for creating a conducive work environment, boosting morale, and fostering a culture of performance and accountability. skill development entails systematic training and education opportunities that enhance employees’ capabilities to perform efficiently (bayley, 2015). it includes both technical competencies and interpersonal or soft skills, all of which are critical in fast-paced environments such as banking. empowerment refers to granting employees autonomy and including them in decision-making processes, which builds a sense of ownership and motivation (akinwale & george, 2020). working conditions encompass the physical and psychological environment of the workplace. as saidi, abdu, and garba (2019) note, safe, ergonomic, and emotionally supportive workspaces enhance concentration, reduce stress, and ultimately increase productivity. employment stability involves consistent contractual relationships and economy, 2025, 12(2): 18-25 21 © 2025 by the authors; licensee asian online journal publishing group the assurance of job security, both of which influence employees’ emotional well-being and willingness to invest effort in their roles (abolade, 2018). modern organizations, especially in emerging economies, increasingly rely on internal csr strategies as part of their human capital management and corporate strategy. according to fatima, zaheer, and ahmed (2023) internal csr must be perceived as a strategic resource capable of shaping organizational identity and influencing employee behavior. the effective implementation of these practices improves employee engagement, reduces turnover, and enhances overall organizational performance. 2.2. empirical review the empirical literature presents mixed but mostly positive evidence on the link between internal csr and employee performance. obeidat et al. (2018) found a significant correlation between internal csr (particularly empowerment and work-life balance) and job satisfaction among employees in jordanian banks. in contrast, alsamman and al-nashmi (2016) reported a weak correlation between csr and non-financial performance in yemeni institutions, suggesting cultural and economic variables may moderate the csr-performance relationship. in the nigerian context, motilewa and worlu (2019) revealed that internal csr initiatives such as employee involvement and job security significantly improved engagement and performance in financial institutions. similarly, mohammed et al. (2016) identified skill development and employee health and safety as the most influential csr drivers of productivity in commercial banks. ibrahim and lawal (2023) provided further support in their study of west african banks, showing that csr policies aligned with employees' expectations led to higher job satisfaction, lower turnover intentions, and enhanced discretionary effort. in smes, babatunde and adeyemi (2022) also confirmed that csr initiatives targeting internal stakeholders positively influence workforce commitment and reduce absenteeism. despite some contrasting findings, the general trend in empirical studies suggests that internal csr is a valuable strategy for improving employee performance, particularly in industries like banking where service delivery is heavily reliant on workforce engagement and satisfaction. 2.3. theoretical review this study is underpinned by two foundational theories stakeholder theory (st) and social exchange theory (set) each offering a different but complementary perspective on the relationship between internal csr and employee performance. stakeholder theory, proposed by freeman (1984) posits that organizations must consider the interests of all stakeholders, not just shareholders to achieve sustainable success. employees, as internal stakeholders, deserve strategic attention in the formulation and implementation of corporate policies. the relevance of this theory to the current study lies in its emphasis on inclusive value creation. by prioritizing employee well-being through icsr, banks in nigeria can build a loyal and high-performing workforce, enhancing both internal and external stakeholder relationships. social exchange theory (set), developed by homans (1958) and further expanded by blau (1964) is based on the idea that social behaviour is the result of an exchange process aimed at maximizing benefits and minimizing costs. in the organizational context, when employers demonstrate care through icsr initiatives, employees are likely to reciprocate with increased loyalty, commitment, and productivity. the application of set to this study underscores the reciprocal nature of employer-employee relationships and supports the argument that internal csr is a catalyst for positive employee outcomes. together, these theories provide a strong conceptual foundation for understanding how internal csr initiatives can foster a more engaged, satisfied, and high-performing workforce in nigeria’s banking sector. stakeholder theory and set provide a robust explanatory framework. while stakeholder theory justifies why organizations should invest in internal csr from a governance perspective, set explains how such investments translate into tangible employee performance outcomes. these theoretical underpinnings are especially relevant in a dynamic service sector like banking, where competitive advantage hinges on workforce motivation, service quality, and customer satisfaction. 3. methodology 3.1. research design this study adopted a mixed-method approach, combining both descriptive and explanatory research designs to effectively investigate the relationship between internal corporate social responsibility (icsr) and employee performance. the descriptive design was employed to summarize the demographic characteristics of the respondents and identify patterns in employee perceptions and organizational practices. on the other hand, the explanatory design (also known as causal research) was used to establish cause-and-effect relationships between the various icsr variables (internal corporate social responsibility, skill development, working conditions, empowerment, and employment stability) and employee performance outcomes such as engagement, commitment, and job satisfaction. this dual approach ensured a comprehensive understanding of both the current state of icsr in the banks and the statistical significance of its influence on performance. 3.2. population and sample size the population of the study comprised all employees across five selected deposit money banks located in adoekiti, ekiti state, nigeria. the banks included first bank plc, zenith bank plc, guaranty trust bank, united bank for africa (uba), and access bank. the total number of employees across these banks was 1,258, made up of 343 senior staff and 915 junior staff. to determine an appropriate and manageable sample size, taro yamane’s formula was used with a 95% confidence level and a 5% margin of error. n = n 1+n(e)2 economy, 2025, 12(2): 18-25 22 © 2025 by the authors; licensee asian online journal publishing group where: n = sample size. n = population size = 1,258. e = margin of error = 0.05. n = 1258 1+1258(0.05)2 = 303 therefore, the calculated sample size was 303 respondents. this sample was considered adequate for generalizing the results to the entire employee population of the selected banks. table 1 details the demographic information of the participating banks. specifically, it lists the name of each bank, all of which are located in ado-ekiti. the table further shows the total number of staff in each bank and the corresponding sample size selected for this study. finally, it provides the overall total for the number of staff across all banks and the total sample size. table 1. demographic table of participating banks. bank name location no. of staff sample size first bank plc ado-ekiti 270 65 zenith bank plc ado-ekiti 240 58 guaranty trust bank ado-ekiti 210 50 united bank for africa ado-ekiti 278 70 access bank ado-ekiti 260 60 total 1,258 303 3.3. sampling technique to ensure a representative and unbiased selection of participants, this study employed a combination of stratified sampling and simple random sampling techniques. the stratified sampling method was used to categorize the population into distinct subgroups, specifically junior staff and senior staff based on their job levels within the banks. this stratification ensured that the perspectives of both management-level employees and operational-level employees were adequately captured. once the population was stratified, simple random sampling was applied within each stratum to select respondents. this technique guaranteed that every employee within each category had an equal chance of being included in the study, thereby minimizing selection bias and enhancing the validity of the findings. proportional allocation was also maintained across the five banks to reflect the actual staff distribution in each institution, ensuring that the sample size from each bank was proportionate to its total workforce. 3.4. data collection procedure data were collected using a structured questionnaire, which was designed to capture information on all key variables in the study: skill development, working conditions, empowerment, employment stability, and employee performance. the questionnaire consisted primarily of close-ended questions measured on a 5-point likert scale ranging from "strongly disagree" (1) to "strongly agree" (5), allowing for quantitative analysis. before the main data collection commenced, a pilot study was conducted with a small group of 20 respondents selected from similar financial institutions not included in the final sample. the purpose of the pilot study was to assess the clarity, reliability, and validity of the instrument. based on feedback from the pilot, minor modifications were made to the wording of some items to enhance comprehension. after validation, the questionnaires were administered physically and electronically to ensure wider reach and higher response rates. respondents were assured of confidentiality and anonymity, and participation was strictly voluntary. to reduce response bias, data collection was carried out over a period of two weeks, allowing respondents enough time to provide thoughtful and accurate responses. table 2. distribution of respondents by bank and staff category. bank name senior staff junior staff total respondents first bank plc 20 45 65 zenith bank plc 18 40 58 guaranty trust bank 15 35 50 united bank for africa 23 47 70 access bank 22 38 60 total 98 205 303 table 2 illustrates the distribution of respondents across the participating banks and their respective staff categories. for each listed bank, the table shows the number of senior staff and junior staff who participated in the study. additionally, it displays the total number of respondents from each bank. the final row summarizes the total number of senior staff, junior staff, and the overall total respondents across all the banks included in the research. 3.5. data analysis the data collected from the administered questionnaires were analyzed using the statistical package for the social sciences (spss) version 25, a widely recognized tool for social science and management research. the analysis was carried out in two phases: descriptive analysis and inferential analysis. descriptive statistics were used to summarize and describe the characteristics of the dataset. key statistical measures such as means, standard deviations, frequencies, and percentages were computed to present the demographic profile of the respondents (e.g., age, gender, education level, job category) and to assess the general trends in responses to items measuring internal corporate social responsibility (icsr) dimensions and employee performance. these descriptive summaries provided a foundational understanding of how respondents perceived skill development, working conditions, empowerment, and employment stability within their organizations. economy, 2025, 12(2): 18-25 23 © 2025 by the authors; licensee asian online journal publishing group to test the formulated hypotheses, multiple regression analysis was employed to examine the individual and combined effects of the independent variables (internal corporate social responsibility, skill development, working conditions, empowerment, and employment stability) on the dependent variable (employee performance). each hypothesis was tested at a 95% confidence level (α = 0.05), with significance determined by p-values and tstatistics. the strength and direction of relationships were assessed using unstandardized regression coefficients (b values) and r-squared values (variance explained in employee performance by internal csr). the overall significance of the regression models was evaluated using the f-statistic, where a significant value indicated reliable prediction of the outcome variable by the predictor set. findings from descriptive and inferential analyses were presented in tables and interpreted in line with prior research, theories, and the study’s conceptual framework. 3.6. hypotheses testing hypothesis 1: internal corporate social responsibility has no significant effect on employee performance. table 3. regression results for hypothesis 1. model r r² adjusted r² std. error f-statistic sig. (p-value) decision regression 0.713 0.509 0.504 0.449 76.32 0.000** significant note: the double asterisks (**) next to the p-value (0.000) indicate a statistically significant result at a very high level of significance (typically p < 0.01 or even p < 0.001), suggesting strong evidence against the null hypothesis. the regression results in table 3 show that the model is statistically significant (f (4, 298) = 76.32, p < 0.01), indicating that internal csr components collectively influence employee performance. the r² value of 0.509 reveals that approximately 50.9% of the variation in employee performance can be explained by the combined internal csr variables: skill development, working condition, empowerment, and employment stability. the hypothesis that “internal corporate social responsibility significantly affects employee performance is therefore accepted. hypothesis 2: skill development has no significant effect on employee performance. table 4. regression results for hypothesis 2. variable unstandardized coefficient (b) standard error t-value p-value decision skill development 0.321 0.056 5.742 0.000** significant note: the double asterisks (**) in table 4, specifically in the "p-value" column next to "0.000", indicate a high level of statistical significance for the effect of "skill development" on employee performance. the regression coefficient (β = 0.321, t = 5.742, p < 0.01) in table 4 reveals that skill development significantly and positively affects employee performance. this finding implies that when employees receive consistent training and development opportunities, their competencies and job satisfaction increase. it supports existing literature that recognizes skill development as essential to organizational productivity (dong, bartol, zhang, & li, 2016; obeidat et al., 2018). therefore, the hypothesis is accepted. hypothesis 3: working conditions have no significant effect on employee performance. table 5. regression results for hypothesis 3. variable unstandardized coefficient (b) standard error t-value p-value decision working condition 0.278 0.056 4.939 0.000** significant note: the double asterisks (**) in table 5, specifically in the "p-value" column next to "0.000", indicate a high level of statistical significance for the effect of "working condition" on employee performance. with a regression coefficient of β = 0.278 (t = 4.939, p < 0.01), the result as shown in table 5 affirms that working conditions significantly affect employee performance. a supportive and safe working environment improves focus, reduces absenteeism, and enhances morale. this confirms previous research by saidi et al. (2019) which emphasized the role of workplace environment in shaping employee productivity. thus, the hypothesis is accepted. hypothesis 4: empowerment has no significant effect on employee performance. table 6. regression results for hypothesis 4. variable unstandardized coefficient (b) standard error t-value p-value decision empowerment 0.341 0.056 6.103 0.000** significant note: the double asterisks (**) in table 6, specifically in the "p-value" column next to "0.000", indicate a high level of statistical significance for the effect of "empowerment" on employee performance. the analysis in table 6 indicates that empowerment has the most substantial impact on employee performance (β = 0.341, t = 6.103, p < 0.01). when employees are empowered through participation in decision-making and given autonomy, they feel valued and are more engaged and committed. this result aligns with the findings of motilewa and worlu (2019) and affirms the importance of inclusive hr policies. therefore, the hypothesis is accepted. hypothesis 5: employment stability has no significant effect on employee performance. table 7. regression results for hypothesis 5. variable unstandardized coefficient (b) standard error t-value p-value decision employment stability 0.149 0.074 2.001 0.046* significant note: the single asterisk (*) in table 7, specifically in the "p-value" column next to "0.046", indicates statistical significance at a lower level than the double asterisks used in previous tables. economy, 2025, 12(2): 18-25 24 © 2025 by the authors; licensee asian online journal publishing group employment stability had a regression coefficient of β = 0.149 (t = 2.001, p = 0.046), indicating a moderate but significant effect. employees who perceive job security are less stressed and more focused, leading to improved performance as indicated in table 7. although the effect is weaker than other icsr variables, it remains statistically significant, echoing the findings of abolade (2018). hence, the hypothesis is accepted. 4. findings and discussion the findings demonstrate a robust and statistically significant relationship between internal csr practices and employee performance. empowerment was identified as the strongest predictor, underscoring the need for participatory management approaches in modern hr strategies. skill development and conducive working conditions also played vital roles in boosting employee morale and output. employment stability, though less impactful, still contributed positively, affirming the psychological importance of job security in performance outcomes. these findings lend strong support to both stakeholder theory and social exchange theory. by addressing employees’ welfare through csr, organizations foster reciprocal behaviours such as loyalty, commitment, and discretionary effort. this is consistent with obeidat et al. (2018) who emphasized the strategic importance of icsr in building high-performance work environments. the study bridges an empirical gap in the nigerian banking sector, reinforcing that employee-centered csr practices are not just ethical imperatives but strategic tools for competitive advantage. 5. conclusion this study concludes that internal corporate social responsibility has a significant and positive effect on employee performance in the banking sector in ado-ekiti, nigeria. empowerment, skill development, good working conditions, and employment stability all contribute meaningfully to enhanced employee attitudes and behaviours. the results imply that employee-focused csr initiatives should be prioritized as strategic hr tools rather than mere compliance measures. such initiatives lead not only to employee satisfaction but also to improved organizational performance and long-term sustainability. 6. recommendations the study therefore recommends that banks should institutionalize regular skill development initiatives, such as training programmes, workshops, and mentorship opportunities, to continuously upgrade employees' knowledge and competencies. management of the banks should invest in maintaining healthy and supportive working conditions by ensuring proper office ergonomics, safety standards, and stress-reducing workplace practices. organizations should empower employees by involving them in decision-making processes and giving them autonomy in task execution, thereby boosting engagement and job satisfaction. to enhance job security and reduce turnover intentions, banks should offer stable employment contracts and promote transparent and merit-based promotion systems. references abolade, d. a. 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(2015). csr and firm performance: evidence from nigeria. asian social science, 11(21), 149–157. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. https://doi.org/10.1080/09585192.2015.1072103 https://doi.org/10.1108/ejtd-02-2014-0022 1 © 2024 by the authors; licensee asian online journal publishing group economy vol. 11, no. 1, 1-18, 2024 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/economy.v11i1.6270 © 2024 by the authors; licensee asian online journal publishing group economy and empirical research perspectives towards artificial intelligence: a deep dive investigative exploration analysis zarif bin akhtar1 ahmed tajbiul rawol2 ( corresponding author) 1department of computing, institute of electrical and electronics engineers, usa. email: zarifbinakhtarg@gmail.com 2department of computer science, faculty of science and technology, american international universitybangladesh. email: tajbiulrawol@gmail.com abstract the transformative potential of artificial intelligence (ai) has sparked significant interest across economic and empirical research domains, inspiring investigations into its impacts on productivity, labor markets, economic growth, and policy adaptation. this study offers a comprehensive analysis of ai's economic implications, focusing on its integration into diverse sectors and its measurable effects on economic performance. through a multi-dimensional approach, we explore ai’s role in enhancing productivity and efficiency, reshaping workforce dynamics, and influencing the distribution of economic benefits. supported by recent empirical studies and quantitative analyses, this research highlights ai’s capacity to drive innovation while examining its challenges, such as labor displacement, income inequality, and skill gaps. case studies and data-driven insights provide evidence of ai’s role in fostering new economic models, underscoring its dual potential to stimulate growth and exacerbate disparities. furthermore, the study delves into the evolving landscape of policy responses, analyzing how different regulatory frameworks influence ai’s integration and impact across economies. by offering nuanced perspectives on ai’s transformative effects, this investigation identifies key trends and areas requiring further research, including the long-term implications for developing economies and global inequality. the findings aim to equip policymakers, researchers, and industry leaders with evidence-based insights to navigate ai’s complexities, ensuring sustainable and inclusive economic advancement in an ai-driven future. keywords: artificial intelligence, economic growth, economic models, economic paradigms, economics science, economy, empirical research perspectives. jel classification: a10; a12; b00; b52; c10; c69; c80; d02; d91; e27. citation | akhtar, z. b., & rawol, a. t. (2024). economy and empirical research perspectives towards artificial intelligence: a deep dive investigative exploration analysis. economy, 11(1), 1–18. 10.20448/economy.v11i1.6270 history: received: 4 november 2024 revised: 9 december 2024 accepted: 23 december 2024 published: 30 december 2024 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. institutional review board statement: not applicable. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. this study followed all ethical practices during writing. data availability statement: the corresponding author may provide study data upon reasonable request. competing interests: the authors declare that they have no competing interests. authors’ contributions: both authors contributed equally to the conception and design of the study. both authors have read and agreed to the published version of the manuscript. contents 1. introduction ......................................................................................................................................................................................... 2 2. methods and experimental analysis .............................................................................................................................................. 2 3. background research and investigative exploration for available knowledge ................................................................... 3 4. empirical research perspectives ..................................................................................................................................................... 6 5. empirical research and analysis: a deep dive ........................................................................................................................... 7 6. transformations of the global economy: artificial intelligence (ai) diversifying developing economies ................. 9 7. case studies analysis: impacts of ai in terms of economic development ........................................................................ 10 8. results and findings ....................................................................................................................................................................... 12 9. discussions ........................................................................................................................................................................................ 15 10. conclusions ..................................................................................................................................................................................... 16 references .............................................................................................................................................................................................. 17 mailto:zarifbinakhtarg@gmail.com mailto:tajbiulrawol@gmail.com https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v11i1.6270 https://orcid.org/0009-0004-5498-6458 economy, 2024, 11(1): 1-18 2 © 2024 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study uniquely integrates economic and empirical research perspectives to analyze ai's dual impact on productivity and inequality, supported by case studies and quantitative insights. it bridges gaps in existing available knowledge by emphasizing ai-driven policy implications and proposing sustainable frameworks for equitable economic growth in an ai-dominated landscape. 1. introduction the rapid evolution of artificial intelligence (ai) has fundamentally altered the technological and economic landscapes, introducing new paradigms across industries, economies, and society as a whole (kianpour, kowalski, & øverby, 2021; king, 2018). as ai advances in capability and complexity, its applications are permeating diverse sectors—from finance and healthcare to manufacturing and services—each harnessing ai’s capacity to automate tasks, derive insights, and enhance decision-making. this integration has brought about significant economic shifts, prompting an urgent need to understand and analyze the empirical impacts ai is exerting on economic growth, labor markets, productivity, and inequality. the implications of ai for economic performance are multifaceted. ai-driven innovations have the potential to boost productivity, reduce operational costs, and unlock new avenues for economic growth (becker, 1974, 1991; hanushek & wößmann, 2007). however, these benefits come with substantial challenges, especially concerning workforce displacement, the reshaping of labor demand, and the polarization of job opportunities. ai’s transformative power raises questions about the future of work and the equitable distribution of economic benefits, highlighting the critical need for policy adaptations that can mitigate adverse effects and ensure sustainable economic progress. empirical research is instrumental in addressing these questions, offering data-driven insights into how ai affects macroeconomic indicators and sector-specific dynamics. studies to date reveal both positive and negative outcomes; while some sectors experience unprecedented efficiency gains, others face disruptions due to job reallocation and shifting skill demands. these empirical findings are crucial for informing policy measures, enabling stakeholders to devise strategies that promote ai adoption while protecting against economic inequalities. this study provides a comprehensive exploration of the economic and empirical research perspectives on ai, presenting an in-depth analysis of its impact on productivity, labor dynamics, and policy. through an evaluation of case studies, economic models, and empirical research, we aim to offer a nuanced understanding of how ai is reshaping economic structures and driving the need for new economic models. by identifying gaps in the current research and areas requiring policy attention, this study seeks to support researchers, policymakers, and industry leaders in fostering an ai-integrated economy that aligns technological advancement with equitable growth. 2. methods and experimental analysis this study employs a multi-dimensional, empirical approach to examine the economic impacts and implications of artificial intelligence (ai) adoption across various sectors. the methodology combines a rigorous investigative available knowledge exploration, data analysis, and case study examination to explore the direct and indirect economic effects of ai on productivity, labor markets, and policy formation. through these methods, the study aims to construct a comprehensive understanding of ai’s evolving role in economic systems, highlighting both positive advancements and potential challenges. the first phase of the methodology involves an extensive available knowledge exploration analysis, which serves as a foundation for the analysis of ai’s economic impact. this investigation systematically examines research articles, economic reports, and industry studies published within the last decade to capture the contemporary discourse on ai’s transformative potential. special emphasis is placed on peer-reviewed studies that offer quantitative insights into ai’s contributions to economic growth, productivity, and labor reallocation. by critically analyzing these sources, we aim to identify common findings, emerging trends, and research gaps that will guide the empirical analysis in later phases. the second phase incorporates a quantitative analysis of economic data related to ai adoption. publicly available datasets from sources such as the world bank, international labour organization, and various ai industry reports provide empirical data on economic indicators including gross domestic product (gdp) growth, productivity levels, labor force participation, and industry-specific performance metrics. econometric models are employed to analyze the correlation between ai adoption rates and these economic indicators, enabling an assessment of ai’s direct impact on economic performance. the analysis also evaluates sectoral shifts and workforce trends to understand how ai-driven automation and augmentation affect labor demand and job quality across industries. this quantitative approach provides an evidence-based perspective on the economic ramifications of ai at both macro and micro levels. in the third phase, case studies of selected industries, including finance, healthcare, and manufacturing, are conducted to provide a contextualized understanding of ai’s impact in real-world settings. these sectors were chosen due to their high degree of ai adoption and their significance to the economy. for each case study, data from industry reports, company financial statements, and news sources are synthesized to examine specific instances of ai application, focusing on productivity gains, cost reduction, and labor adjustments. by analyzing these practical examples, we aim to capture the nuanced effects of ai across different economic sectors and provide insights into the sector-specific challenges and opportunities presented by ai technologies. finally, the study employs a policy analysis framework to evaluate the effectiveness of current policies in managing ai’s economic impacts. this involves a review of ai-related policies and regulatory documents from several leading economies, including the united states, the european union, and china. the analysis examines how different policy approaches address ai’s potential to disrupt labor markets, influence wage structures, and alter economic inequalities. this policy review not only identifies best practices but also highlights areas where policy innovation is necessary to support an equitable and sustainable aidriven economy. together, these methods form a cohesive approach that blends qualitative and quantitative analyses to assess the economic and empirical research perspectives on ai. the multi-phase methodology allows for a well-rounded investigation that considers both theoretical insights and practical applications, ultimately offering a comprehensive view of ai’s economic implications and providing recommendations for future research and policy development. economy, 2024, 11(1): 1-18 3 © 2024 by the authors; licensee asian online journal publishing group 3. background research and investigative exploration for available knowledge economics is a social science focused on studying the production, distribution, and consumption of goods and services, as well as the behaviors and interactions of economic agents. the discipline is divided into two main branches: microeconomics, which examines the basic elements within an economy such as individual agents (households, firms, buyers, and sellers) and their interactions, and macroeconomics, which views economies as systems and analyzes larger phenomena like production, inflation, economic growth, and the influence of public policies (kianpour et al., 2021; king, 2018). economics is also categorized by various distinctions, such as between positive economics, which describes "what is," and normative economics, which explores "what ought to be." other distinctions exist between theoretical and applied economics, rational and behavioral economics, and mainstream versus heterodox economics. beyond its traditional boundaries, economic analysis is applied across diverse fields, including finance, health care, engineering, government, crime, education, and environmental studies (becker, 1974, 1991; hanushek & wößmann, 2007). historically, economics was known as "political economy," but by the late 19th century, the term "economics" became common. originating from the greek word oikonomia—meaning "household management"—the discipline evolved to study how resources are managed, whether for a household, state, or society. early economists like adam smith defined economics in terms of wealth creation and distribution, focusing on how societies achieve prosperity. jean-baptiste say emphasized the science of production, distribution, and consumption, while thomas carlyle famously called it "the dismal science" for its often-pessimistic outlook (bertholet, 2021; blaug, 2017; towards, 2011). later economists provided definitions that reflect the discipline's evolving focus. alfred marshall described economics as the study of people in their "ordinary business of life," while lionel robbins defined it as a science examining human behavior in light of limited resources and competing ends. robbins’ definition is widely accepted for focusing on the influence of scarcity, yet it has faced criticism for being too broad. some argue that the definition has expanded economics into areas that were traditionally outside its domain, such as the analysis of nonmarket behaviors (bertholet & kapossy, 2023; o’driscoll & rizzo, 2014). this expansion has been championed by economists like gary becker, who applied economic principles to new social areas, viewing economics as a methodology rather than a specific subject matter. however, critics like ha-joon chang argue that limiting economics to a single approach, such as rationalchoice modeling, risks defining it as a “theory of everything” and diverging from the traditional subject-based focus common to other sciences. these debates reflect an ongoing discussion about whether economics should be defined by its methodology or its subject matter, showing the discipline's dynamic and interdisciplinary nature (cameron, 1993; cordato, 1980; julie, 2016). the history of economic thought covers the evolution of economic theories, tracing how societies have conceptualized and organized resources, production, and distribution through time. this development is categorized into several key eras (aghion, akcigit, cagé, & kerr, 2016; baker & rafter, 2022; bird, 2015; boring & zignago, 2018; camerer, 2017; department international monetary fund monetary and capital markets, 2023; goldfarb & tucker, 2017; hengel & phythian-adams, 2022; human development reports, 2019; jahan, 2012; neves, afonso, & silva, 2016; trapeznikova, 2019; ventura, 2022; walker, 1878). 3.1. from antiquity through the physiocrats early economic ideas can be traced to ancient thinkers like hesiod, often considered the "first economist" for his insights on resource distribution in household management. greek thinkers like xenophon also influenced economic terminology with works like oeconomicus, where "economy" originally referred to household management rather than broader economic systems. in the 16th and 17th centuries, two influential schools of thought emerged: mercantilism and physiocracy. mercantilists, focused on national wealth through gold and silver accumulation, advocated for trade surplus strategies by exporting goods and limiting imports. physiocrats, however, argued that true wealth was derived from agriculture, and they proposed policies that would allow minimal government interference in the economy (laissez-faire). 3.2. classical political economy smith (1776) is often cited as the foundational work of modern economics, marking economics as a distinct field. smith introduced the idea of the "invisible hand," suggesting that self-interested actions inadvertently promote societal good, and he emphasized specialization and division of labor. david ricardo further expanded on smith’s work by explaining income distribution among landowners, laborers, and capitalists, introducing the principle of comparative advantage, which supports free trade based on cost efficiencies. thomas malthus offered a counterview with his population theory, predicting that population growth would outstrip food supply, leading to poverty. meanwhile, john stuart mill distinguished between market efficiency in resource allocation and income distribution, opening discussions about potential societal interventions. 3.3. marxian economics karl marx developed a critical response to classical economics, highlighting class struggles within capitalist economies. in das kapital, he presented the labor theory of value, asserting that labor is exploited as capitalists reap surplus value generated by workers. 3.4. neoclassical economics in the late 19th century, neoclassical economics emerged, popularized by economists like alfred marshall. this school emphasized marginal utility and supply-demand dynamics in determining value, moving away from the labor theory of value. neoclassicals analyzed individual and household behavior, with economics focusing on choices under scarcity, an approach that lionel robbins formalized as studying "human behavior as a relationship between ends and scarce means." neoclassical economics integrated mathematical methods, which enabled systematic models and econometric analysis, and influenced both microeconomic theory and keynesian macroeconomics in the 20th century. economy, 2024, 11(1): 1-18 4 © 2024 by the authors; licensee asian online journal publishing group 3.5. keynesian economics keynes (1936) introduced concepts that fundamentally reshaped economic thought, focusing on national income and employment levels. keynes argued that in certain situations, free markets cannot self-correct during periods of low demand, and advocated for government intervention to manage economic stability. this framework laid the foundation for contemporary macroeconomics and influenced policies on economic stabilization, employment, and growth. these various schools, each responding to the challenges of their times, have cumulatively advanced the field, influencing modern economic policy, international trade, and approaches to managing economic cycles. the methodology of economic research relies on both theoretical and empirical approaches, with significant sub-disciplines and techniques used to build and test economic theories. here’s an overview of these research methodologies and their applications. 3.6. theoretical research theoretical economics focuses on developing models and frameworks to understand economic behaviors and predict economic outcomes (aghion et al., 2016; aghion, jones, & jones, 2017; baldwin, 2019; bird, 2015; boring & zignago, 2018; camerer, 2017; goldfarb & tucker, 2017; hengel & phythian-adams, 2022; human development reports, 2019; misuraca, barcevičius, & codagnone, 2020; neves et al., 2016; nguyen & doytch, 2022; qin, xu, wang, & skare, 2024; rogerson, hankins, nettel, & rahim, 2022; sachs, 2023; samuelson, 2016; trabelsi, 2024; trapeznikova, 2019; yang, 2022; zhao, gao, & sun, 2022). this involves creating simplified assumptions that reduce complex real-world scenarios into manageable variables, allowing economists to explore relationships, make predictions, and stimulate additional research. 3.6.1. microeconomic theory • key concepts: microeconomic theories revolve around supply and demand, rational choice, opportunity cost, utility, and market structures. • market structures: economists categorize markets into structures like perfect competition, monopoly, and oligopoly, each with distinct dynamics and implications for price and output control. • production and efficiency: in microeconomic models, production functions and cost efficiencies play a crucial role, including concepts like opportunity cost and the production-possibility frontier (ppf), which helps illustrate scarcity and efficiency. 3.6.2. macroeconomic theory • traditional macroeconomic models analyze aggregate variables such as gdp, inflation, and unemployment rates, often linking these to underlying microeconomic foundations to create a holistic view of economic activities on a national or global scale. • general equilibrium theory: this theory seeks to explain the interplay across various markets, assuming that all factors are interdependent and that markets will reach an equilibrium state over time. 3.6.3. mathematical economics • role of mathematics: mathematical economics uses mathematical tools to represent theories, enhancing precision in the formulation of hypotheses and enabling a more robust analysis of economic relationships. theorems, as described in works like paul samuelson's foundations of economic analysis, can be tested empirically to verify or refute economic theories. 3.7. empirical research empirical research in economics involves testing hypotheses through data analysis, often employing econometrics, which uses statistical methods to analyze economic data. empirical research aims to confirm or refute theoretical models by observing actual economic behaviors and outcomes (aghion et al., 2016; aghion et al., 2017; akhtar, 2024c; baker & rafter, 2022; baldwin, 2019; behrendt, peter, & zimmermann, 2020; boring & zignago, 2018; camerer, 2017; cameron, 1993; department international monetary fund monetary and capital markets, 2023; fang, cao, & sun, 2022; goldfarb & tucker, 2017; hengel & phythian-adams, 2022; human development reports, 2019; jahan, 2012; konieczny, 2023; mcdowell & vetter, 2023; misuraca et al., 2020; neves et al., 2016; nguyen & doytch, 2022; o’driscoll & rizzo, 2014; qin et al., 2024; rogerson et al., 2022; sachs, 2023; samuelson, 2016; tekale, 2024; trabelsi, 2024; trapeznikova, 2019; ventura, 2022; walker, 1878; yang, 2022; yu et al., 2023; zhao et al., 2022). 3.7.1. econometrics • statistical analysis: econometrics uses tools such as regression analysis to test the strength and significance of relationships between variables. for example, it examines the effect of interest rates on inflation or the relationship between education and income. • hypothesis testing: empirical testing in economics often deals with probabilistic conclusions, where a hypothesis is accepted if it withstands multiple tests rather than being proven definitively. results are subject to variance based on data sets, experimental conditions, and underlying assumptions. 3.7.2. experimental economics • controlled experiments: experimental economics has advanced the field by conducting scientifically controlled experiments to directly test behavioral assumptions, bridging a gap between theoretical predictions and observed human behavior. • behavioral and neuroeconomics: studies like those of daniel kahneman and amos tversky have shown that actual human behavior often deviates from the assumptions of purely rational decision-making. neuroeconomics further investigates economic decision-making through the lens of cognitive neuroscience. economy, 2024, 11(1): 1-18 5 © 2024 by the authors; licensee asian online journal publishing group 3.7.3. natural experiments • natural experiments analyze scenarios where external factors create a quasi-experimental environment, allowing economists to observe the effects of variables without formal control. this method is particularly useful for studying the impact of policy changes or economic shocks on real-world outcomes. 3.8. microeconomic concepts and applications microeconomics, as a foundation of economic theory, analyzes how individual agents—such as consumers, firms, and governments—make decisions (aghion et al., 2016; aghion et al., 2017; agrawal, gans, & goldfarb, 2019; akhtar, 2024a, 2024b, 2024c; baker & rafter, 2022; baldwin, 2019; behrendt et al., 2020; bertholet & kapossy, 2023; bird, 2015; boring & zignago, 2018; camerer, 2017; cameron, 1993; cordato, 1980; department international monetary fund monetary and capital markets, 2023; fang et al., 2022; goldfarb & tucker, 2017; hengel & phythian-adams, 2022; human development reports, 2019; jahan, 2012; julie, 2016; konieczny, 2023; mcdowell & vetter, 2023; misuraca et al., 2020; neves et al., 2016; nguyen & doytch, 2022; o’driscoll & rizzo, 2014; qin et al., 2024; rogerson et al., 2022; sachs, 2023; samuelson, 2016; tekale, 2024; trabelsi, 2024; trapeznikova, 2019; ventura, 2022; walker, 1878; yang, 2022; yu et al., 2023; zhao et al., 2022). 3.8.1. market interactions • price and quantity: prices coordinate production and consumption decisions, influenced by supply and demand dynamics. this interaction is foundational in determining market equilibrium in competitive markets, as described in the supply-demand model. • imperfect competition: real-world markets often do not align with perfect competition; thus, concepts of monopoly, oligopoly, and monopolistic competition offer insights into pricing and output decisions by firms with market power. 3.8.2. production and cost • inputs and outputs: production involves converting inputs (labor, capital, and natural resources) into outputs (goods and services). efficiency in production, as measured by concepts like pareto efficiency and illustrated by the production-possibility frontier (ppf), represents the optimal use of resources within an economy. 3.8.3. specialization and trade • comparative advantage: specialization allows economies to benefit from trade by producing goods in which they have a comparative advantage. this principle underlies the theory of gains from trade, suggesting that economies can achieve higher output and utility levels through specialization and trade. • global trade patterns: specialization leads to diverse trade patterns, where nations engage in producing goods with lower opportunity costs, resulting in greater global efficiency and increased income levels. economics utilizes a combination of theoretical models and empirical testing to study complex economic systems. the integration of theory with quantitative methods and experimental approaches has allowed economics to advance both as a social science and as a discipline with increasing alignment to scientific rigor, particularly through empirical validation and behavioral insights. by combining microeconomic and macroeconomic perspectives, economic research seeks to offer comprehensive insights into resource allocation, market dynamics, and societal welfare. uncertainty and game theory play a significant role in economic decision-making, where uncertainty refers to unpredictable outcomes that can be quantifiable as risk. this concept underlies various fields within economics, affecting household behavior, capital markets, and communications. to model such uncertainty, economists often rely on game theory, a branch of applied mathematics analyzing strategic interactions between agents. game theory's foundational text, by neumann and morgenstern (1944) has far-reaching applications beyond economics, influencing fields such as political science, ethics, and evolutionary biology. it allows economists to generalize market dynamics by modeling scenarios with incomplete information and anticipating strategic behavior in competitive contexts, such as wage negotiations and firm behavior within oligopolies. market failures are instances where economic assumptions fail, leading to inefficiencies. examples include information asymmetry, where one party has more knowledge than another, as in the "market for lemons" scenario. externalities also exemplify market failures, where costs or benefits are not reflected in market prices (e.g., pollution as a negative externality). governments often intervene through taxes, subsidies, or regulations to mitigate these failures. welfare economics evaluates societal well-being and resource allocation, focusing on how economic activities contribute to social welfare. macroeconomics, distinct from microeconomics, studies the economy on a large scale, analyzing aggregates like national income, unemployment, and inflation. it examines the effects of monetary and fiscal policies on economic stability and growth. economic growth theory explores factors driving per capita output over time, with research focusing on investment, technology, and population growth. business cycle theories explain fluctuations in economic activity, influenced by keynesian and classical approaches. unemployment, measured as the percentage of job-seeking workers, can be frictional, structural, or cyclical, with okun's law highlighting the link between output and unemployment rates. money and monetary policy are central to economic systems, with money acting as a medium of exchange, store of value, and unit of account. monetary policy, typically managed by central banks, uses tools like interest rate adjustments to stabilize economies. economics is a broad discipline that explores a range of issues from public policy to labor dynamics, international trade, and developmental economics. public economics, for example, examines government activities, such as taxation, spending, and fiscal policies, with a focus on economic efficiency and income distribution. it also includes welfare economics, which uses microeconomic techniques to determine efficient resource allocation and income distribution, seeking to assess social welfare. international economics studies trade and capital flows across borders, focusing on the impacts of globalization, tariffs, and international finance on exchange rates and economic gains from trade. labor economics investigates how labor markets operate through the economy, 2024, 11(1): 1-18 6 © 2024 by the authors; licensee asian online journal publishing group interactions of workers and employers, analyzing wage patterns, employment, and income. this field examines labor as a distinct factor of production, distinct from land and capital, while also exploring concepts like human capital. development economics centers on the economic growth and structural changes in low-income countries, where it often incorporates social and political elements to understand poverty and development better. economics also intersects with fields like law, politics, energy, and sociology. law and economics apply economic principles to evaluate legal rules and their efficiency, a method pioneered by ronald coase. political economy examines the interplay of economic systems, politics, and law, analyzing how various political and economic systems influence one another. energy economics addresses issues related to energy supply and demand, integrating concepts like entropy from thermodynamics, while economic sociology examines how social paradigms affect economic phenomena. influential thinkers in economic sociology include weber and simmel (1988) who linked economic behaviors to social norms. the professionalization of economics has seen significant growth, with economists now employed in academia, government, and the private sector. they apply rigorous quantitative methods, including calculus, linear algebra, statistics, and game theory, to analyze complex economic issues. many economists receive recognition through awards like the nobel memorial prize in economic sciences, while women in economics, although historically underrepresented, have increasingly contributed to the field. prominent figures like harriet martineau, joan robinson, and recent nobel laureates such as esther duflo and claudia goldin highlight the significant impact of women in economics, even as gender representation remains imbalanced in certain areas of the profession. 4. empirical research perspectives empirical research is a methodology for acquiring knowledge based on direct or indirect observation and experience, prioritizing empirical evidence over theoretical beliefs. this approach involves systematically collecting and analyzing observable data to answer questions about specific phenomena. researchers can analyze data in either quantitative or qualitative forms, or sometimes a combination of both, to form conclusions about empirical questions (aghion et al., 2016; aghion et al., 2017; agrawal et al., 2019; akhtar, 2024a, 2024b, 2024c; baldwin, 2019; behrendt et al., 2020; camerer, 2017; fang et al., 2022; goldfarb & tucker, 2017; konieczny, 2023; mcdowell & vetter, 2023; misuraca et al., 2020; nguyen & doytch, 2022; qin et al., 2024; rogerson et al., 2022; sachs, 2023; tekale, 2024; trabelsi, 2024; yang, 2022; yu et al., 2023; zhao et al., 2022). typically, empirical research is particularly valued in fields like social sciences and education, where direct laboratory study may not always be feasible. in these disciplines, research often uses mixed-method designs, combining quantitative and qualitative analyses for a more comprehensive understanding of complex issues. empirical research often begins with the formation of a research question or hypothesis based on an existing theory. for example, a researcher might hypothesize that listening to music affects memory retention, predicting that those who study with music will recall less information than those who study in silence. the researcher then tests this hypothesis through experimentation, and depending on the outcome, the hypothesis is either supported, rejected, or further refined. this approach aligns with a scientific process in which evidence is collected through observable measures, and results contribute to a theory’s validation or prompt adjustments for future tests (aghion et al., 2016; aghion et al., 2017; agrawal et al., 2019; akhtar, 2024c; baldwin, 2019; behrendt et al., 2020; fang et al., 2022; konieczny, 2023; mcdowell & vetter, 2023; misuraca et al., 2020; nguyen & doytch, 2022; qin et al., 2024; rogerson et al., 2022; sachs, 2023; tekale, 2024; trabelsi, 2024; yang, 2022; yu et al., 2023; zhao et al., 2022). historically, the term "empirical" traces back to ancient greek practitioners who relied on observational evidence rather than dogmatic doctrines. empirical research methods are rooted in the idea that knowledge is derived from sensory experience, forming the basis for empiricism as a philosophy of knowledge. in scientific research, the term specifically refers to data gathered through sensory evidence or calibrated instruments. this reliance on observable data forms the foundation of empirical research, setting it apart from subjective or anecdotal evidence. for instance, temperature measurements taken with a thermometer provide consistent empirical data, unlike subjective impressions of a room's warmth, which can vary between observers (akhtar, 2024a, 2024b, 2024c; behrendt et al., 2020; fang et al., 2022; konieczny, 2023; mcdowell & vetter, 2023; qin et al., 2024; rogerson et al., 2022; tekale, 2024; trabelsi, 2024; yang, 2022; yu et al., 2023; zhao et al., 2022). in conducting empirical research, the scientific method emphasizes the careful calibration and standardization of instruments and procedures. this ensures that results can be replicated and judged according to scientific rigor. empirical research designs include various typologies, such as pre-experimental, experimental, and quasi-experimental designs, with randomized experiments holding a particularly valued place in fields like education. statistical analysis is crucial in empirical research to validate or refute hypotheses; methods such as regression, t-tests, chi-square, and analysis of variance (anova) help determine the statistical significance of results. while empirical research does not provide absolute proof, it establishes probabilities that support or question the validity of hypotheses. a major theoretical debate in empirical research centers on empiricism versus rationalism. empiricists argue that knowledge originates from sensory experience and is fundamentally observational. in contrast, rationalists believe that certain knowledge can exist independently of sensory experience, rooted instead in innate ideas or deductive reasoning. this philosophical divergence influences empirical research by framing how researchers approach questions of knowledge acquisition. empiricists often challenge rationalist notions of innate knowledge, emphasizing the necessity of observable data as the basis of knowledge, while rationalists posit that some concepts and understanding are derived beyond empirical experience. de groot’s (1969) empirical cycle further elucidates the empirical research process, consisting of five stages: observation, induction, deduction, testing, and evaluation. this cycle begins with the observation of a phenomenon, leading to the induction of hypotheses that seek to explain it. deductive reasoning is then used to design experiments that test the hypotheses. during the testing phase, data is collected, and finally, the evaluation phase interprets these findings to refine or establish a theoretical framework. this iterative process provides a structured method for researchers to engage with empirical questions, continuously refining theories through evidence-based inquiry. to provide a better understanding concerning the matter figure 1 provides the cycle illustration. economy, 2024, 11(1): 1-18 7 © 2024 by the authors; licensee asian online journal publishing group figure 1. the empirical cycle according to a.d. de groot. 5. empirical research and analysis: a deep dive empirical research is a scientific approach that aims to create knowledge about how the world operates by collecting concrete, verifiable evidence. unlike theoretical research, which relies on models or assumptions, empirical research draws on real-world observations to address questions about how phenomena unfold or interact. this approach builds on the ancient greek idea of "empiricism," which focuses on knowledge acquired through direct experience and sensory observation. empirical studies seek to reveal general explanations or patterns that hold across various contexts and over time, providing an evidence-based understanding of reality. the core of empirical research lies in its methods, which can be categorized as either qualitative or quantitative. qualitative methods gather non-numerical data and explore deeper meanings, motivations, or interpretations within a research context. common qualitative techniques include observations, interviews, case studies, textual analysis, and focus groups. these methods offer rich, descriptive insights into complex issues (aghion et al., 2016; aghion et al., 2017; agrawal et al., 2019; akhtar, 2024a, 2024b, 2024c; baldwin, 2019; behrendt et al., 2020; bird, 2015; boring & zignago, 2018; camerer, 2017; fang et al., 2022; goldfarb & tucker, 2017; hengel & phythian-adams, 2022; human development reports, 2019; konieczny, 2023; mcdowell & vetter, 2023; misuraca et al., 2020; neves et al., 2016; nguyen & doytch, 2022; qin et al., 2024; rogerson et al., 2022; sachs, 2023; samuelson, 2016; tekale, 2024; trabelsi, 2024; trapeznikova, 2019; ventura, 2022; yang, 2022; yu et al., 2023; zhao et al., 2022). for example, observational studies, a subset of qualitative research, involve direct observation of subjects and are commonly used in ethnographic studies. interviews, another popular qualitative method, provide an in-depth look at individual perspectives, while case studies and textual analysis analyze specific instances or texts to draw broader conclusions. quantitative methods, in contrast, collect and analyze numerical data to measure variables such as behavior, preferences, and opinions in a structured format. common quantitative techniques include surveys, polls, and longitudinal studies. these approaches allow researchers to quantify patterns or trends across larger sample sizes, making it easier to generalize findings. sometimes, combining qualitative and quantitative methods provides a more comprehensive perspective, as it enables the strengths of both types of data to be leveraged. each method has its specific application. observational studies can yield valuable insights, as exemplified by the famous gravitational wave observation by abbott and mckinney (2016) which demonstrated the power of quantitative observational research. interviews capture precise qualitative information, particularly useful in the social sciences and humanities. case studies delve into specific examples, offering detailed insights that can be applied to similar situations. textual analysis interprets written content, frequently in the context of social media or other forms of media, and is helpful for understanding public sentiment or cultural patterns. lastly, focus groups gather feedback from a selected group on specific topics, often utilized by consumer goods companies to refine product design based on user preferences. empirical research is essential in advancing knowledge across scientific fields. by distinguishing between qualitative and quantitative approaches and selecting the appropriate methods, empirical research allows scholars to draw conclusions based on tangible, objective evidence. this evidence-driven approach continues to be a cornerstone of modern research, with many empirical studies appearing in prestigious, high-impact journals due to their rigorous methods and influential findings. quantitative empirical research methods provide a structured, data-driven approach for analyzing and interpreting observations, helping researchers to make informed conclusions. the most common quantitative research economy, 2024, 11(1): 1-18 8 © 2024 by the authors; licensee asian online journal publishing group techniques include experiments, surveys, causal-comparative research, cross-sectional studies, longitudinal studies, and correlational research. each of these methods uniquely serves to collect and assess data in varying contexts. for instance, experiments allow researchers to test hypotheses in controlled environments by adjusting variables, while surveys collect extensive data from target populations, enabling generalizations based on statistical analysis. causal-comparative research reveals cause-and-effect relationships, whereas cross-sectional studies offer a snapshot view by comparing groups at a single point in time. longitudinal studies track changes over time, often revealing patterns in subjects' behavior or conditions, and correlational research assesses relationships between variables to identify positive, negative, or neutral correlations. the process of conducting empirical research involves a systematic approach to ensure rigor and reliability. it starts with establishing the research objective, which involves defining the problem statement, expected outcomes, and potential challenges with resource allocation and scheduling. the next step is a available knowledge exploration analysis, where researchers identify relevant theories and previous studies to ground their research in existing knowledge and frameworks. then, researchers frame hypotheses, define variables, and determine measurement units, establishing a clear framework for collecting and analyzing data. selecting an appropriate research design and methodology is crucial, as it affects how data is collected and whether the study will use experimental or observational approaches. after gathering data, the researcher analyzes it quantitatively or qualitatively, supporting or rejecting the hypothesis based on statistical outcomes. the research concludes with a final report that includes findings, limitations, and recommendations for further research, emphasizing originality and credibility by ensuring it is free from plagiarism. the empirical research cycle, as proposed by de groot’s (1969) formalizes the progression of quantitative research into five key phases: observation, induction, deduction, testing, and evaluation. in the observation phase, an initial idea triggers a hypothesis that can be explored empirically. induction allows researchers to form a general conclusion from observed data, leading to a hypothesis that guides the research. deduction involves reasoning to form specific, testable conclusions, and the testing phase then examines the hypothesis through experiments or statistical analysis. the final phase, evaluation, is vital for interpreting results, acknowledging limitations, and offering directions for future research. this phase consolidates the knowledge gained, ensuring that the research contributes to the wider field and inspires further inquiry by outlining the study's scope and suggesting new variables for continued exploration. the cyclical nature of empirical research reinforces a comprehensive, evidence-based approach to scientific inquiry, enabling consistent advancements in knowledge and understanding. empirical research, which has its origins in ancient greek practice, is a research approach rooted in observation and experimentation, offering a practical way to understand complex phenomena. distinguished by its reliance on evidence and factual data, empirical research aims to provide verifiable insights into how the world functions, making it a critical tool in modern science and various academic fields. its methodology can be qualitative— utilizing interviews, case studies, and focus groups to explore themes and experiences—or quantitative, relying on surveys, experiments, and statistical analyses to generate measurable findings. together, these approaches make empirical research versatile and valuable across disciplines, as it supports hypothesis validation, enhances knowledge, and contributes to theory building. one of the key strengths of empirical research is its focus on validating existing theories and frameworks through rigorous testing. this method enhances the internal validity of findings by allowing researchers significant control over variables, enabling them to identify and understand gradual changes in the phenomena under study. because it is based on factual evidence, empirical research is highly authentic, providing dependable data for critical applications, from healthcare advancements to technological innovations. however, the process of gathering such evidence can be challenging; empirical research is often time-consuming, especially in longitudinal studies, and obtaining permission to study sensitive subjects can be difficult. additionally, interpreting statistical data demands caution, as even experienced researchers can sometimes misinterpret significance levels, leading to potential inaccuracies in findings. ethical considerations are integral to empirical research, given its emphasis on human subjects and data-driven results. researchers are expected to adhere to ethical principles such as informed consent, confidentiality, avoidance of harm, and transparency, ensuring participants’ rights are respected and the research's credibility is upheld. ethical safeguards, such as anonymizing personal data and allowing participants the right to withdraw from studies, are foundational practices that uphold integrity while protecting individual privacy and well-being. empirical research’s applications are extensive and impactful, ranging from information technology, occupational health, and environmental science to economics, genetics, and infectious disease control. its methods are also widely used in academic research, notably in theses and dissertations across disciplines like artificial intelligence, urban planning, and marketing. this broad relevance underscores empirical research’s role in addressing real-world challenges, from developing medical treatments for new diseases to creating effective environmental policies. empirical research is indispensable in modern society. its structured cycle—comprising observation, hypothesis generation, testing, and evaluation—ensures systematic knowledge-building. by providing a framework for generating accurate, evidence-based knowledge, empirical research enables society to confront complex issues, validate scientific progress, and improve quality of life. empirical analysis is an evidence-based approach to research, focusing on information gathered through direct observation or experience. this method is central to scientific research and requires tangible, observable data to substantiate theories. unlike theoretical approaches that rely on logical deduction, empirical analysis emphasizes collecting verifiable data and testing hypotheses through observable results. this type of research often employs statistical analysis to provide robust support for claims. the term “empirical” is rooted in the greek word empeiria, which means "experience," reflecting its reliance on real-world data. empirical analysis is closely tied to the scientific method, involving a cycle that begins with observation and progresses through induction, deduction, testing, and evaluation. this cycle, established by researcher de groot (1969) ensures a structured and repeatable process. during the observation phase, researchers note phenomena and form initial ideas. in the induction phase, they develop probable explanations or theories based on observed data. deductive reasoning then leads to testable hypotheses. testing involves data collection through quantitative and qualitative methods, and results are analyzed to see if they support or refute the hypothesis. finally, the evaluation economy, 2024, 11(1): 1-18 9 © 2024 by the authors; licensee asian online journal publishing group phase synthesizes findings, discussing methodology, limitations, and future research avenues. empiricism contrasts with rationalism, which seeks truth through logical reasoning without needing observable evidence. while rational approaches develop ideas through logical sequences, empirical approaches validate ideas through data. both approaches, when used together, produce comprehensive insights that are both logically sound and supported by reality. empirical analysis can incorporate quantitative methods—focused on measurable, numerical data—and qualitative methods, which capture insights on thoughts, behaviors, and perceptions. the two approaches complement each other, providing both measurable data and deeper understanding. in information technology and business, empirical analysis plays a crucial role in improving decision-making by uncovering patterns within complex systems and human behavior. data analytics, for instance, is an empirical process that mines vast datasets for actionable insights, whether related to customer behavior or operational efficiencies. a/b testing, another empirical method, assesses user interaction by presenting different versions of a product to different groups to see which performs better based on metrics like click-through rates. these methods reduce uncertainty and guide more informed choices in it and business, making empirical analysis an invaluable tool for data-driven fields. 6. transformations of the global economy: artificial intelligence (ai) diversifying developing economies the rapid advance of artificial intelligence (ai) is set to reshape the global economy, bringing both promising opportunities and significant risks (akhtar, 2024; akhtar, 2024a, 2024b, 2024c, 2024d; behrendt et al., 2020; fang et al., 2022; konieczny, 2023; mcdowell & vetter, 2023; qin et al., 2024; tekale, 2024; yu et al., 2023). with ai predicted to impact nearly 40% of jobs worldwide, its effects could range from enhancing productivity and boosting global income to replacing jobs and exacerbating inequalities. the net impact is complex and uncertain, requiring a balanced approach from policymakers to harness ai's potential for the betterment of humanity. ai’s impact on labor markets is especially noteworthy, affecting both advanced and emerging economies, though with different intensities. in high-income countries, approximately 60% of jobs may feel ai's influence, with some benefiting from increased productivity as ai augments human tasks. however, for other roles, ai may perform key job functions, potentially reducing hiring and wage growth. in emerging and low-income nations, ai’s effect will be slightly more limited at 40% and 26%, respectively, though these regions face challenges due to limited digital infrastructure and a shortage of skilled workers, which may impede their ability to capitalize on ai advancements. this disparity could further widen economic divides between nations. within countries, ai may contribute to rising income inequality. workers who can effectively leverage ai may experience increased productivity and wages, while those unable to do so may face declining incomes, creating a widening income gap. the potential of ai to complement the skills of high-income earners could drive further gains for this group, while ai-driven productivity boosts for firms may favor high earners through increased capital returns. these trends suggest that, without intervention, ai could deepen socioeconomic divides. to address these risks, policymakers must act to make the transition to an ai-driven economy more inclusive. establishing social safety nets and retraining programs is essential to protect vulnerable workers, helping them adapt to new roles in an ai-enhanced landscape. the international monetary fund (imf) has developed an ai preparedness index to assist countries in crafting appropriate policies, evaluating readiness in digital infrastructure, human capital, labor market resilience, and regulatory strength. according to the index, advanced economies, such as singapore, the united states, and denmark, are better prepared for ai integration than lowerincome countries, though gaps remain even among wealthier nations. in response, advanced economies should focus on furthering ai innovation and developing comprehensive regulatory frameworks to ensure safe and ethical ai usage. meanwhile, emerging markets must prioritize investments in digital infrastructure and workforce skills to create an ai-ready environment. by taking these steps, countries can help ensure that ai benefits are more broadly distributed, fostering a prosperous and inclusive ai era for all. artificial intelligence (ai), as a transformative general-purpose technology, holds immense potential to aid developing economies in achieving economic diversification. much like electricity, ai’s broad range of applications—from early-stage disease detection to investment planning—redefines the scope of human work, presenting new opportunities for developing nations to enhance their economic resilience and expand their comparative advantages. for many of these economies, diversification beyond a narrow range of exports can create more stable growth paths, providing a buffer against economic shocks similar to how diversified investment portfolios reduce financial risk. a recent study, ai specialization for pathways of economic diversification, explores how developing countries can leverage ai to foster growth in diverse sectors. by analyzing private investments in ai across 29 specialized categories—such as autonomous vehicles, agri-tech, and robotics—the study constructs a network that links ai specializations with each country’s unique comparative advantages in goods and services. the research introduces the "product space" concept, mapping out sectors where countries can potentially excel with ai support. for example, robot automation in ai shows strong connections with manufacturing industries like machinery, metal products, and chemicals, while image recognition ai aligns well with sectors like food processing and e-commerce. the findings suggest tailored strategies for countries to integrate ai into their economic plans. for instance, mexico could benefit from investments in robot automation to strengthen its metal fabrication sector, while advancements in fintech could boost its travel services sector. in india, investments in ai-driven agricultural technology could enhance productivity for its farmers, helping the country leverage ai to support critical domestic sectors. moreover, the global ai landscape makes it feasible for ai-driven solutions to be designed in one location and deployed globally. an example of this is kuka robotics, a german company whose ai-powered industrial robots are used in diverse industries around the world, such as automotive and electronics. the company’s use of ai to optimize various stages of production, from manufacturing to recycling, illustrates how ai could underpin economic participation in global value chains. as ai-based services continue to expand, the wealth of nations may increasingly depend on their ability to integrate ai across diverse industries, enabling sustainable and inclusive economic growth. economy, 2024, 11(1): 1-18 10 © 2024 by the authors; licensee asian online journal publishing group 7. case studies analysis: impacts of ai in terms of economic development artificial intelligence (ai) has become a prevalent part of modern life, shaping both societal optimism and concerns (aghion et al., 2016; aghion et al., 2017; agrawal et al., 2019; akhtar, 2024a, 2024b, 2024c; baldwin, 2019; behrendt et al., 2020; fang et al., 2022; konieczny, 2023; mcdowell & vetter, 2023; misuraca et al., 2020; nguyen & doytch, 2022; qin et al., 2024; rogerson et al., 2022; sachs, 2023; tekale, 2024; trabelsi, 2024; yang, 2022; yu et al., 2023; zhao et al., 2022). many see ai as a source of hope, with the potential to boost productivity, drive economic growth, and enhance risk management across industries. however, there are significant fears regarding the disruption ai may cause, including job displacement, required skill retraining, and the exacerbation of digital divides (bostrom, 2017; mateu & pluchart, 2019). a ipsos (2021) study of 19,504 respondents across 28 countries highlights the anticipated impact of ai on multiple sectors, including education, security, employment, and transport, with each expected to experience considerable changes due to ai in the coming years. historically, ai is viewed as part of the "3rd transformation of economic history," following the 19th-century industrial revolution and the 20th-century computing era (baldwin, 2019). research by joseph (1998); hemous and olsen (2014); acemoglu and pascual (2018) and aghion et al. (2017) underscores the potential of ai to drive economic growth by substituting labor with capital, which is theoretically limitless. however, these gains could be hindered if competition policies do not evolve in tandem with ai’s development. in a sachs (2023) report, ai is estimated to affect up to 300 million jobs worldwide, automating about 25% of the global labor market, with particularly high impacts expected in administrative, legal, and engineering roles. the report suggests that the adoption of ai could increase labor productivity and potentially raise the global gdp by 7% annually over a decade. while ai is driving technological and organizational advances, it also faces a "crisis of confidence." its models and algorithms are often perceived as opaque “black boxes” that lack transparency and robustness. however, new approaches based on principles of collective intelligence are emerging to address these concerns and foster greater trust in ai systems (jean-claude, 2018). as ai continues to evolve, it promises both remarkable benefits and complex challenges that require careful consideration and balanced policies to optimize its societal impact. concerning the case studies investigations which provides a very structured analysis of the socio-economic impacts of ai as detailed towards economy. this also captures the multifaceted impact of ai on the economy, skills, technology, risk management, consumption, and sustainability, highlighting both opportunities and challenges as ai transforms modern socio-economic structures. ai has the potential to significantly enhance human decisionmaking by offering advanced analytics and predictive insights, enabling businesses and governments to make more informed decisions. by reducing the cost of predictive activities, ai can optimize resource allocation, manage risks, and strengthen competitiveness across sectors like healthcare, energy, and retail (akhtar, 2024a, 2024b, 2024c; tekale, 2024). the concept of an "ai economy" relies on both prospective and predictive perspectives. prospective ai, focused on real-time responses, is useful for immediate decision-making scenarios, while predictive ai leverages historical data to anticipate future trends, aiding in long-term planning and strategic foresight. the two approaches are complementary. predictive insights help guide prospective actions, while real-time data from prospective ai can refine predictive models, improving accuracy. however, predictive ai faces challenges due to biases in algorithms, especially in fields like predictive justice and marketing, raising concerns about the validity of such predictions. increased scrutiny from institutions aims to address these limitations to ensure algorithmic fairness and accuracy. globally, ai’s integration into public services accelerated during the covid-19 pandemic, yet a divide remains between developed and developing nations. the ai readiness index highlights this disparity, ranking countries based on their ai preparedness in government, technology, and data infrastructure. leading countries like the usa, singapore, and the uk excel in areas such as ai strategy, digital capacity, and data governance, while emerging technologies and infrastructure development play a significant role in driving ai capabilities. deploying ai in public services could enhance efficiency and quality, but it requires equipping government employees with the necessary skills and knowledge. governments must invest in training and hiring ai experts and, simultaneously, be prepared for citizens’ demands for transparency, accountability, and ethical use of ai. civil society organizations advocate for public participation, independent audits, and regulatory frameworks to safeguard citizens’ interests and mitigate potential job displacement. by addressing these societal concerns, governments can foster trust, ensuring that ai benefits public service delivery responsibly and equitably. ai is widely regarded as a powerful driver of productivity and economic growth, enhancing efficiency and decision-making by processing vast amounts of data. it holds the potential to generate new products, services, and industries, thereby increasing consumer demand and opening new revenue streams. however, ai’s influence may also disrupt economies and societies, creating super firms with potentially adverse effects on the broader economy and widening disparities between developed and developing nations. ethical and societal concerns, such as biases and inequalities in automated systems, have sparked debates over ai’s implications, especially regarding tools like chatgpt. the economic value of ai primarily stems from productivity gains, improved consumption, and better risk management. yet, the impact of ai varies across sectors and regions, influenced by factors such as digital infrastructure, ai skills, and access to technology (akhtar, 2024; akhtar, 2024a, 2024b, 2024c; tekale, 2024). ensuring inclusive and ethical ai use is essential for maximizing its positive impact on economic growth. research shows that while advanced economies benefit significantly from technology and patents, emerging economies experience a less pronounced effect, indicating an uneven distribution of ai-driven growth. to harness ai responsibly, governments should work closely with academia, industry experts, and other stakeholders (akhtar, 2024; akhtar, 2024a, 2024b, 2024c; behrendt et al., 2020; fang et al., 2022; konieczny, 2023; mcdowell & vetter, 2023; qin et al., 2024; rogerson et al., 2022; tekale, 2024; trabelsi, 2024; yang, 2022; yu et al., 2023; zhao et al., 2022). public-private partnerships can expedite ai advancements while aligning them with public interest. once deployed, ai systems require ongoing monitoring and evaluation to address potential biases and mitigate negative societal impacts. regular assessments enable adjustments that help optimize ai’s benefits and minimize its potential risks, ultimately fostering a balanced approach that benefits society as a whole. for further information concerning the matters table 1 and 2 along with figures 2 and 3 provides an overview retrospective. economy, 2024, 11(1): 1-18 11 © 2024 by the authors; licensee asian online journal publishing group figure 2. imf reports 1. note: share of employment within each country group is calculated as the working-age-population-weighted average. source: international labour organization (ilo) and imf staff calculations figure 3. imf reports 2. note: plot reflects 32 advanced economies, 56 emerging markets economies, and 37 low-income countries. dotted reference lines are derived from ai preparedness index median values and high-exposure employment. color coding orange: represents countries classified as advanced economies (aes). blue: represents countries classified as emerging market economies (emes). source: fraser institute, ilo, international telecommunication union, united nation, universal postal union, world bank, world economic forum, and imf staff calculations. economy, 2024, 11(1): 1-18 12 © 2024 by the authors; licensee asian online journal publishing group table 1. the top 10 countries who have invested towards ai. countries united states china great britain israel canada india germany france south korea singapore amount invested (billions of dollars) 2013–2023 248.9 95.1 18.2 10.8 8.8 7.7 7.0 6.6 5.6 4.7 table 2. the top 20 countries for artificial intelligence (ai) readiness index. global position countries/regions overall score government technology sector data and infrastructure 1 united states of america 88.16 88.46 83.31 92.71 2 singapore 82.46 94.88 66.69 85.80 3 united kingdom 81.25 85.69 67.26 90.81 4 finland 79.23 88.45 63.85 85.40 5 netherlands 78.51 80.42 66.17 88.92 6 sweden 78.16 80.76 67.37 86.36 7 canada 77.73 84.36 63.75 85.08 8 germany 77.26 78.04 67.68 86.07 9 denmark 76.96 83.50 63.24 84.14 10 republic of korea 76.55 85.27 58.49 85.89 11 france 76.41 82.10 60.61 86.53 12 japan 76.18 81.90 59.31 87.32 13 norway 76.14 84.24 59.25 84.91 14 australia 75.41 83.79 57.07 85.37 15 china 74.42 83.79 61.33 78.15 16 luxembourg 73.37 82.67 50.66 86.80 17 ireland 72.80 74.70 61.11 82.59 18 taiwan, china 71.98 77.59 59.42 78.92 19 united arab emirates 71.60 79.41 53.33 82.05 20 israel 70.01 64.64 65.87 79.52 8. results and findings this investigative exploration provides an insightful and comprehensive exploration into the intersection of artificial intelligence (ai) and economic theory, framing ai's recent surge as a force poised to redefine traditional economic models. the narrative begins by contextualizing the societal and economic impact of the "rise of ai" through its influence across various sectors, paralleling the transformative effect of the information age. this sets the stage for a hypothesis that ai could significantly shift how economic theory is both perceived and applied (akhtar, 2024; akhtar, 2024a, 2024b, 2024c; tekale, 2024). one of the primary objectives delineated within the analysis is to highlight specific domains within economic theory that are experiencing changes due to ai advancements. the exploration dives into techniques from ai that researchers are applying to economics, such as machine learning models for predictive analysis and agent-based simulations for complex market dynamics. additionally, the analysis aimed to trace academic available knowledge on ai's role in economics, offering a curated, though not exhaustive, overview of significant contributions. the historical background situates the discussion within the evolution of economic thought, tracing the foundational market theories from adam smith to the neo-classical refinements of the industrial revolution. by presenting the arrow-debreu model, the article bridges classical economics with computational frameworks, showcasing how economic equilibria can be formalized through mathematical models and algorithms. this model, widely influential in general equilibrium theory, serves as a conceptual foundation for the broader computational economy. the available knowledge exploration spans early applications of ai in economic models, discussing how concepts like artificial adaptive agents, market design, and multi-agent systems started influencing economic simulations in the 1990s. the focus on agent-based computational economics underscores the shift from single-agent models in traditional ai research to multi-agent interactions that reflect real-world economic systems. these investigations make a compelling case for ai’s transformative role in economics, positioning this interdisciplinary convergence as a dynamic field with evolving methodologies and insights. the overall research background—acknowledging some limited formal economics training—adds transparency and frames the investigation as an exploratory study rather than an authoritative economic analysis, enhancing its relevance for readers interested in the broader implications of ai across disciplines. the overview highlights emerging computational methods and stimulates further inquiry into how ai can continue to shape economic theory and practice. agent-based computational economics (ace) and artificial economics provide computational frameworks that enable economists to study the complex dynamics of economic systems in a controlled environment using computer simulations. by modeling economies with interacting agents, researchers can capture the heterogeneous and adaptive nature of real-world economic participants. 8.1. key properties of ace ace focuses on five essential characteristics that align well with economic systems. 1. heterogeneous agents: agents are diverse, each with unique states, methods, and data. 2. dynamic interactions: systems evolve as agents interact over time. 3. strategic decision-making: agents make decisions by considering the past and anticipating future actions. 4. local information processing: agent’s act based on their localized information, rather than global awareness. 5. reflexive system influence: actions of agents affect future states of the system. this approach also involves many other aspects. 1. model setup: define a population of agents with diverse characteristics. 2. behavioral rules: establish rules that guide agent behavior. 3. implementation: translate these rules into code. 4. validation: run simulations, calibrate parameters, and compare results with empirical data. economy, 2024, 11(1): 1-18 13 © 2024 by the authors; licensee asian online journal publishing group 8.2. agent representation and rationality in ace a critical consideration in ace is how to model economic agents. traditional models often assume rational, utility-maximizing behavior, yet behavioral economics suggests that bounded rationality—where agents have limitations in processing information—may better represent human decision-making. therefore, ace models frequently incorporate boundedly rational agents to explore more realistic economic interactions. 8.3. artificial economics artificial economics adopts a bottom-up approach, allowing for an explicit representation of agent individuality and interaction. this generative modeling method addresses limitations of classical economics, such as the need for representative agents, by instead representing agents with distinct and evolving characteristics. the use of machine learning within artificial economics provides new methods for prediction and causal inference, where agents can learn from data, making forecasts based on historical patterns. for a better understanding concerning the matters table 3 provides further information. table 3. classical vs artificial economics features. classical economics features artificial economics features representative agents individual agents with unique attributes rationality adaptive, learning-based behaviors perfect information local and asymmetric information focus on equilibrium emphasis on dynamic, out-of-equilibrium behavior determinism incorporation of stochastic elements top-down analysis bottom-up synthesis through agent interactions 8.4. prediction markets in ace and ai prediction markets enable agents to trade on the outcome of future events, with market prices reflecting collective beliefs. these markets serve as both a forecasting tool and a mechanism for distributed machine learning. in such systems, agents can optimize their utility by buying and selling positions based on their beliefs, leading to a probabilistic aggregation of predictions. this approach aligns with ensemble learning methods in ai, where multiple models (agents) are combined to improve prediction accuracy. 8.5. market-based control in market-based control (mbc), the principles of market dynamics are applied to control systems. here, economic agents represent various control processes that "trade" resources (e.g., energy, computational power) in a market-like environment to achieve optimized collective behavior. this approach provides flexibility, decentralization, and robustness, which can be advantageous in complex systems requiring adaptive, autonomous decision-making. ace and artificial economics utilize agent-based modeling and computational simulations to provide richer, more realistic insights into economic phenomena. these fields, combined with ai tools like machine learning, have potential applications in understanding economic systems, improving policy design, and creating adaptive market models that evolve over time based on agent interactions. the exploration of economic problems through probabilistic models and knowledge representation, a technique that is rooted in probabilistic reasoning under uncertainty, has yet to gain extensive application in economic domains. this approach, exemplified by ibm’s watson system, utilizes a structured ontology—a system that organizes knowledge into objects, properties, and their interrelations. by implementing a medical ontology, watson was able to process complex and diverse health data, providing diagnostic insights and treatment predictions for patients. a similar approach holds potential for economic applications where structured data systems could allow ai to analyze vast amounts of financial and social data, leading to more comprehensive economic insights. the potential of probabilistic reasoning and knowledge representation in economic settings is underscored by dr. david ferrucci’s move to bridgewater associates, suggesting active interest in applying such systems in finance. an examination of the existing available knowledge shows that, while the concept of "ontology" in economics predominantly arises in the field of philosophy of economics, it has recently begun to appear in computer science applications. for instance, ontologies have been suggested as models to define fundamental economic entities like goods, money, and value, while other researchers have proposed an ontology for business models. however, skepticism remains around the practicality of using ontologies for modeling complex economic systems, mainly due to concerns about the limitations of language and symbolic representation. critics argue that language inherently shapes our perceptions and thought processes, as captured by the sapirwhorf hypothesis, suggesting that computer languages may face similar challenges in encapsulating economic realities. the transition into what some describe as the "data age" presents a new phase where data acts as a precursor to knowledge, empowering decision-making across government, business, and personal spheres. the abundance of data generated through individual digital interactions holds transformative potential for economic decision-making and public policy, as the social data revolution provides vast datasets for analysis. as the knowledge economy grows, data-driven insights could reshape business models and social policies, offering new ways to address complex economic issues. for instance, large-scale datasets enable more precise policy-making and economic modeling, but raise questions regarding data privacy and regulation, which future economic models must address to balance utility and privacy. the historical significance of information in economic theory can be traced to friedrich von hayek’s seminal work, where he argued that the distributed nature of knowledge limits the feasibility of centralized economic planning. his view laid the groundwork for understanding the economic role of information and the complexities of centralized versus decentralized planning. more recent perspectives, however, suggest that advances in ai and data aggregation could transform these traditional limitations. for example, with enhanced ai tools and reduced data search costs, there may be potential for ai-assisted economic planning. this shift could enable ai to assist or even economy, 2024, 11(1): 1-18 14 © 2024 by the authors; licensee asian online journal publishing group partially perform economic planning roles, although such a transition would likely face significant public concern due to fears of excessive ai control over economic and social systems. finally, the evolution of ai and its application in economic systems brings to light the ethical implications and public apprehensions surrounding ai autonomy. experts, including sir tim berners-lee, highlight the risks of unchecked ai decision-making in areas like finance, where ai systems may autonomously shape markets, potentially creating a layer of economic activity that operates beyond human accountability. while concerns over the singularity and ai autonomy are widespread, current ai research and applications focus largely on more immediate, practical improvements. consequently, the debate remains open, with a pressing need for clear regulatory frameworks that prioritize human oversight, particularly as ai applications in economics and other societal sectors continue to expand. for a better overview on the matter’s figures 4, 5, 6 and 7 provides an overall visualization of the findings concerning the investigations. figure 4. an overview visualization of the research findings 1. note: color coding blue: represents high income economies green: represents emerging economies orange: represents low-income economies figure 5. an overview visualization of the research findings 2. economy, 2024, 11(1): 1-18 15 © 2024 by the authors; licensee asian online journal publishing group figure 6. an overview visualization of the research findings 3. figure 7. an overview visualization of the research findings 4. 9. discussions the analysis reveals a profound economic impact from the accelerated adoption of artificial intelligence (ai) across various industries, each of which is characterized by both beneficial advancements and notable challenges. from a macroeconomic standpoint, ai has shown significant potential to drive productivity and economic growth. the findings suggest that ai-enabled automation has led to substantial efficiency gains in sectors such as manufacturing, logistics, and finance. however, this automation also raises concerns about potential displacement of labor, as repetitive and routine tasks become increasingly automated, reshaping workforce dynamics and potentially widening economic inequalities. one of the most immediate impacts of ai adoption is observed in productivity metrics. industries that have implemented ai technologies report marked improvements in output efficiency and operational costs. this aligns with empirical data showing a positive correlation between ai adoption and productivity at both firm and industry levels. however, while productivity increases, the distribution of economic benefits remains uneven. high-skill, hightech industries are more likely to see gains in productivity and economic output, while industries reliant on lowerskilled labor may face challenges in integrating ai without displacing workers. this disparity highlights a critical need for skill-based workforce development programs and policies aimed at reskilling and upskilling workers to thrive in an ai-enhanced economy. the empirical analysis of labor markets also reveals an emerging trend in job polarization, where demand for high-skilled roles, such as data scientists and machine learning engineers, is rising, while demand for certain low and medium-skilled roles declines. although ai technology is creating new opportunities and occupations, it is also reshaping traditional jobs, requiring workers to acquire new skill sets. this shift suggests a dual impact on the labor market: on one hand, ai can elevate job quality and create highly skilled positions; on the other hand, it risks deepening existing inequalities if sufficient measures for reskilling the workforce are not adopted. furthermore, the rise in gig economy roles economy, 2024, 11(1): 1-18 16 © 2024 by the authors; licensee asian online journal publishing group associated with ai, such as data labeling and freelance programming, introduces new employment structures that may lack the security and benefits of traditional employment, raising additional socio-economic considerations. the industry case studies in this analysis illustrate sector-specific dynamics that contribute to a nuanced understanding of ai’s economic impact. for example, in healthcare, ai has driven significant advancements in diagnostic accuracy and patient care management, which has led to both cost savings and improved patient outcomes. however, the integration of ai in healthcare is limited by regulatory and ethical concerns, particularly in datasensitive environments. conversely, in the manufacturing sector, ai has facilitated a faster transition to smart factories and autonomous production lines, but these advancements often come at the cost of reduced demand for assembly-line labor. these case studies underscore the importance of industry-specific strategies and policies to support balanced ai adoption that optimizes benefits while mitigating potential harms. the policy analysis suggests that regulatory frameworks are lagging behind the rapid advancements of ai technologies. currently, policies regarding ai focus primarily on ethical considerations, privacy, and data protection, but less so on economic implications such as job displacement and wage dynamics. the comparison of policy approaches in the united states, european union, and china reveals distinct strategies. for instance, the european union has taken a proactive stance on regulating ai with its artificial intelligence act, which places stricter compliance requirements on high-risk ai applications. in contrast, the united states has adopted a more innovation-friendly approach, favoring minimal regulation to encourage technological growth. meanwhile, china’s approach centers on rapid ai deployment with a focus on economic dominance, albeit with significant state oversight. these different approaches reflect varying national priorities but also highlight the need for a balanced policy framework that both safeguards societal interests and encourages economic growth. moreover, this study identifies gaps in the current available knowledge on ai’s economic impact, particularly in understanding the long-term effects of ai on wealth distribution and global economic inequalities. while research has largely focused on developed economies, there is a need for deeper investigations into how ai adoption will affect emerging economies. the current economic frameworks used to assess ai's impact may require modifications to account for the technology’s rapid evolution, as traditional economic models may not fully capture ai’s disruptive potential. the discussions here underscore the transformative yet complex role of ai in reshaping the economic landscape. the findings highlight ai’s capacity to generate substantial economic benefits while also posing challenges related to labor market shifts, industry disruptions, and regulatory adaptation. policymakers, industry leaders, and educational institutions must work collaboratively to address these challenges, implementing strategies that not only facilitate ai innovation but also foster inclusivity, resilience, and adaptability in the workforce. this research underscores the importance of an empirical, evidence-based approach to guide responsible ai integration and lays the groundwork for future studies on sustainable ai-driven economic growth. 10. conclusions the findings of this research underscore the transformative potential of artificial intelligence (ai) within the global economy, highlighting both its substantial benefits and associated challenges. ai’s adoption across various industries has spurred significant gains in productivity, operational efficiency, and innovation, illustrating its critical role in driving economic growth and advancing technological capabilities. however, these advancements come with complex socio-economic implications, particularly in the labor market, where the automation of routine tasks poses risks of job displacement and demands new skill requirements. this dual effect, where ai both creates new opportunities and redefines traditional roles, necessitates proactive strategies for workforce development, including targeted reskilling and upskilling programs that equip workers for a changing economy. a key insight from this study is the uneven distribution of ai’s economic impacts, with high-skill sectors and advanced economies experiencing the most substantial gains. as ai continues to reshape industries, it is evident that a well-coordinated response from policymakers, industry leaders, and educational institutions is essential to ensure that the benefits of ai are inclusive and accessible. developing countries, which often lack the resources for large-scale ai integration, may face challenges in catching up with advanced economies, potentially widening global inequalities. this reinforces the importance of international cooperation and investment in ai infrastructure and education to promote equitable growth in the ai era. the policy analysis further reveals varying regulatory approaches to ai, reflecting differing national priorities and strategies for balancing innovation with ethical and economic considerations. for example, the european union’s regulatory framework emphasizes ethical ai deployment with a focus on human rights and data protection, whereas the united states prioritizes innovation with a comparatively minimal regulatory approach. china, meanwhile, seeks economic dominance through rapid ai adoption, often with considerable state oversight. these contrasting approaches underscore the importance of a balanced regulatory framework that both fosters ai innovation and mitigates its potential risks, including privacy concerns, security vulnerabilities, and socioeconomic disparities. additionally, this study identifies critical gaps in existing literature on the long-term economic impacts of ai, particularly concerning wealth distribution and the effects on emerging economies. traditional economic models may fall short in capturing ai’s unique, disruptive potential, necessitating updated frameworks that incorporate both the economic gains and social consequences of this technology. further research in this area will be crucial for developing policies and models that can effectively harness ai’s benefits while addressing its broader economic and societal impacts. ai stands at the forefront of an economic revolution that is reshaping industries, job markets, and national policies. realizing the full potential of ai requires a collaborative approach that includes not only technological innovation but also thoughtful policy-making and investment in human capital. the results of this research contribute to a deeper understanding of ai’s economic implications, offering insights that can 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(2022). how does artificial intelligence affect green economic growth?—evidence from china. science of the total environment, 834, 155306. https://doi.org/10.1016/j.scitotenv.2022.155306 asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. https://doi.org/10.1016/j.worlddev.2015.10.038 https://doi.org/10.1016/j.telpol.2021.102291 https://library.oapen.org/bitstream/handle/20.500.12657/48514/9781317691365.pdf?sequence=1 https://doi.org/10.1007/s13132-023-01183-2 https://doi.org/10.1257/jep.30.4.107 https://www.investopedia.com/updates/adam-smith-wealth-of-nations/ https://doi.org/10.2139/ssrn.4850278 https://sustainabledevelopment.un.org/index.php?page=view&type=400&nr=126&menu=35 https://doi.org/10.5772/intechopen.108876 https://wol.iza.org/articles/measuring-income-inequality/long https://wol.iza.org/articles/measuring-income-inequality/long https://gfmag.com/features/wealth-distribution-income-inequality/ https://gfmag.com/features/wealth-distribution-income-inequality/ https://journals.sagepub.com/doi/abs/10.1111/j.1467-954x.1988.tb02933.x?journalcode=sora https://journals.sagepub.com/doi/abs/10.1111/j.1467-954x.1988.tb02933.x?journalcode=sora https://doi.org/10.1016/j.respol.2022.104536 https://doi.org/10.1016/j.resourpol.2022.103221 https://doi.org/10.1016/j.scitotenv.2022.155306 51 © 2025 by the authors; licensee asian online journal publishing group economy vol. 12, no. 2, 51-59, 2025 issn(e) 2313-8181: / issn(p) 2518-0118: doi: 10.20448/economy.v12i2.6780 © 2025 by the authors; licensee asian online journal publishing group bridging finance and marketing: the role of psychological traits and social factors in investment decisions and positive word-of-mouth poltak sinaga1 deddy marciano2 amelia amelia3 ( corresponding author) 1,3pelita harapan university, indonesia. email: poltak.sinaga@uph.edu 2,3universitas surabaya, indonesia. email: marciano@staff.ubaya.ac.id email: ameliafbe@staff.ubaya.ac.id abstract this study investigates the various factors that influence investment decision-making, specifically focusing on five key variables: family influence, innovation, need for achievement, risk-taking, and the relationship between investment decisions and positive word of mouth. a quantitative research approach was employed, and data were analyzed using spss version 22.0. the study surveyed 250 respondents, consisting mostly of e-commerce users in indonesia. the purpose was to examine how psychological and social variables impact individuals’ investment behaviors and how these behaviors contribute to subsequent outcomes such as word-of-mouth promotion. five hypotheses were formulated and tested to determine the significance of each factor. the findings revealed that four out of the five hypotheses were supported. family influence, innovation, and need for achievement were found to have a significant and positive effect on investment decisionmaking. in contrast, risk-taking showed no significant effect. furthermore, investment decisions were shown to have a meaningful and positive relationship with positive word of mouth, suggesting that confident and well-informed investment behavior can lead to increased consumer advocacy. the results underscore the importance for marketers and business strategists to understand and enhance the key drivers of investment behavior. by addressing these factors effectively, companies can encourage more favorable consumer decisions and foster stronger brand loyalty through word-of-mouth communication. keywords: family influence, innovation, investment decision-making, need for achievement, positive word of mouth, risk-taking. citation | sinaga, p., marciano, d., & amelia, a. (2025). bridging finance and marketing: the role of psychological traits and social factors in investment decisions and positive word-of-mouth. economy, 12(2), 51-59. 10.20448/economy.v12i2.6780 history: received: 14 may 2025 revised: 11 june 2025 accepted: 13 june 2025 published: 16 june 2025 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this research is supported by “universitas pelita harapan, indonesia”. institutional review board statement: the ethical committee of the universitas pelita harapan, indonesia has granted approval for this study transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. this study followed all ethical practices during writing. data availability statement: the corresponding author may provide study data upon reasonable request competing interests: the authors declare that they have no competing interests. authors’ contributions: all authors contributed equally to the conception and design of the study. all authors have read and agreed to the published version of the manuscript. acknowledgements: the authors would like to thank uph and universitas surabaya also the anonymous referees for their valuable comments and suggestions. contents 1. introduction ...................................................................................................................................................................................... 52 2. literature review ............................................................................................................................................................................ 53 3. research issue and methodology ................................................................................................................................................. 55 4. finding and discussion ................................................................................................................................................................... 55 https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v12i2.6780 https://orcid.org/0000-0002-3927-8320 https://orcid.org/0000-0001-6216-5319 https://orcid.org/0000-0002-3579-1995 economy, 2025, 12(2): 51-59 52 © 2025 by the authors; licensee asian online journal publishing group 5. discussion .......................................................................................................................................................................................... 57 6. conclusion ......................................................................................................................................................................................... 57 7. research limitation ........................................................................................................................................................................ 58 references .............................................................................................................................................................................................. 58 contribution of this paper to the literature this study uniquely integrates psychological, social, and technological factors specifically family influence, need for achievement, risk-taking behavior, and innovation to examine their combined impact on investment decisions and positive word of mouth, offering a holistic perspective rarely addressed in previous investment behavior research. 1. introduction the process of investment decision-making has undergone significant transformation over time. initially, investment activities were primarily conducted through traditional methods, where investors relied on direct interactions with financial advisors and institutions. this conventional approach often involved personalized advice and portfolio management services provided by registered investment advisors (rias), who operated independently from banks and other financial entities (bodie, kane, & marcus, 2014). however, as financial markets evolved, both individual and institutional investors sought to enhance efficiency and accessibility through technological advancements and financial innovations (markowitz, 1991). one of the most notable developments has been the emergence of digital investment platforms, which have significantly expanded access to financial markets. these platforms democratize investing by providing costeffective, user-friendly solutions that cater to a broader demographic, including individuals with limited financial knowledge or resources (tapia & yermo, 2021). the rise of digital trading platforms, robo-advisors, and algorithmic investment tools has transformed traditional investment strategies, making financial markets more accessible and fostering increased participation (d’hondt, de winne, & van achter, 2015). beyond technological advancements, investment decisions are also deeply influenced by psychological and social factors, particularly family dynamics. family plays a crucial role in shaping financial literacy, risk tolerance, and long-term financial behavior. individuals who grow up in financially literate households are more likely to develop prudent investment habits, whereas those from risk-averse families may demonstrate conservative investment behaviors (lusardi & mitchell, 2014). furthermore, family influence extends to investment attitudes, shaping perceptions of market opportunities and risk assessment (guiso, sapienza, & zingales, 2008). in addition to family influence, the need for achievement serves as a critical driver of investment behavior. investors with a strong need for achievement are motivated by financial success and personal growth, which influences their willingness to take calculated risks and explore innovative investment strategies (mcclelland, 1987). these individuals are more likely to seek high-reward opportunities, engage in active portfolio management, and adapt to emerging market trends (barber & odean, 2001). their ambition often fuels the adoption of novel investment tools and strategies, thereby contributing to the expansion of digital investment platforms (d’hondt et al., 2015). risk-taking behavior is another essential factor shaping investment decisions. investors with a higher risk tolerance tend to embrace diversified portfolios, explore emerging markets, and experiment with unconventional financial instruments. their propensity to take risks is influenced not only by personal financial goals but also by external encouragement, including advice from family members or positive experiences shared by peers (kahneman & tversky, 1979). risk-tolerant investors are more receptive to adopting financial innovations, further reinforcing the role of digital platforms in modern investment strategies (charness, gneezy, & imas, 2013). furthermore, positive word of mouth (wom) has emerged as a powerful force in shaping investor behavior. successful investment experiences often lead investors to share insights with their social circles, fostering trust and encouraging broader market participation (brown & reingen, 1987). social networks, both offline and online, serve as key channels for investment-related discussions, with peer recommendations often carrying more weight than traditional financial marketing efforts (bikhchandani, hirshleifer, & welch, 1992). the widespread use of digital platforms, including social media and investment forums, has amplified the influence of wom, enabling investors to exchange knowledge and strategies more efficiently. as financial markets continue to evolve, investors face new challenges and opportunities. economic fluctuations, technological disruptions, and changing market dynamics necessitate a strategic approach to investment decision-making. a combination of financial literacy, adaptability to innovation, and risk assessment plays a crucial role in navigating modern investment landscapes (lusardi & mitchell, 2011). additionally, empathydriven investment strategies—those that account for investors’ subjective financial goals and experiences—can enhance decision-making processes and support long-term financial growth (shefrin & statman, 2000). this research contributes significantly to the understanding of investment behavior by integrating psychological, social, and technological perspectives. by examining the interconnected influences of family, innovation, need for achievement, and risk-taking on investment decisions and positive word of mouth, this study provides valuable insights for financial institutions, policymakers, and investors. the findings highlight the importance of financial education, the promotion of technological innovation in investment services, and leveraging social networks to enhance investor confidence and market participation. in conclusion, the interplay between family influence, innovation, need for achievement, and risk-taking behavior plays a pivotal role in shaping investment decisions and fostering positive word of mouth. as financial markets undergo continuous transformation, investors and financial service providers must adapt to these evolving dynamics, embracing innovative strategies that enhance investment experiences and outcomes. economy, 2025, 12(2): 51-59 53 © 2025 by the authors; licensee asian online journal publishing group 2. literature review 2.1. family influence according to mandell and klein (2009) family plays a fundamental role in shaping an individual's financial literacy, which significantly impacts investment decision-making. financial literacy, acquired through parental guidance and early financial experiences, influences how individuals perceive risks and opportunities in investment activities. families that engage in discussions about financial management tend to foster greater confidence and a proactive investment mindset among their members. lusardi and mitchell (2014) also found that family influence extends beyond financial education to shaping risk tolerance. individuals raised in families with a strong investment culture are more likely to take calculated investment risks, whereas those from risk-averse families tend to prefer conservative financial strategies. this aligns with the findings of shim, barber, card, xiao, and serido (2010) who emphasized that parental financial behaviors serve as role models, reinforcing long-term financial habits and decision-making patterns in adulthood. moreover, jorgensen and savla (2010) noted that parental influence on financial attitudes significantly affects the ability to assess investment opportunities. parents who actively engage in wealth-building activities and discuss financial strategies with their children contribute to higher financial confidence and a greater likelihood of investment participation. in addition, gudmunson and danes (2011) highlighted that intergenerational financial transmission plays a crucial role in shaping investment behavior. children from families with a history of asset accumulation and stock market participation are more inclined to make informed investment decisions, relying on parental guidance as a reference point for their own financial choices. h1: family influence has a significant effect on investment decision-making. 2.2. innovation according to schindler (2017) financial innovation has significantly transformed investment decision-making by increasing accessibility, efficiency, and the availability of data-driven insights. technological advancements such as robo-advisors, algorithmic trading, and blockchain-based investment platforms have reshaped traditional investment strategies, allowing investors to make more informed and automated decisions. cheng and quiring (2019) emphasized that the integration of artificial intelligence (ai) and machine learning in financial markets has improved the ability to analyze complex market trends, predict asset price movements, and optimize portfolio allocations. these innovations reduce human biases and improve decision-making by processing vast amounts of data with greater accuracy. furthermore, philippon (2016) argued that financial innovation has led to a democratization of investing, enabling retail investors to participate in markets that were once dominated by institutional players. the rise of low-cost investment platforms, fractional shares, and exchange-traded funds (etfs) has lowered the barriers to entry, making investment opportunities more inclusive. lerner and tufano (2011) highlighted that innovations in fintech have revolutionized risk assessment and investment strategies, providing investors with real-time risk analytics and automated financial planning tools. these developments help investors optimize asset allocation while considering risk tolerance and financial goals. moreover, chishti and barberis (2016) found that fintech innovations have increased investor engagement by offering customized investment solutions based on behavioral finance principles. personalized recommendations, automated rebalancing, and ai-driven financial coaching have made investing more accessible, even for individuals with limited financial literacy. h2: innovation has a significant effect on investment decision-making. 2.3. need for achievement according to mcclelland (1961) individuals with a high need for achievement are more likely to set ambitious financial goals and seek investment opportunities that align with their aspirations for success. this psychological drive encourages investors to engage in strategic decision-making, focusing on maximizing returns and optimizing portfolio performance. rauch and frese (2007) found that individuals with strong achievement motivation demonstrate higher financial risk tolerance and proactive investment behavior. their desire for accomplishment leads them to explore innovative investment strategies, such as venture capital, high-growth stocks, and alternative assets. furthermore, barba-sánchez and atienza-sahuquillo (2012) argued that need for achievement correlates with entrepreneurial investment behavior, where individuals are more inclined to invest in businesses or startups with high-growth potential. these investors often exhibit long-term commitment and strategic patience, allowing them to withstand short-term market fluctuations. zhao, seibert, and hills (2005) also found that achievement-oriented investors tend to leverage financial knowledge and analytical skills to make informed decisions, reducing the impact of emotional biases. their structured approach to investing contributes to more sustainable financial growth and portfolio diversification. h3: need for achievement has a significant effect on investment decision-making. 2.4. risk taking investment decisions inherently involve risk, and individuals with a higher risk tolerance tend to engage in more diversified and aggressive investment strategies (kahneman & tversky, 1979). the prospect theory suggests that risk-taking behavior is influenced by how investors perceive potential gains and losses, with riskseeking individuals more likely to invest in volatile assets such as stocks, cryptocurrencies, and derivatives. blais and weber (2006) emphasized that risk-taking behavior is shaped by both cognitive and emotional factors, including past investment experiences, financial literacy, and market confidence. investors with a high-risk appetite are more willing to explore emerging markets, new asset classes, and innovative financial instruments. furthermore, grinblatt and keloharju (2009) found that personality traits, such as overconfidence and optimism, significantly influence risk-taking behavior in financial decisions. investors who perceive themselves as economy, 2025, 12(2): 51-59 54 © 2025 by the authors; licensee asian online journal publishing group financially competent are more likely to take risks, believing they can outperform the market through informed decision-making. additionally, panno (2019) found that risk-taking is positively correlated with investment success when paired with financial knowledge and analytical decision-making skills. well-informed risk-takers benefit from higher returns and portfolio growth over time. h4: risk-taking has a significant effect on investment decision-making. 2.5. investment decision according to arndt (1967) positive word of mouth (wom) is one of the most influential factors in financial decision-making. investors who have positive experiences with financial products or services are more likely to share their insights with peers, influencing the investment behavior of others. bughin, doogan, and vetvik (2010) found that peer recommendations and social influence play a crucial role in investment decisions, particularly in financial markets where uncertainty is high. positive wom creates trust and credibility, encouraging more individuals to participate in investment activities. furthermore, east, hammond, and lomax (2008) argued that investors who achieve significant financial gains are more inclined to share their success stories, leading to greater adoption of investment platforms, financial products, and trading strategies. this social validation effect reinforces market participation and investor confidence. berger and milkman (2012) emphasized that investments with high perceived value generate more wom, as investors are eager to discuss profitable ventures and strategies. additionally, investment firms and financial service providers benefit from customer advocacy, where satisfied investors actively promote their services. h5: investment decisions have a significant effect on positive word of mouth. 2.6. positive word of mouth positive word of mouth (wom) plays a significant role in shaping investment decisions by influencing investor perceptions, trust, and market participation. one relevant theory is the diffusion of innovation theory rogers (1962) which explains how new financial products or investment strategies spread through social networks. investors who successfully adopt innovative investment tools, such as robo-advisors or exchange-traded funds (etfs), tend to share their positive experiences, encouraging wider adoption. additionally, the social influence theory kelman (1958) suggests that investors rely on social validation from peers or financial experts when making investment decisions. positive recommendations from trusted individuals or communities enhance credibility and persuade others to invest in similar assets. the signaling theory shefrin and statman (2000) also plays a crucial role in investment-related wom, as successful investors act as signals of financial credibility. when individuals share their positive investment experiences, they unintentionally provide signals to others about the reliability and profitability of certain financial instruments. furthermore, the expectation confirmation theory (oliver, 1980) states that investors who experience returns exceeding their expectations are more likely to share favorable reviews, reinforcing confidence in particular investment products or platforms. lastly, the prospect theory kahneman and tversky (1979) suggests that individuals evaluate investment gains and losses asymmetrically. investors who experience higher-than-expected gains are more likely to spread positive wom, creating a ripple effect that attracts new investors to the market. these theories collectively highlight the powerful impact of positive wom in shaping investment behaviors and fostering greater financial market participation. economy, 2025, 12(2): 51-59 55 © 2025 by the authors; licensee asian online journal publishing group figure 1. research model. 3. research issue and methodology this study utilizes the conceptual framework shown in figure 1 to examine the intricate relationships among family influence, innovation, need for achievement, and risk-taking behavior in shaping investment decisions and encouraging positive word-of-mouth. gender and investment experience are included as control variables to account for demographic and experiential differences. data were collected from 250 respondents across indonesia, all of whom had prior investment experience and had shared positive word-of-mouth related to their investment activities. of the participants, 39.23% were male and 60.77% were female. a purposive sampling method was used to target individuals with relevant investment backgrounds. the survey was distributed over a three-day period, and participants were given one week to complete and return the questionnaire. the self-administered questionnaire was designed to measure investment behavior and decisionmaking in relation to the study’s key constructs. strict methodological standards were followed throughout the data collection process to ensure reliability and validity. participation was entirely voluntary, ensuring that the responses were authentic and free from coercion. 4. finding and discussion 4.1. characteristics of respondents in every research study, understanding the characteristics of the respondents is crucial. one important aspect that influences differences in individual views, behavior, and preferences is gender and age. table 1. characteristics of respondents based on gender. no description qty percentage 1 male 138 39.23% 2 female 112 60.77% total qty 250 250 source: questionnaire respondents, 2025. based on table 1, out of 250 respondents, 138 (55.2%) are women and 112 (44.8%) are men, indicating that female investors make up the majority in this study. psychological research highlights that men and women often exhibit different investment behaviors: men typically demonstrate higher risk tolerance and prefer aggressive strategies, while women are generally more risk-averse and inclined toward stable, long-term investments (barber & odean, 2001). the greater representation of female investors in this study may reflect a broader shift, with more women gaining financial independence and actively engaging in investment decisions. this trend is consistent with research showing increased female participation in financial decision-making, driven by rising financial literacy and improved access to digital investment platforms (lusardi & mitchell, 2014). economy, 2025, 12(2): 51-59 56 © 2025 by the authors; licensee asian online journal publishing group table 2. characteristics of respondents based on age. no description qty percentage 1 21 – 30 133 53% 2 31 – 40 90 36% 3 41 – 50 18 7% 4 5156 9 4% total qty 250 100% source: questionnaire respondents, 2025. based on table 2, all respondents fall within the productive age group in indonesian society. the majority of respondents are aged 21-30 years, comprising 53% of the sample. this is followed by respondents aged 31-40 years, who account for 36%, while those aged 41-50 years represent 7%. lastly, respondents aged 51-56 years constitute 4% of the total sample. 4.2. validity, reliability and multicollinearity test the data obtained from the questionnaire were analyzed using spss software. the outputs from this analysis include the corrected item-total correlation and cronbach’s alpha, which assess the validity and reliability of each questionnaire item based on the indicators of each variable. to meet the validity criteria, the corrected item-total correlation must exceed the r table value (0.196). for the reliability test, cronbach’s alpha must be greater than 0.7 (ghozali, 2017). additionally, to pass the multicollinearity test, the variance inflation factor (vif) must be less than 10, and the tolerance value must be greater than 0.1. table 3. validity, reliability, and multicollinearity test. variable indicator validity test reliability test tolerance vif family influence (fi) fi1 0.724 0.874 0.525 1.904 fi2 0.787 fi3 0.758 innovation (in) in1 0.819 0.916 0.458 2.185 in2 0.853 in3 0.819 need for achievement (na) na1 0.771 0.894 0.387 2.583 na2 0.813 na3 0.791 risk taking (rt) rt1 0.739 0.878 0.427 2.340 rt2 0.814 rt3 0.739 investment decision (id) id1 0.773 0.876 id2 0.796 id3 0.710 positive word of mouth (pwom) pwom1 0.778 0.911 pwom2 0.874 pwom3 0.814 based on the tests for data validity, reliability, and multicollinearity from table 3, it is confirmed that all indicators used to estimate each variable are valid and reliable, and they also pass the multicollinearity test. 4.3. normality test the normality test is conducted to assess whether the residuals in the regression model follow a normal distribution (ghozali, 2017). in this context, the kolmogorov-smirnov test is typically employed. if the asymp. sig. value exceeds 0.05, it indicates that there is no significant deviation from normality, and thus the residuals are considered to follow a normal distribution. table 4. normality test. no. equation asymp. sig. (2-tailed) critical number description 1. fi, in, na, rt→ id 0.200 0.05 normal 2. id → pwom 0.052 0.05 normal according to table 4, the asymp. sig. value exceeds 0.05, indicating that there is no significant deviation from normality in the data. therefore, it can be concluded that the data collected in this study are approximately normally distributed. table 5. multiple regression and t-test. variable standardized coef. sig description fi*id 0.255 0.000 hypothesis accepted in*id 0.139 0.006 hypothesis accepted na*id 0.520 0.000 hypothesis accepted rt*id 0.045 0.387 hypothesis rejected id*pwom 0.781 0.000 hypothesis accepted note: * = the influence of the independent variables on the dependent variable. economy, 2025, 12(2): 51-59 57 © 2025 by the authors; licensee asian online journal publishing group 4.4. multiple regression and t-test the results of the t-test significance from table 5 indicate that five hypotheses were tested. the results show that hypotheses h1, h2, h3, and h5 are supported, as the t-test values for these variables are below 0.05. therefore, it can be concluded that h1 (family influence), h2 (innovation), h3 (need for achievement), and h5 (investment decision * positive word of mouth) are supported. however, hypothesis h4 (risk taking * investment decision) is rejected, as the t-test value is above 0.05 (0.387). additionally, from table 5, it can be concluded that the need for achievement (na) has the largest positive direct influence on investment decision (id), with a regression coefficient of 0.520. the factors with the greatest positive influence on investment decision are family influence (fi) with a coefficient of 0.255, followed by innovation (in) with a coefficient of 0.139, and lastly, risk taking (rt) with a coefficient of 0.045. table 6. f-test. variable sig standard hypothesis fi, in, na, rt→ id 0.000 0.05 hypothesis accepted id → pwom 0.000 0.05 hypothesis accepted 4.5. f-test based on table 6, it can be stated that there is a significant influence of family influence (fi), innovation (in), need for achievement (na), and risk taking (rt) on investment decision (id), as well as an influence of investment decision (id) on positive word of mouth (pwom), with all hypotheses being accepted. 5. discussion this model was developed to examine the impact of various psychological and social factors on investment decision-making (idm), including family influence (fi), innovation (in), need for achievement (na), and risktaking (rt), with positive word of mouth (pwom) serving as a moderating variable. the research established that family influence, innovation, and need for achievement significantly affect investment decision-making, while risk-taking did not. based on the data analysis, the study confirms that factors such as familial support, openness to innovation, and personal achievement goals drive the investment decisions of individuals. additionally, the findings suggest that gender and age play a role in shaping investment behaviors. the majority of respondents in the study were women aged 21-30, which highlights the importance of understanding this demographic in investment decision-making processes. these results indicate that financial platforms and investment firms should consider targeting younger, tech-savvy women, who are more likely to make investment decisions and influence others within their social circles. the positive regression coefficient for family influence indicates a unidirectional relationship, meaning that as family influence increases, so does the likelihood of making investment decisions. this supports hypothesis 1 (h1), confirming that familial support plays a crucial role in the decision-making process. the findings align with previous research that highlights the significant role of family in shaping financial choices, especially in areas requiring long-term planning like investment. similarly, hypothesis 2 (h2), which proposed that innovation influences investment decisions, was also supported. although the effect was moderate, the data shows that individuals open to innovation are more likely to make investment decisions, emphasizing the relevance of new financial products and services that appeal to more innovative investors. hypothesis 3 (h3), concerning the need for achievement, was strongly supported as well. individuals with a high need for achievement were found to make investment decisions at higher rates. this finding highlights the influence of personal ambition and goals for financial success on investment behavior. investors who are driven by achievement may be more willing to take calculated risks and seek opportunities for growth, which is critical in investment decision-making. on the other hand, hypothesis 4 (h4), which suggested that risk-taking significantly impacts investment decisions, was rejected. the study found that risk-taking behavior did not significantly influence investment decision-making, which contradicts traditional views that assume investors are inherently risk-tolerant. this could be due to the moderating effect of other factors such as family influence and personal achievement, which may outweigh the direct influence of risk-taking on investment decisions. finally, the significant positive relationship found between investment decisions and positive word of mouth (hypothesis 5, h5) underscores the importance of social influence in financial decision-making. individuals who make investment decisions are more likely to share their experiences with others, thereby spreading information about investments through word-of-mouth. this finding aligns with the theory that social networks play a significant role in financial behaviors, with recommendations from trusted peers serving as important drivers of investment decisions. in conclusion, the study provides a comprehensive understanding of the psychological, social, and demographic factors that influence investment decision-making. family influence, innovation, and need for achievement were found to have a significant impact on investment decisions, while risk-taking was not as influential as expected. the positive effect of investment decisions on positive word of mouth further emphasizes the role of social influence in shaping investment behaviors. these insights can inform marketing strategies for investment platforms and financial advisors, helping them target specific demographics and build trust through social validation. 6. conclusion based on the results of the analysis, this research has successfully contributed to the understanding of the psychological and social factors influencing investment decision-making (idm). specifically, four hypotheses were supported in this study, confirming the significant impact of family influence (fi), innovation (in), and need for economy, 2025, 12(2): 51-59 58 © 2025 by the authors; licensee asian online journal publishing group achievement (na) on investment decisions. however, the hypothesis related to risk-taking (rt) was rejected. the study highlights that family support, innovation, and personal ambition play key roles in shaping individuals’ investment choices, while risk-taking does not have as significant an effect as initially expected. the research also emphasizes the important role of positive word of mouth (pwom) in influencing investment decisions, with a strong positive relationship found between investment decisions and pwom. the findings suggest that the most significant variable in making investment decisions is the influence of family. therefore, investment platforms should target customers by acknowledging and incorporating family influences into their marketing strategies. for instance, providing tools or advice that encourage family involvement in financial planning could enhance customers' decision-making processes. additionally, innovation is another vital factor, with individuals who are open to new ideas and technologies being more likely to make investment decisions. financial institutions should aim to offer innovative and technology-driven products to attract this demographic, especially by promoting investment tools that incorporate cutting-edge technologies. furthermore, the study found that need for achievement (na) plays a significant role in investment decisionmaking. individuals who are driven by a desire for success and personal achievement tend to be more engaged in making investment decisions. investment firms should consider this aspect and offer personalized financial products that appeal to goal-oriented individuals. tailoring services that help customers set and achieve their financial goals could foster a stronger connection with this target market. the hypothesis related to risk-taking (rt), however, was rejected, suggesting that risk-taking behaviors are not as strongly correlated with investment decisions as typically assumed. this finding could indicate that other factors, such as family influence or personal ambition, may outweigh the effect of risk tolerance in financial decision-making. it is crucial for financial institutions to focus more on offering stable and secure investment opportunities that appeal to conservative investors, rather than solely emphasizing high-risk, high-reward products. lastly, the research underscores the importance of positive word of mouth (pwom) in reinforcing investment decisions. individuals who make investment decisions are more likely to share their experiences and influence others in their social networks. therefore, financial institutions and platforms should leverage the power of social influence in their marketing strategies. encouraging satisfied investors to share their experiences and recommend investment products can further enhance customer acquisition and loyalty. in conclusion, this study highlights the significant psychological and social factors influencing investment decision-making. family influence, innovation, and personal ambition emerged as key drivers in shaping investment behaviors, while risk-taking was not as influential as expected. the positive effect of investment decisions on positive word of mouth further emphasizes the role of social influence in financial decision-making. financial institutions and platforms should tailor their marketing strategies to focus on these factors, while also encouraging the social sharing of investment experiences to build trust and drive customer acquisition. 7. research limitation this study is limited by its focus on e-commerce users in indonesia, and future research should apply the same model or a modified version to different populations for more generalizable results. expanding the respondent base and incorporating additional variables such as income, age, and gender could further enhance understanding of the factors influencing investment decisions and consumer behavior. longitudinal studies could also provide insights into how investment 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(2005). the mediating role of self-efficacy in the development of entrepreneurial intentions. journal of applied psychology, 90(6), 1265. https://doi.org/10.1037/0021-9010.90.6.1265 asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. https://doi.org/10.1016/j.ijresmar.2008.04.001 https://doi.org/10.1016/j.ijresmar.2008.04.001 https://doi.org/10.1007/s10834-011-9275-y https://doi.org/10.1111/j.1540-6261.2008.01408.x https://doi.org/10.1111/j.1741-3729.2010.00616.x https://doi.org/10.2307/1914185 https://doi.org/10.1177/002200275800200106 https://doi.org/10.3386/w16780 https://doi.org/10.1017/s147474721100045x https://doi.org/10.1257/jel.52.1.5 https://doi.org/10.1891/1052-3073.30.1.132 https://doi.org/10.1111/j.1540-6261.1991.tb02669.x https://doi.org/10.1111/j.1540-6261.1991.tb02669.x https://doi.org/10.1177/002224378001700405 https://doi.org/10.1080/13594320701595438 https://doi.org/10.17016/feds.2017.081 https://doi.org/10.2307/2676187 https://doi.org/10.1007/s10964-009-9432-x https://doi.org/10.1037/0021-9010.90.6.1265 1 © 2025 by the authors; licensee asian online journal publishing group economy vol. 12, no. 1, 1-7, 2025 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/economy.v12i1.6521 © 2024 by the authors; licensee asian online journal publishing group revisiting the forecasting power of public health expenditure and climate change impact on life expectancy in nigeria: a scenario analysis. abubakar orlando ijoko1 salam s. mohammed2 ( corresponding author) 1department of economics, faculty of social sciences, nigerian army university biu, biu, borno state, nigeria. email: abubakar.ijoko@naub.edu.ng 2department of economics, faculty of social sciences, prince abubakar audu university paau, p.m.b 1008, ayingba, kogi state, nigeria. email: mohammedss23@gmail.com abstract in this study, we investigate the forecasting power of public health expenditure and the impact of climate change on life expectancy in nigeria. this study relies on time-series data covering a period of 35 years (1988 to 2022) and uses a bias-adjusted ordinary least squares (ols) method to predict the relationship and armse to forecast with 8 policy options (scenarios) for 5 years. the analysis is based on data sourced from fao, 2025, and wdi, 2025 databases. the results reveal a positive impact of both climate change (cc) and public health expenditure (phe) on life expectancy (le). in a single predictor model, for every one-degree celsius rise (or fall) in cc and a percentage rise (or fall) in phe, le will rise (or fall) by 52.3 and 2.82, respectively. however, in a multiple predictor equation, the responses of le to a change in cc and phe are 15.14 and 2.12, respectively. we also reveal the 3rd scenario as the best option for policymaking. given these positive impact results, the study concludes that climate change has led to an improvement in healthcare investment in nigeria to mitigate the effects of climate-induced health challenges. we thus advise the government to sustain its improvement in the health sector through budgetary allocation and implementation. keywords: bias-adjusted ols, climate change, forecasting power, in-sample forecast, life expectancy, nigeria, out-of-sample forecast, prediction, public health expenditure, scenario analysis. jel classification: h51; i18; q54. citation | ijoko, a. o., & mohammed, s. s. (2025). revisiting the forecasting power of public health expenditure and climate change impact on life expectancy in nigeria: a scenario analysis. economy, 12(1), 1–7. 10.20448/economy.v12i1.6521 history: received: 24 january 2025 revised: 28 february 2025 accepted: 12 march 2025 published: 21 march 2025 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. institutional review board statement: not applicable. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. this study followed all ethical practices during writing. data availability statement: the corresponding author may provide study data upon reasonable request. competing interests: the authors declare that they have no competing interests. authors’ contributions: both authors contributed equally to the conception and design of the study. both authors have read and agreed to the published version of the manuscript. contents 1. introduction ......................................................................................................................................................................................... 2 2. literature review ............................................................................................................................................................................... 2 3. methodology and data ...................................................................................................................................................................... 3 4. results and discussion of findings................................................................................................................................................. 5 5. conclusion ............................................................................................................................................................................................ 6 references ................................................................................................................................................................................................. 6 mailto:abubakar.ijoko@naub.edu.ng mailto:mohammedss23@gmail.com https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v12i1.6521 https://orcid.org/0000-0001-5632-2365 https://orcid.org/0000-0002-6772-2468 economy, 2025, 12(1): 1-7 2 © 2025 by the authors; licensee asian online journal publishing group contribution of this paper to the literature the contributions of this study lie in the analysis of eight scenarios to forecast the impact of public health expenditure and climate change on life expectancy over five years. additionally, the application of armse for both in-sample and out-of-sample forecasts is utilized in a study that integrates public health expenditure and climate change in a single study in nigeria. 1. introduction public expenditure on health and climate change are critical determinants of life expectancy of people, particularly in lowand middle-income countries like nigeria. the interplay of these factors significantly impacts the quality of life, socio-economic progress, and overall well-being of the population. understanding this relationship is essential for formulating effective policies that promote health equity and resilience to climate change. public expenditure on health is a critical driver of improved healthcare delivery and population health outcomes. however, in nigeria, the allocation of public resources to the health sector has consistently fallen short of expectations. according to world bank (2023) nigeria allocates less than 5% of its gross domestic products (gdp) to healthcare, significantly below the 15% target set by the abuja declaration. also, out-of-pocket healthcare expenditures account for over 70% of total health spending, leaving vulnerable populations at risk (world health organization (who), 2023). nigeria’s life expectancy is among the lowest globally, at approximately 55 years in 2022, compared to a global average of 73 years (world bank, 2023). life expectancy in nigeria lags behind regional peers such as ghana (64 years) and south africa (65 years), reflecting disparities in health investments and outcomes. though, women in nigeria generally live longer than men, with female life expectancy at 57 years compared to 55 years for men. this aligns with global trends but highlights the need for targeted male health interventions (national bureau of statistics, 2023). this under-funding has resulted in inadequate healthcare infrastructure, limited access to essential services, and a disproportionate burden of diseases, particularly among vulnerable populations. simultaneously, nigeria faces significant challenges from climate change, which exacerbates health risks and disrupts socio-economic activities. rising temperatures, unpredictable rainfall, and increased frequency of extreme weather events have led to the proliferation of climate-sensitive diseases such as malaria, cholera, and respiratory illnesses (intergovernmental panel on climate change (ipcc), 2022). climate change exacerbates food insecurity, and malnutrition, thereby reduces life expectancy in affected regions (akinbobola & saibu, 2021). integrated health system and climate adaptation policies remain scarce, leading to missed opportunities for improving resilience and life expectancy (united nations development programme (undp), 2020). though, investments in climateresilient health systems mitigate these effects, but such measures are largely underdeveloped in nigeria (world health organization (who), 2021). these health impacts are particularly pronounced in rural and underserved areas, where healthcare systems are already overstretched. the intersection of insufficient public health investment and climate-induced health challenges exacerbates this situation, highlighting the urgent need for comprehensive policy responses. in the past, nigeria has developed several health policies, such as the national health policy and basic health care provision fund, but implementation gaps remain significant (olaniyan, oladeji, & adepoju, 2022). there is wealth of knowledge in this area of research, for instance, the work of ilori, olalere, and babatola (2017) and odhiambo sewe et al. (2018) separately investigated the relationship of public health expenditure on life expectancy and temperature on years of life lost respectively. ilori et al. (2017) revealed a long-run association between public health expenditure and life expectancy while odhiambo sewe et al. (2018) found mixed result across low-, middle-, and high-income countries. kewalani and saifudeen (2021) also explored the climate change and life expectancy in 172 countries and found that life of human living in cold region is elongated than those living in temperate region. empirical studies consistently show that increased public health expenditure positively impacts life expectancy, while climate change poses significant risks to health outcomes, particularly in low-income and vulnerable regions like nigeria. despite the wealth of research, there is limited integration of public health expenditure and climate change in a single analytical framework, particularly in nigeria. it is evident from the literature that most studies focused on county-specific and cross-countries analysis and concentrated on the impact analysis. however, this study seeks to investigate the relationship between public expenditure on health and climate change, on life expectancy in nigeria. by examining these interdependencies, the research aims to provide actionable insights for policymakers to optimize health spending, enhance resilience to climate change, and ultimately improve life expectancy. this, we proffer a scenario analysis to help policy making easier after forecasting for five years. the bias-adjusted ordinary least squares (ols) and the armse in-sample and out-of-sample forecast (developed by adjusting the traditional rmse) methodology deployed also signifies the novelty of this study over others. 2. literature review to conceptualize this study, we start from public health expenditure which refers to government spending on healthcare infrastructure, services, and programs aimed at improving the health of the population (anyanwu & erhijakpor, 2009). however, in nigeria, public health expenditure remains below international benchmarks, which undermines its ability to significantly impact health outcomes (world health organization (who), 2023). climate change on the other hand is a global challenge that has direct and indirect impacts on health. the ecological framework of health highlights how environmental factors, including temperature, precipitation, and extreme weather events, influence the spread of vector-borne diseases, heat-related illnesses, and food insecurity (mcmichael, woodruff, & hales, 2006). nigeria, being highly vulnerable to climate change, faces rising incidences of diseases such as malaria, cholera, and respiratory infections, particularly in rural areas where adaptive capacities are limited (intergovernmental panel on climate change (ipcc), 2022). these climate-induced health risks disproportionately affect the most vulnerable populations, exacerbating existing health inequities. economy, 2025, 12(1): 1-7 3 © 2025 by the authors; licensee asian online journal publishing group finally, life expectancy, the average number of years an individual is expected to live, serves as a critical indicator of a population’s overall health and well-being. factors influencing life expectancy include healthcare access, socioeconomic conditions, environmental quality, and government policies. the capability approach, as proposed by sen (1999) emphasizes that life expectancy is not only a measure of biological survival but also a reflection of the broader socio-economic and environmental context. in nigeria, low life expectancy is driven by high infant and maternal mortality rates, prevalence of communicable diseases, and insufficient public health investment. therefore, the implications of the interaction between public expenditure on health and climate change significantly affects life expectancy. inadequate health funding limits the capacity to address climate-sensitive diseases, while the impacts of climate change strain already underfunded healthcare systems. the concept of climate-resilient health systems (world health organization (who), 2021) emphasizes the need for integrated policies that enhance health system capacity to adapt to climate change while improving health outcomes. studies suggest that targeted investments in healthcare, coupled with climate adaptation strategies, can mitigate the adverse impacts of climate change and improve life expectancy (ebi, campbell-lendrum, & wyns, 2018). while some studies have explored these issues individually, there is a paucity of research examining their interrelationships in the nigerian context, leaving a critical gap in understanding and policy-making. several theoretical postulations have sought to explain the relationship between public health expenditure, climate change and life expectancy. starting with the health production function theory which posits that health is both a consumption and an investment good. that is, individuals and government invest in health to improve their quality of life, productivity, and societal well-being. the suitability of this theory in our study is that, it contributes to improved healthcare services, reduced morbidity, and increased life expectancy (grossman, 1972). empirically, the validity or otherwise of this theory rests on the outcomes of studies that links public expenditure on health and life expectancy. for example, the studies of bokhari, gai, and gottret (2007); anyanwu and erhijakpor (2009); novignon, olakojo, and nonvignon (2015) and olaniyan et al. (2022) found that increased public health expenditure significantly improves life expectancy and reduces infant mortality rates in africa, including nigeria, and other sub-saharan african countries. however, the efficacy of the impact rests on governance quality and the efficiency of resource allocation. this theory underscores the importance of adequate health funding in achieving better health outcomes. in the nigerian context, where public health expenditure is significantly low, the theory provides a basis for analyzing its impact on life expectancy. concerning the bronfenbrenner (1979)’s ecological systems theory which emphasizes the interplay between individuals and their environment, highlighting how external factors influence health outcomes. climate change, as a macro-level environmental factor, affects human health through extreme weather events, temperature changes, and the spread of vector-borne diseases. this theory is particularly relevant for understanding the impacts of climate change on health in nigeria, where vulnerabilities to climate-related risks are high, especially in rural areas with limited adaptive capacities. empirical evidences have shown direct and indirect negative impact of climate change on life expectancy. directly, it was argued by ebi et al. (2018) that low-income countries are disproportionately affected by climate change on global health. their outcome was not surprising as other investigations revealed an indirect effect of climate change on life expectancy through malarial prevalence, food insecurity and malnutrition, increased disease burden, and migration (abidemi, alabi, & olatunji, 2018; akinbobola & saibu, 2021; dell, jones, & olken, 2012). these studies highlighted the role of climate adaptation strategies, such as improved healthcare infrastructure and disease surveillance systems, in mitigating the negative impacts on life expectancy. other frameworks that explain these relationships are the capability approach and climate-resilient health systems framework. where capability approach focuses on the freedom individuals have to achieve well-being and live a long and healthy life, climate-resilient health systems framework emphasizes the need for health systems to adapt and respond to the challenges posed by climate change. it highlights the integration of climate adaptation measures into health policies, infrastructure, and services (world health organization (who), 2021). these approaches underscore the role of public health expenditure in enhancing individuals’ capabilities and mitigating the effects of socio-economic and environmental constraints, such as climate change. it should be understood that in nigeria, where healthcare systems are already strained, this framework provides a lens to explore how public health funding can be optimized to build resilience against climate-related health risks and improve life expectancy. empirical studies that focused on the impacts of public health expenditure and climate change on life expectancy to validate or otherwise the postulation of these frameworks suggested that countries with higher investments in health and adaptive infrastructure experienced fewer climate-induced health crises and higher life expectancy gains (ogunleye, balogun, & abayomi, 2020; united nations development programme (undp), 2020; world health organization (who), 2021). they concluded that integrated policies addressing both health and climate resilience are essential for improving life expectancy in vulnerable regions. 3. methodology and data based on the multi-theoretical postulations this study is underpinned, we follow the ilori et al. (2017) procedure to express life expectancy as a function of government health expenditure and climate change as follows. 𝐿𝐸 = 𝑓(𝑃𝐻𝐸, 𝐶𝐶) (1) the term le is the life expectancy and is measured as the average number of years a newborn is expected to live, based on current mortality trends. phe is public health expenditure as a percentage of gross domestic products (gdp) and per capita health spending. cc is climate change indicators and is captured by average temperature at time. although, the common approach in the literature is to measure the climate change using co2 emissions (see for example (opoku & boachie, 2020; tang & tan, 2015)). the co2 despite representing a major source of climate change is not the only sources. in other not to undermine the accuracy of the measure of climate change in this study, preference was given to temperature which is a better indicator of climatic condition and global warming irrespective of the varying sources of climate change. all the variables are annual time-series spanning between 1988 to 2022 totaling 34 number of observations. the data were sourced from two main online economy, 2025, 12(1): 1-7 4 © 2025 by the authors; licensee asian online journal publishing group databases namely, food and agricultural organization (fao) (climate change) and world development indicators (wdi) (public health expenditure and life expectancy) databases. however, in order to explore functional representation in equation 1 as our predictive model, we transform it to an estimable empirical model and in reduced form to include the predictors only, namely; government health expenditure and climate change. 𝑙𝑒𝑡 = 𝛽0 + 𝛽1𝑝ℎ𝑒𝑡 + 𝛽2𝑐𝑐𝑖𝑡 + 휀𝑡 (2) equation 2 is our estimable predictive model which is a reduced form of the functional representation in equation 1. according to liu, reed, and girard (2017) having too many predictors in a predictive model often lead to inclusion of irrelevant variables likely to result into an in-sample over fitting problem. to address this concern, we follow the westerlund and narayan (2015) estimation techniques to account for possible endogeneity bias that may result from the omission of an important variable(s) in equation 2. while the estimated coefficients attached to each predictor series, for instance β1 and β2 can be positive or negative depending on which of the three hypotheses earlier mentioned is under consideration, we further rewrite equation 2 in a more compact form and in line with the westerlund and narayan procedure as shown below. 𝐿𝐸𝑡 = ∝ +𝛽𝐴𝑑𝑗𝑥𝑡−1 + 𝜂(𝑥𝑡 − 𝜌𝑥𝑡−1) + 𝜗𝑡 (3) the predicting series for instance, let in equation 3 remain as earlier defined while 𝑥𝑡 is potential predictor of life expectancy (le) which will be captured singly for climate change (cc) and public health expenditure (phe) when the predictive model in equation 3 is expressed in bivariate form, and jointly in a multivariate form to simultaneously include cc and phe in a single framework. the parameter 𝛽 in equation 3 measures the first order autocorrelation coefficient, while the inclusion of the second term (𝑥𝑡 − 𝜌𝑥𝑡−1) is meant to address any presence of persistence effect in the predictive model. the term 𝜂 on the other hand is meant to capture the likelihood of the presence of endogeneity effect in the model (see (lewellen, 2004)). in particular, accounting for endogeneity via the lewellen approach has the potential to help address bias that would have arisen due to omission of any important variable(s) in the predictive model. hence, estimating equation 3 with ordinary least squares (ols) method having corrected for the potential presence of persistence and endogeneity is expected to yield a bias-adjusted ols estimator for 𝛽 described as: 𝛽𝐴𝑑𝑗 = 𝛽^ − 𝛿(𝜌^ − 𝜌) (4) for the purpose of our analysis and the quest to have a robust comparison regarding which matter most between public health expenditure (phe) and climate change (cc) in forecasting of life expectancy, we consider the following pair of predictors: 𝑙𝑒𝑡 = ∝ + 𝛽𝑐𝑐𝑡−1 + 𝜂(𝑐𝑐𝑡 − 𝜌𝑐𝑐𝑡−1) + 𝜗𝑡 (5) 𝑙𝑒𝑡 = ∝ + 𝛽𝑝ℎ𝑒𝑡−1 + 𝜂(𝑝ℎ𝑒𝑡 − 𝜌𝑝ℎ𝑒𝑡−1) + 𝜗𝑡 (6) the bivariate predictive model presented in equations 5 and 6 captured cc and phe singly in each equation to evaluate and compared their respective forecasting power in the predictability of climate change. for easy identification and representation of results in the subsequent section we named the equations as cc_model and phe_model, respectively. furthermore, equation 7 are a multivariate predictive model that captured the combine forecasting power of cc and phe in a single framework and tagged “cc_phe_model”. 𝑙𝑒𝑡 = ∝ + 𝛽𝑐𝑐𝑐𝑐𝑡−1 + 𝛽𝑝ℎ𝑒𝑝ℎ𝑒𝑡−1 + 𝜂𝑐𝑐(𝑐𝑐𝑡 − 𝜌𝑐𝑐𝑐𝑐𝑡−1) + 𝜂𝑝ℎ𝑒(𝑝ℎ𝑒𝑡 − 𝜌𝑝ℎ𝑒𝑝ℎ𝑒𝑡−1) + 𝜗𝑡 (7) the in-sample forecastability of the predictive models will be assessed to determine which variant of the predictive models is the most suitable for our out-of-sample forecast and scenario analysis. essentially, the predictability of life expectancy is evaluated using alternative forecast performance measures, viz: root mean square error (rmse) and it adjusted variant (i.e. armse) developed by moosa and burns (2012). the outcomes of each of the measures is expected to be consistent so as to ascertain the robustness of our findings. if the full-sample period is 𝑡 = 𝑛 + 1, . . . , 𝑛 + 𝑘, such that 𝑛 is the in-sample period while 𝑘 is the forecast horizon, hence the rmse for the in-sample and out-of-sample forecasts can be expressed as follows: in-sample: 𝑅𝑀𝑆𝐸 = √ 1 n ∑ (𝑙𝑒𝑡 − 𝑙𝑒𝑡)^2n 𝑡=1 (8) out-of-sample: 𝑅𝑀𝑆𝐸 = √ 1 k ∑ (𝑙𝑒𝑡 − 𝑙𝑒𝑡)^2k 𝑡=1 (9) for the sake of consistency and robustness of the forecasts, we compliment the rmse method with its adjusted variant following the moosa and burns (2012) approach (see also, (ali, awe, mohammed, & isah, 2024; salisu, isah, & ademuyiwa, 2017)). the armse is developed by adjusting the traditional rmse to take into consideration the potential of the model to predict the direction of change. in line with the salisu et al. (2017) procedure, the armse can be calculated using the following formula: in-sample: 𝐴𝑅𝑀𝑆𝐸 = √ 𝐶𝑅 n ∑ (𝑙𝑒𝑡 − 𝑙𝑒𝑡)^2n 𝑡=1 (10) out-of-sample: 𝐴𝑅𝑀𝑆𝐸 = √ 𝐶𝑅 k ∑ (𝑙𝑒𝑡 − 𝑙𝑒𝑡)^2k 𝑡=1 (11) the term cr is often described as the confusion rate calculated as 1cr da= − , where the da is the direction accuracy computed correspondingly for the in-sample and out-of-sample as: in-sample: 𝐷𝐴 = 1 𝑚 ∑ 𝑎𝑡 𝑚 𝑡=1 (12) out-of-sample: 𝐷𝐴 = 1 𝑘 ∑ 𝑎𝑡 𝑘 𝑡=1 (13) intuitively, the predictive model which in-sample and out-of-sample forecasts has the least rmse values would be considered the most accurate to carry out scenario analysis. with respect to the arsme, however, it is posited that where two models have equal rmse values, the model with a higher cr should have a higher armse (moosa & burns, 2012). one of the attractive features of the armse as represented in equations 10 & 11, is that it is not sensitive to the measures of either magnitude (i.e. values of rmse) or direction (i.e. cr). economy, 2025, 12(1): 1-7 5 © 2025 by the authors; licensee asian online journal publishing group table 1. descriptive and/or summary statistics. statistics life expectancy (le) climate change (cc) public health expenditure (phe) mean 49.1 0.80 16.6 std. dev. 2.81 0.42 4.21 skewness 0.02 -0.69 0.75 kurtosis 1.44 3.76 3.64 jb stat. 3.55 (0.17) 3.59 (0.17) 3.84 (0.15) note: the values in parenthesis are probability values associated with the jaque-bera (jb) statistic. 4. results and discussion of findings table 1 shows the descriptive statistics of the data deploy. the essence is to provide some background information about the variables of interest. the variables; le, cc, and phe have different mean values of 49.1, 0.79, and 16.57 respectively. this suggests that, the variables are influenced by different factors. the standard deviation, the skewness, and the kurtosis largely suggest that the variables under consideration are well behaved. the jaque-bera (jb) statistics, which takes into consideration the skewness and kurtosis, for all variables are insignificance suggesting they are normally distributed. the kurtosis for le is less than 3 while that of cc and phe are greater than 3. this means that the skewness for le platykurtic while that of cc and phe are leptokurtic. table 2. unit root, autocorrelation, persistence and endogeneity tests results. variable adf unit root test results ljung-box autocorrelation test results persistence test results endogeneity test results le -3.01**f (0.05) 49.1*** (0.00) cc -3.37**l (0.02) 0.80*** (0.00) 0.49*** (0.00) 0.50*** (0.00) phe -3.16**l (0.03) 16.6*** (0.00) 0.55*** (0.00) 1.02*** (0.00) note: *** and ** implies significant at 1%, and 5% levels of significance. the unit root test is performed using the augmented dickey-fuller test with the subscript l suggesting that a variable is stationary at level test while f means that a series is a difference series. the autocorrelation test is performed using ljung-box test and the values reported are the q-statistics associated with the test. the persistence test is performed by regressing each of the predictor on its first lag: 𝑥𝑡 = 𝛼 + 𝛿𝑥𝑡−1 + 𝜐𝑡 using the ols estimator. the first order coefficient, for instance (𝛼) captures the persistence effect and the null is that there is no presence of the effect. the closer the value of 𝛼to one, the higher the degree of persistence. regarding the endogeneity test, the procedure follows a three steps approach as follows: (i) we ran a predictive regression, for instance, 𝑧𝑡 = 𝛼 + 𝜆𝑥𝑡−1 + 휀𝑧,𝑡with ols as the estimator, where 𝑧𝑡 denotes the life expectancy and 𝑥𝑡−1 is the predictor variables such as cc and phe; (ii) we follows the westerlund and narayan (2015) model of the predictor variable as follows: 𝑥𝑡 = 𝜇(1 − 𝛿) + 𝛿𝑥𝑡−1 + 휀𝑡and in the third and final step (iii) the relationship between the two error terms (휀𝑧,𝑡 and 휀𝑥,𝑡 ) is captured using 휀𝑧,𝑡 = 𝜌휀𝑥,𝑡 + 𝜓𝑡 . if the coefficient 𝜌 is statistically different from zero, then the predictor variable is considered to be endogenous and strictly exogenous if otherwise. table 2 clearly shows that le is stationary at first difference while cc and phe are stationary at level. the evidence of mixed order of integration denotes that the stochastic behaviour of both the predicting variable (i.e., le) and the predictor series (cc & phe) aligns with the chosen methodology. ljung-box autocorrelation test indicates that there is overwhelming evidence of autocorrelation in the series. also, we observe the series are significant hence, suggesting high degree of persistence and endogeneity bias in the predictor series. due to the presence of autocorrelation, persistence and endogeneity in the series which could undermine the forecasting power of life expectancy, le, preference is given to the lewellen (2004) estimator as appropriate to capture and accommodate any bias. table 3. predictability results. dependent variable le coef. t-stat. p-value single predictor case cc 52.3*** 14.2 0.00 phe 2.82*** 24.8 0.00 multiple predictor case cc_phe cc 15.14*** 3.25 0.00 phe 2.12*** 8.85 0.00 note: the in-sample predictability results were obtained by estimating the predictive model in equation 3, for instance, 𝐿𝐸𝑡 = 𝛼 + 𝛽𝐴𝑑𝑗𝑥𝑡−1 + 𝜂(𝑥𝑡 − 𝜌𝑥𝑡−1) + 𝜗𝑡 where �̑�'s denoting coefficient for the individual predictor across the bivariate and multivariate models, respectively. the values reported in parentheses are standard errors while *** implies 1% levels of significance, respectively. the main aim of this study is to examine the forecasting power of climate change (cc) and public health expenditure (phe) in predicting life expectancy and thereafter perform a scenario analysis that will enable us arrive at the most appropriate policy option that will improve life expectancy of nigerians. therefore, table 3 shows the bias-adjusted ols estimates for each of the predictors across both the single–factor and multiple–factor predictive models. the single-factor predictive model indicates that cc and phe in the individual models are positive and statistically significant. also, in a multiple-factor based predictive model that jointly reflects the relationship of cc and phe on le, the study reveals a positive and significant effect of the predictors (cc and phe) on the regresand (le). what this means is that, both cc and phe induce life expectancy (le) in nigeria and this evidence finds support in some of the recent studies (abidemi et al., 2018; ilori et al., 2017; odhiambo, bunker, ingole, egondi, & oudin åström, 2018). though, the impact of cc which is captured by temperature does not conform with the general expectation of negative relationship (that is, increase in temperature is expected to reduce life expectancy). this result could demonstrate the fact that impact of climate change in nigeria has led to improvement in mitigation strategy. economy, 2025, 12(1): 1-7 6 © 2025 by the authors; licensee asian online journal publishing group table 4. in-sample forecast performance results. forecast performance measures cc_model phe_model cc_phe_model remark (preferred model) rmse 18.2 10.9 9.21 cc_phe_model armse 8.58 5.10 4.14 cc_phe_model note: the model with the least rmse and armse values is considered the most accurate to forecast climate change. the in-sample forecasting power of the predictors is determined to ascertain which of the predictive models is the most accurate and appropriate for our out-of-sample and scenario analysis. table 4 explains the in-sample forecasts performance of the alternative predictive models under consideration namely cc_model, phe_model and cc_phe_model, respectively. the results of the rmse and armse find that the predictive model that jointly includes both cc and phe is the most accurate to forecast le in nigeria. table 5. out-of-sample forecasts, scenario analysis and ranking of life expectancy. scenario year 1 2 3 4 5 6 7 8 2023 50.0 48.9 54.9 54.7 46.3 45.0 45.2 46.2 2024 58.0 55.3 63.0 62.3 44.0 40.5 41.3 43.3 2025 59.8 55.7 70.8 69.6 41.8 36.5 37.7 40.6 2026 62.7 57.5 80.8 79.2 39.7 32.8 34.5 38.1 2027 66.8 60.6 93.2 91.2 37.7 29.6 31.5 35.8 rank 3rd 4th 1st 2nd 5th 8th 7th 6th note: the ranking is based on the life expectance increase impact of the scenario option. hence, scenario that causes consistent increase in life expectancy across all the five out-of-sample forecast horizons considered is ranked higher and it is in that order that we determine the ranking. haven established multiple-equation as the most accurate in the predictability of life expectancy, hence, the need for out-sample forecasts and scenario analysis to determine which policy option is the most suitable for life expectancy improvement in nigeria. table 5 presents the result of the out-sample forecast results, scenario analysis and ranking position of the scenarios, this study considers eight scenarios that could provide guide for policy makers to proffer policies that could increase life expectancy in nigeria. in the first and second scenario, we allow both cc and phe to follow their natural path using unequal weight moving average technique. that is, we allow cc to follow its conventional path and reduces phe by 5% and 10%, respectively. for the sake of just comparison, the third and fourth scenarios are nothing but direct opposite of the first and second scenarios. the fifth and sixth scenarios allow both cc and phe are reduced by 5% and 10% respectively. we also further check for seventh and eight scenarios where the former allow for cc reduction by 5% and 10% for phe. the eight scenario reverse the policy option of scenario seven which allows for percentage increase of cc to 10% and reduces the percentage of phe to 5%. using each of these scenarios, we projected for the impacts of cc and phe in the next five years (that is, 2023, 2024, 2025, 2026, and 2027) and observe that scenario three impact increases consistently more on life expectancy (le), thus, ranked the best for policy makers to improve le. 5. conclusion the relationship between climate change, public health expenditure and life expectancy is what this study examined in the quest to analyse the predictive impact of climate change and public health expenditure on life expectancy. also, the forecasting power of these predicting variables is examined on life expectancy for five years under eight potential policy options (scenarios) that can be adopted to improve life expectancy in nigeria. to accurately forecast, the study explored single-predictor and multiple-predictor equation and found that the multiple predictor equation was better, therefore, it was observed from the results of the chosen model that both climate change and public health expenditure positively impact on life expectancy. the positive impact of climate change suggests possible improvement in health facilities to mitigate its effect. this is suggestive in the result of public health expenditure as it positively impacts on life expectancy. on the forecasting outcome, it was discovered that scenario three was a better option to adopt to improving life expectancy in the next five years given its consistent increase. based on the aforementioned, the implication is that as climate change (temperature) impact intensified (or increase), the need for the improved healthcare facility to mitigate its accompanied effect like fever, malaria and other related sickness. references abidemi, o., alabi, t., & olatunji, o. 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(2023). public health spending and health outcomes in africa. retrieved from https://www.who.int asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. https://doi.org/10.1086/259880 https://www.ipcc.ch/ https://doi.org/10.1016/j.jfineco.2002.11.002 https://doi.org/10.1289/ehp1745 https://doi.org/10.1289/ehp1745 https://doi.org/10.1016/j.enpol.2019.111178 https://doi.org/10.1016/j.energy.2014.11.033 https://www.undp.org/ https://doi.org/10.1093/jjfinec/nbu001 https://data.worldbank.org/ https://www.who.int/ https://www.who.int/ 146 © 2025 by the authors; licensee asian online journal publishing group economy vol. 12, no. 2, 146-155, 2025 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/economy.v12i2.7632 © 2025 by the authors; licensee asian online journal publishing group effects of macroeconomic variables on unemployment in kenya penina anyango1  maurice ombok2 benedict troon3 christopher maokomba4 ( corresponding author) 1,2,3,4school of business and economics, maasai mara university, kenya. 1email: anyangopenina2018@gmail.com 2email: ombokmaurice74@gmail.com 3email: troonbenedict@gmail.com 4email: maokomba@mmarau.ac.ke abstract unemployment remains a major global challenge, with uneven progress across regions towards the 3% target. in kenya, despite various interventions since independence, the issue remains unresolved and persistent. the aim of the study was to examine the effects of macroeconomic variables (economic growth, lending rate, development expenditure, and vat) on unemployment in kenya and provide empirical insights for designing policies to create employment. the study employed a time series research design to assess how changes in the macroeconomic variables under review influenced unemployment. the study adopted a two-regime markov switching model with all parameters switching on secondary data for the period 1991-2024. regime 1 represents a period of stagnating unemployment, while regime 2 represents a period of trend unemployment. the findings established that in both regimes, while economic growth significantly reduced unemployment, development expenditure was found to significantly increase unemployment. conversely, the lending rate reduced unemployment, but the effect was only significant in regime 2. similarly, vat significantly increased unemployment only in regime 2. the findings imply that policymakers should promote sustainable and inclusive growth, while strategically allocating development funds to sectors that are labor-intensive and have high employment potential to create more employment opportunities and reduce unemployment. additionally, they should enhance access to credit and consider targeted vat reforms, such as exemptions or reductions of vat rates, especially during periods of trend unemployment. keywords: kenya, macroeconomic variables, unemployment, markov switching model, regimes, time series design, keynesian theory. citation | anyango, p., ombok, m., troon, b., & maokomba, c. (2025). effects of macroeconomic variables on unemployment in kenya. economy, 12(2), 146–155. 10.20448/economy.v12i2.7632 history: received: 24 september 2025 revised: 15 october 2025 accepted: 20 october 2025 published: 31 october 2025 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. institutional review board statement: not applicable. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. this study followed all ethical practices during writing. competing interests: the authors declare that they have no competing interests. authors’ contributions: all authors contributed equally to the conception and design of the study. all authors have read and agreed to the published version of the manuscript. contents 1. introduction .................................................................................................................................................................................... 147 2. literature review .......................................................................................................................................................................... 148 3. methodology ................................................................................................................................................................................... 150 4. results and discussion ................................................................................................................................................................. 151 5. discussion ........................................................................................................................................................................................ 153 6. conclusions ..................................................................................................................................................................................... 154 7. recommendations .......................................................................................................................................................................... 154 references ............................................................................................................................................................................................ 154 mailto:anyangopenina2018@gmail.com mailto:ombokmaurice74@gmail.com mailto:troonbenedict@gmail.com mailto:maokomba@mmarau.ac.ke https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v12i2.7632 https://orcid.org/0000-0002-3226-7821 https://orcid.org/0009-0004-3150-6386 economy, 2025, 12(2): 146-155 147 © 2025 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this paper contributes to the existing literature by utilizing the markov switching model to examine the effects of macroeconomic variables on unemployment in kenya. this study narrows its focus to vat, development expenditure, and lending rates, in contrast to previous studies that examined broader indicators such as taxation, government expenditure, and general interest rates. 1. introduction unemployment remains a persistent global challenge and a key concern for policymakers. in tracking progress towards achieving sdg goal 8, specific thresholds have been established. the target is considered met if the unemployment rate is 3% or less (united nations, 2022). however, sodergren, kettler, sulak, and payne (2023) report that this target remains unmet both globally and across all regions. although the global unemployment rate appears to be low, significant regional disparities exist. asia and the pacific are relatively close to achieving the target, while the arab states and africa lag far behind due to high and increasing unemployment, as shown in figure 1. figure 1. trends of global and regional unemployment rates. source: ilo database. since independence, some of the interventions undertaken by kenya to address unemployment included shortterm employment interventions, such as public works programs and targeted youth funds, while medium-term strategies focused on sectoral policy reforms. these were complemented by broader macroeconomic initiatives to modernize agriculture, boost industrialization, and improve labour market efficiency through education and regulatory updates (omondi, 2013). despite adopting these interventions, kenya experienced a sharp and unexplained increase in the unemployment rate since 2017, which peaked in 2021 as shown in figure 2. figure 2. trend of kenya's unemployment rate from 1991 to 2024. source: world bank data bank. economy, 2025, 12(2): 146-155 148 © 2025 by the authors; licensee asian online journal publishing group while factors like public sector downsizing, election uncertainty, development plan blueprints, and pandemics such as covid-19 provide partial context, the precise impact of key macroeconomic drivers on unemployment in kenya remains unclear. for instance, the sharp unemployment spike between 2017 and 2022 occurred despite favorable macroeconomic indicators; rising development expenditure, stable vat rates, and falling lending rates, as shown in figure 3. this may indicate a disconnect between macroeconomic performance and labour market outcomes, suggesting deeper investigations into how macroeconomic variables interact to influence unemployment in the kenyan context. figure 3. trend of kenya’s unemployment rate and macroeconomic variables under review. despite extensive research, no consensus exists on the precise impact of the variables above on unemployment. furthermore, previous studies have focused on broad policy tools such as overall tax revenue, government expenditure, and general interest rates. therefore, this study fills the gap by providing a deeper empirical analysis of how vat, development expenditure, and the commercial lending rate influence unemployment trends in kenya. the general aim of this study is to determine the effect of the selected macroeconomic variables on unemployment in kenya. to achieve this, the study will be guided by four specific objectives: first, to determine the effect of commercial lending rates on unemployment; second, to examine the impact of development expenditure; third, to evaluate the influence of value added tax (vat); and finally, to analyze the effect of economic growth on unemployment trends in kenya. 2. literature review the study was guided by keynesian theory and okun’s law. keynesian theory postulates that, in the short run, employment is determined by effective demand, implying that unemployment is caused by a deficiency in aggregate demand. since labour demand is a ‘derived’ demand, high unemployment can be solved by increasing the demand for goods through an increase in disposable income, a reduction in interest rates, and increasing government spending. on the other hand, okun’s law was used to investigate the link between the unemployment rate and economic growth. the theory argues that a 3 per cent increase in output reduces the unemployment rate by 1 per cent. 2.1. empirical literature several studies have been conducted in an attempt to understand the impacts of macroeconomic variables on the unemployment rate using different methodologies and empirical approaches. 2.1.1. lending rate and unemployment rate lloyd (2024) studied the effects of inflation, gdp, interest rate, and policy rate on unemployment in ghana using time series data for the period 2000-2021. the study employed a multiple regression analysis and found that the lending rate had a positive and significant effect on unemployment. musiita, kijjambu, and katarangi (2024), using annual data from 1987 to 2019, analyzed the impacts of input costs (lending rate, global crude oil prices, and gdp) on unemployment in uganda. the study employed the autoregressive distributed lag (ardl) model and found that lending rates had a short-term negative impact on unemployment, while in the long run, a positive relationship was established between the lending rate and unemployment. chinonye (2021) studied the impact of fiscal (government expenditure and taxes) and monetary policy (interest rate and money supply) on unemployment in nigeria. the study utilized a vector autoregressive model on time series data for the period 1981-2020 and found that interest rates had a negative and significant effect on unemployment at lag 2. maijama’a and musa (2021) in the study on the nexus between crude oil, interest rates, and unemployment in nigeria applied toda and economy, 2025, 12(2): 146-155 149 © 2025 by the authors; licensee asian online journal publishing group yamamoto's long-run granger causality on time series data from 1991 to 2019. the findings indicated a one-way causality running from unemployment to interest rates. mahadika and wibowo (2021) assessed the influence of monetary policy (real interest rate, real exchange rate) and economic growth on the unemployment rate in indonesia using time series data for the period spanning 1975-2016. the study employed autoregressive distributed lag (ardl) and established that the real interest rate at lag 1 had a negative and significant effect on the unemployment rate in the short run. aboelsoud, alqudah, and paparas (2021) examined the dynamic relationship between london interbank offered rate (libor), the unemployment rate, and economic growth in the united kingdom. the study employed the vector autoregressive model and granger causality test on quarterly data for the period 1992 to 2016 and established no short-run relationship between libor and the unemployment rate. furthermore, the granger causality test indicated no directional causality between libor and unemployment. 2.1.2 economic growth and unemployment rate abdisalan (2024) empirically examined the relationship between gdp and unemployment in somalia using secondary data from 2000 to 2021. the study applied ordinary least squares (ols) and established that economic growth had a negative and insignificant effect on unemployment. in addition, modified ordinary least squares (fmols), canonical cointegrating regression (ccr), and dynamic ordinary least squares (dols) were employed, and the relationship between the gdp gap and unemployment was not strong enough to be considered statistically significant. lestari (2023) assessed the effect of economic growth and labor force on unemployment in langsa city, indonesia. the study employed multiple linear regression analysis on secondary data spanning 2011-2020 and found that economic growth had a negative and insignificant effect on unemployment. tembo (2023) studied the effects of economic growth, real effective exchange rate, external debt, and inflation rate on unemployment in zambia. the study used vector error correction model (vecm) on quarterly time series data from 1990 to 2020, and findings revealed that in the short run, economic growth had a negative significant effect on unemployment at lag 2. chenini, ayad, attouchi, and dahmani (2023) analyzed the existence of okun’s law in algeria from 1970 to 2020. the study employed both the gap and differences model and established that economic growth had no significant effect on unemployment. leasiwal, oppier, tutupoho, and palloma (2022) investigated the effect of economic growth, minimum wage, and the human development index on unemployment in indonesia by utilizing secondary data from 2001 to 2020. the study employed vector error correction model (vecm), and the findings showed that both in the short and long run, economic growth had a positive and significant impact on the unemployment rate. sotonye, zeb-obipi, and konya (2021) examined the effect of gross national product (gnp), gross domestic product (gdp), and per capita income (pci) on unemployment reduction in nigeria using time series data for the period 1995-2019. the study employed ordinary least squares and established that gross domestic product (gdp) had a positive but insignificant effect on unemployment. hjazeen, seraj, and ozdeser (2021) examined the relationship between the unemployment rate, economic growth, education, female population, and urban population in jordan. the study employed auto-regressive distributed lag (ardl) model on data spanning 1991–2019 and established that economic growth had a negative and statistically significant effect on unemployment. katumo and maingi (2020) analyzed the relationship between youth unemployment and economic growth, inflation rate, fdi, and minimum wage. the study employed the granger causality test and regression analysis on secondary data for the period 1991-2015 and found a unidirectional relationship between youth unemployment and economic growth, with causality running from economic growth to youth unemployment, while regression output indicated that economic growth had positive and significant effects on youth unemployment. usha (2020) assessed the relationship between unemployment and economic growth in mauritius. the study adopted autoregressive distributed lag (ardl), ardl error-correction model (ardl-ecm) using the ordinary least squares (ols) approach and okun’s law-gap version on annual data for the period spanning 19832017. the findings indicated that both in the long run and short run, there is a negative and insignificant relationship between economic growth and unemployment, whereas okun’s coefficient predicted that a 4 percent increase in gdp would reduce unemployment by 1 percent. 2.1.3. development expenditure and unemployment rate wandile, semosa, and ogujiuba (2024), in a study on the effect of socio-economic variables (government expenditure, economic growth, and population growth) on unemployment in south africa, a vector error correction model (vecm) was employed on time series data covering the years 1980 to 2020. the findings established a positive and significant effect of government expenditure on unemployment. ibrahim (2023) examined the impact of fiscal policy tools (tax revenue, government expenditure, foreign direct investment (fdi), and domestic investment) on the unemployment rate in nigeria between 1991 and 2021. the study applied the autoregressive distributed lag model (ardl) and established that in the long run, government expenditure had a positive and significant effect on unemployment. in the short run, lagged government expenditure had a positive impact on the unemployment rate. hammad et al. (2023) assessed the effect of public spending on the unemployment rate in iraq using quarterly time series data for the period 2004-2021. the study used the autoregressive distributed lag model (ardl) and found that in the short run, public spending had a positive and insignificant effect on unemployment at lags 1 and 2. however, at lags 3 and 4, public spending had a negative and insignificant effect on unemployment. further, in the long run, public spending had a negative and insignificant effect on unemployment. kinuthia (2022) assessed the validity of the phillips curve in the kenyan economy by examining the effect of inflation, money supply, and government expenditure on unemployment. the study employed auto-regressive distributed lag (ardl) and error correction model (ecm) on annual secondary time series data from 1991 to 2020. government expenditure had a negative and insignificant effect in the short run, while in the long run, it had a positive but insignificant effect on unemployment. enyoghasim and hycenth (2022) analyzed the effect of fiscal policy tools (inflation rate, interest rate spread, gross fixed capital formation, government recurrent expenditure, government capital expenditure, and debt servicing) on unemployment in nigeria by applying autoregressive distributed lag (ardl) on annual data for the period 1981 to 2011. the economy, 2025, 12(2): 146-155 150 © 2025 by the authors; licensee asian online journal publishing group findings indicated a negative and insignificant effect of government recurrent expenditure on unemployment, while government capital expenditure had a positive and significant effect on unemployment. abdullahi and haruna (2021) studied the impact of fiscal policy instruments (external debt, recurrent expenditure, capital expenditure, and tax revenue) on unemployment in nigeria using data from 1986 to 2020, and employed the autoregressive distributed lag (ardl) model. the results revealed that recurrent expenditure had a positive but insignificant effect, while capital expenditure had a positive and significant impact on unemployment in nigeria. mungai and korir (2020) analyzed the effect of fiscal policy (government expenditure), inflation, population, and economic growth on unemployment in kenya using time series data over the period 1986-2017. the study employed ols and found that government expenditure had a positive and significant effect on unemployment. saraireh (2020) empirically examined the effect of government expenditure, private investment, development assistance, and gross fixed capital formation (gfcf) on unemployment in jordan. the study utilized autoregressive distributed lag (ardl) on annual data for the period 1990 to 2019, and findings revealed that in the long run, government expenditure had a negative and significant effect on unemployment, while in the short run, it had a positive and significant effect on unemployment. 2.1.4 vat on unemployment olabiyi, etong, olaniyan, and akinrinde (2024) assessed the impacts of vat on unemployment in nigeria but included the inflation rate and manufacturing output as control variables. the study employed the ardl model on time series data for the period 1994-2021 and found that, in the short run, vat had positive and significant effects on unemployment, while in the long run, vat had a negative and significant effect on unemployment. peter, olaolu, and nneka (2021) focused on the effects of tax revenues (with vat as one of the variables) on unemployment in nigeria. the study utilized ardl-ecm on secondary data spanning 1994-2020 and established that vat had a positive and significant effect on the unemployment rate in nigeria. kadenge (2021) assessed the effects of taxes (vat, income tax, customs, and excise duty) on economic performance in kenya. the study employed ols on secondary data for the period 2010-2020 and found that vat could reduce unemployment through its positive and insignificant effects on gdp. enueshike, dele, and nwala (2021) examined the effect of tax revenue (corporate taxes, customs tax, excise duty, and vat) on unemployment in nigeria from 1994 to 2020. the study used ardl-error correction model (ecm) and established that vat had a positive and significant effect on unemployment in nigeria. anichebe (2019) examined the effect of tax policy (specifically company income tax, personal income tax, and customs and excise duty) on unemployment in nigeria. the study employed ols on time series data from 1981 to 2017 and established a positive and significant effect of vat on the unemployment rate. 3. methodology the study employed a time series research design due to its suitability in detecting long-term patterns and the impact of policy changes and economic shocks. this will enable the study to examine how macroeconomic variables influence unemployment trends over the review period. 3.1. model specification unemployment was defined as a function of lending rate, vat, development expenditure, and economic growth, as shown below: unemployment = f(lending rate, vat, development expenditure, economic growth) (1) log transformation was applied to the development expenditure to reduce data skewness. the study employed time series data, and equation 1 will be rewritten as: 𝑌𝑡 = 𝛽0 + 𝛽1𝑋1𝑡 + 𝛽2𝑋2𝑡 + 𝛽3𝑋3𝑡 + 𝑙𝑛𝛽4𝑋4𝑡 + 휀, 휀~𝑁(0, 𝛿2) (2) where: y represents unemployment, x1 represents the commercial lending rate, x2 represents the log of development expenditure, x3 represents the economic growth rate, and x4 represents vat. to correct the autocorrelation issue, an ar (1) term was introduced into equation 2 and rewritten as: 𝑌𝑡 = 𝛽0 + 𝛽1𝑋1𝑡 + 𝛽2𝑋2𝑡 + 𝛽3𝑋3𝑡 + 𝛽4𝑋4𝑡 + ∅𝑌𝑡−1 + 휀 (3) since a break was anticipated, the study employed a markov switching model (hamilton, 1989) to account for the break. let st represent the unobserved state. a markov switching linear model can be stated as follows: y𝑠𝑡 = 𝛽0,𝑠𝑡 + 𝛽1,𝑠𝑡𝑋1𝑡 + 𝛽2,𝑠𝑡𝑋2𝑡 + 𝛽3,𝑠𝑡𝑋3𝑡 + 𝛽4,𝑠𝑡𝑋4𝑡 + ∅𝑠𝑡𝑌𝑡−1 + 휀𝑖𝑡 , ε𝑡𝑖 ~𝑁(0, 𝜎𝑠𝑡 2 ). (4) where; 𝑆𝑡 𝜖{1 … 𝐾} (5) assuming there are k interdependent regimes and that the markov property holds, such that the future state st+1 depends only on the current state st, then a first-order markov process’s transition probabilities will be given as: 𝑃(𝑆𝑡+1 = 𝑗|𝑆𝑡 = 𝑖) = 𝑃𝑖𝑗 (6) under the assumptions given, the aggregated state transitions will be described with a transition probability matrix: 𝑃 = [( 𝑝𝑖1 ⋯ 𝑝1𝑖 ⋮ ⋱ ⋮ 𝑝1𝑖 ⋯ 𝑝𝑖𝑖 )] (7) the transition probability matrix and the coefficients of the markov switching model were estimated using the maximum likelihood method with the em algorithm. 3.2. data type and data sources this study employed secondary data from multiple sources between 1991 and 2024. unemployment rates were obtained from the world bank development indicators database, while data on economic growth, lending rates and government expenditure were sourced from the annual economic survey reports published by the kenya economy, 2025, 12(2): 146-155 151 © 2025 by the authors; licensee asian online journal publishing group national bureau of statistics (knbs). for value-added tax (vat) rates, the study compiled a comprehensive time series by combining three sources: karingi and wanjala (2005) provided historical vat data for 1991–2004, omondi (2020) covered 2005–2016, and more recent records (2016–2024) were extracted from kra. 3.3. data analysis 3.3.1. pre-estimation tests these are tests conducted on the data before fitting the model. descriptive statistics provided an overview of the observed data and included: means, standard deviations, minimums, and maximums. since the study employed time series data, a stationarity test was conducted. a stationarity test is done to prevent spurious results and help guide the model to be applied in the study. the study employed the phillips-perron test to assess the stationarity of the variables. a structural break test was conducted using the bai-perron test due to its ability to detect multiple breaks. the optimal number of breaks was selected via the lowest bic value. 3.3.2. post-estimation test after model estimation, post-estimation tests were conducted to ensure the reliability and validity of the model, as they influence the accuracy and usefulness of the estimates. to assess the validity of the markov switching model, various diagnostic tests were performed. the ljung-box test was employed to test for autocorrelation since it can detect higher-order autocorrelation. the normality assumption was tested using the jarque-bera test. the arch test was used to check for arch effects on both residuals and squared residuals of the markov switching model. to check if the coefficients are significantly different, 95% confidence intervals were computed for each coefficient in regimes 1 and 2. 4. results and discussion table 1 gives the descriptive summary on key variables under review, including measures of central tendency (mean and median), and variability (minimum, maximum, and standard deviation). table 1. descriptive statistics of the variables for the period 1991-2024. economic growth rate lending rate development expenditure vat unemployment rate minimum -0.200 -3.000 9076 14.00 2.650 maximum 7.600 31.500 133655 18.00 5.707 mean 3.847 10.380 239682 16.35 3.352 median 4.650 8.720 625780 16.00 2.855 standard deviation 2.208 7.799 1.460 1.041 1.054 the analyzed variables displayed a wide range of volatility, with vat and unemployment rates remaining relatively stable while commercial lending rates were highly volatile. economic growth averaged 3.9%, with its peak of 7.6% attributed to post-lockdown recovery and its low of -0.2% caused by sectoral poor performance and high inflation. the lending rate averaged 10.4%, swinging from -3% to 31.5%, and development expenditure also showed significant variation between its high and low points. finally, the vat rate demonstrated low volatility, fluctuating only between 14% and 18% with an average of 16.4%. the results of the phillips-perron (pp) test are presented in table 2. the results indicate that economic growth, lending rate, and vat were stationary at the level, while development expenditure became stationary only after first differencing. however, after differencing the unemployment rate ten times, it remained non-stationary. this suggests a potential structural break in the unemployment rate data. table 2. results of stationarity test. variable phillips-perron statistic at level phillips-perron statistic after differencing p-value at level p-value after differencing order of integration unemployment -1.200 -4.071 0.883 0.873 unknown economic growth -24.888 0.01 i(0) lending rate -5.218 0.01 i(0) vat -20.631 0.026 i(0) development expenditure -8.087 -42.094 0.613 0.01 i(1) given the unemployment rate's persistent non-stationarity despite differencing, the study employed the baiperron multiple structural break test to identify structural breaks in the unemployment rate series and the results are presented in table 3. table 3. results of the structural break test. breaks (m) breakdates rss bic 0 – 36.672 106.113 1 2017 2.313 19.201 2 2012, 2017 2.275 25.696 3 2004, 2012, 2017 2.165 31.067 4 1995, 2004, 2012, 2017 2.161 38.048 5 1995, 2000, 2005, 2012, 2017 2.173 45.289 economy, 2025, 12(2): 146-155 152 © 2025 by the authors; licensee asian online journal publishing group model selection criteria indicated a single statistically significant breakpoint in 2017, supported by a bic value of 19.201 (the lowest) and a significant reduction in the residual sum of squares (rss) observed between the null model (m = 0) and the single-break model (m = 1). 4.1. markov switching model a markov switching model was fitted to capture potential regime-dependent dynamics in the data. a baseline linear regression model was fitted to the data before estimating a markov switching model, and results are presented in table 4. table 4. results of the baseline linear regression model. variables estimate std. error t-value p-value intercept -2.016 4.219 -0.478 0.636 gdpg -0.104 0.092 -1.132 0.267 clr 0.005 0.022 0.218 0.829 lndevexp 0.494 0.167 2.963 0.006 ** vat -0.0004 0.183 -0.002 0.998 aic=97.903 bic=107.062 log lik. = -42.952 residual standard error: 0.927 note: signif. codes: 0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1. a two-regime ms-ar model with all parameters switching was fitted. regime 1 indicates a period of stagnating unemployment, whereas regime 2 represents a period of trend unemployment. table 5 presents the results of the fitted markov switching model. table 5. results of markov switching model with all variables switching. regime 1 model variables estimate std. error t-value p-values intercept (s) -0.042 0.174 -0.261 0.812 gdpg (s) -0.026 0.004 -6.023 1.709e-09 *** clr (s) -0.001 0.001 -0.889 0.374 lndevexp (s) 0.026 0.01 3.321 0.001 *** vat(s) 0.002 0.008 0.200 0.841 unempr_1(s) 0.94 0.010 95.959 < 2.2e-16 *** residual standard error: 0.03521215 note: s=switching implying that the variable is switching regime 2 model variables estimate std. error t-value p values intercept (s) -21.209 0.218 -97.513 < 2.2e-16 *** gdpg (s) -0.066 0.009 -7.152 8.540e-13 *** clr (s) -0.020 0.005 -4.533 5.807e-06 *** lndevexp (s) 1.682 0.028 59.660 < 2.2e-16 *** vat(s) 0.079 0.030 2.629 0.009 ** unempr_1(s) 0.703 0.009 76.424 < 2.2e-16 *** residual standard error: 0.006 aic= -104.642 bic= -44.77 transition probability matrix regime 1 regime 2 regime 1 0.924 0.283 regime 2 0.076 0.717 note: s=switching implying that the variable is switching diagnostic checks were performed on the model assumptions to ensure that the results were valid and reliable, and the results are presented in table 6. the results show that the model satisfied all the assumptions. table 6. diagnostic test results for the markov switching model with all variables switching. diagnostic test statistic p-value conclusion normality 0.559 0.756 residuals normally distributed autocorrelation 12.297 0.266 no autocorrelation arch test on residuals 8.701 0.728 no arch effect on residuals arch test on squared residuals 7.117 0.850 no arch effect on squared residuals the study proceeded to interpret the model since it satisfied all the assumptions. the markov switching model equation is given by: unempt = −0.042 − 0.026gdpgt − 0.001clrt + 0.026lndevexpt + 0.002vatt + 0.940unempt−1, st = 1 (8) unempt = −21.21 − 0.066gdpgt − 0.020clrt + 1.682lndevexpt + 0.079vatt + 0.703unempt−1, 𝑆𝑡 = 2 (9) holding other factors constant, a 1% increase in economic growth reduces unemployment by 0.026% and 0.066% in regime 1 and regime 2, respectively. while economic growth is significant in both regimes, it has a stronger impact on unemployment in regime 2 compared to regime 1. economy, 2025, 12(2): 146-155 153 © 2025 by the authors; licensee asian online journal publishing group the lending rate coefficients of -0.001 in regime 1 and -0.020 in regime 2 imply that an increase in the lending rate by 1% decreases the unemployment rate by 0.001% in regime 1 and 0.020% in regime 2, holding other factors constant. the lending rate was statistically significant in regime 2 but insignificant in regime 1. an increase in development expenditure by 1% increased unemployment by 0.00026% in regime 1 and 0.0168% in regime 2, holding other factors constant. it was significant at 0.05 in both regimes. on the other hand, an increase in vat rate by 1% in regime 1 and regime 2 increased unemployment by 0.0016% and 0.079%, respectively. however, the impact of vat on unemployment is significant in regime 2 at 0.05 but insignificant in regime 1. in regime 1, unemployment in the previous period increases current unemployment by 0.94%, and by 0.70% in regime 2. both effects are significant at the 0.05 level in both regimes. the transition probability matrix in table 5 indicates that when the process is in regime 1, the probability of remaining in that regime is 92.4%, while the probability of transitioning to regime 2 is 28.3%. conversely, when the process is in regime 2, the probability of remaining in regime 2 is 71.7%, while the probability of transitioning to regime 1 is 7.6%. furthermore, the expected duration for regimes 1 and 2 is 13.6 and 3.5 periods, respectively. this suggests that regime 1 is highly persistent, whereas regime 2 is short-lived. significant differences in parameter estimates across regimes were assessed using 95% confidence intervals, and the results are presented in table 7. table 7. a 95% non-overlapping confidence interval. variable regime 1 ci [lower, upper] regime 2 ci [lower, upper] decision conclusion intercept [-20.72, -20.00] [-0.38, 0.26] no overlap in ci significant difference gdpg [-0.075, -0.064] [-0.035, -0.018] no overlap in ci significant difference clr [-0.014, -0.010] [-0.002, 0.001] no overlap in ci significant difference lndevexp [1.59, 1.61] [0.013, 0.044] no overlap in ci significant difference vat [0.074, 0.105] [0.013, 0.016] no overlap in ci significant difference unempr_1 [0.707, 0.725] [0.919, 0.958] no overlap in ci significant difference the results on unemployment rate projections, presented in table 8, show a slow and consistent decline in unemployment rates over the next 5 years. on the other hand, regime probability estimates indicate that while unemployment is likely to stay in the stagnating regime, the probability falls while the probability of shifting to the trend regime increases. table 8. 5-year period unemployment rate and probabilities forecast. unemployment rate forecast period 1 period 2 period 3 period 4 period 5 -0.0378 -0.036 -0.035 -0.035 -0.034 regime probabilities forecast regime 1 regime 2 period 1 0.766 0.234 period 2 0.653 0.347 period 3 0.593 0.408 period 4 0.557 0.443 period 5 0.536 0.464 5. discussion 5.1. economic growth rate and unemployment the study found that economic growth had a negative and statistically significant effect on unemployment in both regimes. this is consistent with okun’s law, which suggests that an increase in economic growth results in the creation of jobs and lower unemployment rates. the results align with findings of tembo (2023), leasiwal et al. (2022), and hjazeen et al. (2021). 5.2. commercial lending rate and unemployment contrary to the economic theory that a high lending rate increases the unemployment rate, the study established that a high commercial lending rate significantly reduced unemployment only in regime 2. this may be attributed to improved access to credit through the growth of digital loans, mobile money, and the 2019 repeal of the 2016 interest rate cap. the results agree with the findings of musiita et al. (2024) and chinonye (2021). 5.3. development expenditure and unemployment development expenditure had a positive and significant effect on unemployment in both regimes, with a stronger effect in regime 2. this contradicts keynesian theory, which postulates that an increase in government expenditure could reduce unemployment by boosting demand. the positive effect may be attributed to lag effects, mostly due to the time lag between project implementation and results realization in the form of job creation. further, funds may be allocated to capital-intensive projects. in addition, some projects provide short-term employment opportunities or jobs dominated by foreigners, or projects are stalled, further increasing unemployment. the results align with the findings of wandile et al. (2024), ibrahim (2023), enyoghasim and hycenth (2022), abdullahi and haruna (2021), and mungai and korir (2020). 5.4. vat and unemployment vat had a positive effect on unemployment, though statistically significant only in regime 2. the results align with economic theory that a high vat rate reduces consumer spending by decreasing purchasing power, economy, 2025, 12(2): 146-155 154 © 2025 by the authors; licensee asian online journal publishing group thus causing firms to cut production and lay off workers, increasing unemployment. the results resonate with the findings of peter et al. (2021), enueshike et al. (2021), and anichebe (2019). 6. conclusions economic growth significantly reduces unemployment in both regimes, highlighting the crucial role played in job creation. therefore, policymakers should prioritize growth-led policies. on the other hand, lending rates were found to reduce unemployment in both regimes, although the effect was significant only in regime 2. this suggests that increased access to credit facilities may offset the traditional adverse effect of high lending rates. contrary to keynesian theory, development expenditure significantly increased unemployment in both regimes. this may indicate inefficiencies in development expenditure, possibly due to time lag or allocation of funds to capitalintensive projects or projects that generate short-term employment. vat rates were found to increase unemployment; however, the effect was significant only in regime 2. this suggests vat can be harmful during trend unemployment, as it reduces demand. the non-overlapping confidence intervals, which confirmed that all coefficients differ significantly between regime 1 and regime 2, underscore that unemployment in kenya varies depending on the state of the economy. hence, uniform policy measures may not be effective in addressing unemployment across different regimes. furthermore, based on the forecast, the study concludes that although a slow but steady decline in the unemployment rate is expected over the next 5 years, the probability of kenya switching to trend unemployment in the next 5 years is increasing. this calls for long-term policies that will ensure the decline in unemployment is sustained and inclusive. 7. recommendations the study examined the impact of lending rates, development expenditure, vat, and economic growth on unemployment in kenya from 1991 to 2024. based on the findings, the study proposes several key recommendations. first, policymakers should implement growth-led policies designed to promote sustainable and inclusive economic expansion, with a specific priority given to sectors that have a high capacity for labour absorption. to further stimulate job growth, targeted vat reforms such as introducing exemptions or reducing rates during periods of high unemployment could boost consumption and create jobs. furthermore, development funds must be strategically allocated to labour-intensive sectors with high employment potential. this should be accompanied by robust frameworks for project monitoring, assessment, and transparency to ensure that public investment effectively translates into tangible job creation. in the financial sector, efforts should focus on promoting financial inclusion and implementing targeted credit policies, such as lowering lending rates for highemployment-potential sectors during economic downturns. the analysis also reveals a significant difference in variable coefficients between economic regimes, suggesting that policymakers should adopt flexible, regime-specific measures rather than applying uniform policies. finally, given the forecast of only a slow decline in the unemployment rate over the next five years, proactive policies are urgently needed to accelerate this projected decrease and achieve a more rapid improvement in the labour market. in light of these findings, future studies should undertake a comparative analysis of the effects of these macroeconomic variables on unemployment, consider how other types of taxes (corporate tax and pay as you earn) affect unemployment, and examine how interest rates (commercial bank rates such as savings and deposit rates, and overdraft and central bank rates such as treasury bill rates, central bank rate (cbr), repo rates, and interbank rates) influence unemployment. references abdisalan, m. a. 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(2024). effect of socio-economic variables on unemployment in south africa: a vector error correction model. journal of infrastructure, policy and development, 8(8), 5130. https://doi.org/10.24294/jipd.v8i8.5130 asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. https://doi.org/10.22219/jiko.v8i02.19854 https://doi.org/10.20473/jiet.v6i1.27100 https://doi.org/10.22610/jebs.v16i1(j).3711 https://doi.org/10.18276/ap.2024.57-09 https://doi.org/10.7176/ejbm/13-12-04 https://doi.org/10.18488/journal.8.2020.83.189.203 https://doi.org/10.1177/0974910119886934 https://doi.org/10.24294/jipd.v8i8.5130 8 © 2025 by the author; licensee asian online journal publishing group economy vol. 12, no. 1, 8-20, 2025 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/economy.v12i1.6524 © 2024 by the author; licensee asian online journal publishing group analysis and empirical study on the influencing factors of the tourism economy in hunan province lei wen guangxi city vocational university, chongzuo, guangxi., 532100, china. email: wenleiwda@163.com abstract tourism is a key driver of regional economic development and a foundational sector for national economic growth. understanding the factors influencing the tourism industry is crucial for policy and investment decisions. this study examines the determinants of tourism revenue in hunan province, china, from 2003 to 2019. using factor and regression analysis, the study investigates the impact of nine independent variables: rail and road travel distances, civil air passenger traffic, total number of tourists, art performance groups, gdp, urban and rural disposable income, and food and beverage consumption. all nine factors positively correlate with hunan’s tourism revenue, indicating that economic and infrastructural variables significantly influence tourism industry growth. strengthening tourism infrastructure, enhancing investment channels, and supporting supply-side reforms are essential for sustained growth. regional collaboration and innovation should be prioritized to drive long-term industry development. policymakers should focus on expanding tourism consumption capacity, improving connectivity, and fostering an innovation-driven tourism economy to enhance regional and national economic benefits. keywords: consumption ability, infrastructure and investment, regional economic development, supply-side reform, tourism industry growth, tourism revenue. citation | wen, l. (2025). analysis and empirical study on the influencing factors of the tourism economy in hunan province. economy, 12(1), 8-20. 10.20448/economy.v12i1.6524 history: received: 6 february 2025 revised: 4 march 2025 accepted: 14 march 2025 published: 24 march 2025 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this research is supported by the humanities and social sciences research project of the ministry of education of china (grant number: 23xjc760003), the shaanxi provincial social science foundation project (grant number: 2023gm03), and the shaanxi provincial social science planning project (grant number: 2023zd1825). transparency: the author confirms that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. this study followed all ethical practices during writing. data availability statement: lei wen may provide study data upon reasonable request. competing interests: the author declares that there are no conflicts of interests regarding the publication of this paper. contents 1. introduction ..................................................................................................................................................................... 9 2. literature review ........................................................................................................................................................... 9 3. research methods ........................................................................................................................................................ 10 4. conclusions and suggestions ..................................................................................................................................... 17 references .......................................................................................................................................................................... 19 mailto:wenleiwda@163.com https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v12i1.6524 https://orcid.org/0000-0001-9881-2290 economy, 2025, 12(1): 8-20 9 © 2025 by the author; licensee asian online journal publishing group contribution of this paper to the literature this study uniquely combines economic, transportation, and cultural factors to analyze tourism revenue in hunan province. unlike previous research, it integrates urban and rural income effects with tourism-related cultural activities, providing a comprehensive, data-driven perspective on tourism growth from 2003 to 2019. 1. introduction since the reform and opening up, the growth of china's tourist sector has accelerated (chai, li, bao, zhu, & he, 2021). the tourist sector's rapid growth has produced excellent outcomes, holding a significant place in the worldwide tourism market (ma et al., 2021). tourism is not just an economic and social activity, but also a cultural and social one. in comparison to other businesses, tourism also comprises components like food, lodging, transportation, travel, shopping, and entertainment (li et al., 2021). due to the expansion of the economy and the rise in demand for tourist consumption, tourism in hunan has seen unheard-of growth (hao, niu, & wang, 2021). the hunan provincial bureau of statistics reported in 2020 that the tourist sector in hunan contributed up to 245.765 billion yuan in revenue in 2019. in general, tourism is crucial for supporting the nation's economic growth, preserving jobs, and preserving people's means of subsistence (xie, zhang, sun, chen, & zhou, 2021). furthermore, there is a dearth of studies on the elements that have contributed significantly to the fast growth of china's tourist industry (qi, wu, wang, & wang, 2021). according to calculations based on data from the national bureau of statistics of china (2018) and the hunan provincial tourism industry value added accounting scheme (figure 1), the added value of tourism and related industries in hunan province in 2019 was rmb245.765 billion, a 10.17 percent increase in current prices over the same period the previous year; it accounted for 6.18 percent of gdp, a 0.06 percentage point increase over the previous year. the tourist industry in hunan had a surge from 2014 to 2019, as seen in the graph below. the data specifically from 2014, 141.946 billion yuan to 245.765 billion yuan in 2019, the industry's added value of about 100 billion yuan, completely indicates the tourist industry's tremendous potential for growth in hunan province. in light of this backdrop, hunan province has established several administrative laws to assist the growth of the tourist industry and places a high value on them (zhang & ju, 2021). the necessity to enhance the supply of services and speed up the growth of the cultural, tourism, and other service sectors is emphasised in both the 2035 vision and the 14th five-year plan for economic and social development. based on the many benefits of tourist manufacturing, tourism is seen as the industry of choice in many districts of hunan. in light of this, a detailed analysis of the variables that have affected the growth of the tourist sector is both theoretically and practically very valuable (yang et al., 2021). through factor analysis and regression analysis, this paper empirically investigates the factors influencing the tourism economy in hunan province. by identifying the factors that contribute to the growth of the tourism industry in hunan province, it also offers a new theoretical framework for the development of the industry in other regions. figure 1. value added and proportion of tourism and related industries in hunan province from 2014 to 2019. 2. literature review 2.1. overview of tourism tourism in hunan is quickly developing into a cornerstone sector with significant growth potential because to its robust radiation function and strong driving capacity. the tourism sector is a diverse one that has a high level of significance and a significant driving force (matthews, scott, & andrey, 2021). the world tourism organization has reported that the economic multiplier impact of the tourism industry is much larger than that of other businesses (usman, yaseen, kousar, & makhdum, 2021). in addition to being directly connected to the transportation, hospitality, and commodity trade sectors, the tourism industry also indirectly drives and influences the growth of other sectors such as agriculture, industry, urban development, and culture (lin, ling, lin, & liang, 2021). this can help to accelerate the development of contemporary service sectors like insurance and information. the tourist business is broad and diverse, and because of this, it has a clear driving force that may help one industry grow and benefit a hundred others (liu, chou, & lin, 2021). the hunan region's ecological surroundings, as well as its natural and humanistic scenery, may be greatly improved by the tourist business, which also uses very few resources while exerting a significant radiation effect (chen, bi, & li, 2021). hunan has recently put a lot of resources—both financial and human—into urban greening, old city restoration, new neighbourhood building, road reconstruction, river management, etc. the quality and cultural development of residents have generally economy, 2025, 12(1): 8-20 10 © 2025 by the author; licensee asian online journal publishing group improved, which has significantly improved the city's ecological environment and investment climate, created the perception of excellent tourist cities with their own distinctive qualities and brands, and opened up new opportunities for the growth of tourism in hunan province. therefore, concentrating just on these elements is still insufficient if an area wishes to build its tourist business in a sustainable and stable manner (chenghu, arif, shehzad, ahmad, & oláh, 2021). therefore, it is explored what elements influence the growth of the tourist sector and if there are variances in the strength of the impact of various aspects. the key drivers of the tourist economy may be efficiently identified by analysing and examining these topics, which is very important for the modernization and transformation of the tourism industry (obeidat, alalwan, baabdullah, obeidat, & dwivedi, 2022). scholars are now researching and analysing the aspects that affect the growth of the tourist industry. according to preliminary results, current academics are mostly focused on how tourist resources influence tourism economic growth and see tourism resources as the primary driving force behind travel (huang, wang, wang, cheng, & dai, 2021). the body of research demonstrates that key determinants of how the tourism sector develops include the environment, climate, and industrial makeup of tourist locations. the subjective demand elements of visitors, such as their individual preferences, one-time income, and free time, are the primary variables influencing the growth of contemporary tourism, followed by the objective supply aspects of tourism resources, such as tourism enterprises, facilities, and resources (ho, quang, & miles, 2022). the growth of tourism is also influenced by external environmental elements such as political, economic, cultural, and emergency contexts. by performing factor and regression analyses on the overall growth of the tourist economy in hunan province, this research investigates the elements that are significant in fostering the development of china's tourism industry (shi, xu, & xu, 2021). 2.2. main problems of tourism development in hunan province 2.2.1. the overall characteristics are not bright enough although each of hunan's tourist resources has unique qualities, none stand out in particular. it seems a little unfair to use slogans like "famous mountains, water, buildings, and cities" and "scenic hunan, a little township with humanities." feel the cloud town, excellent hunan, fiery hunan, lovely town, joyful hunan, and other newly discovered areas. the emerging topics in tourism are often not widely understood. the primary focus is inactive even amid a beautiful landscape. hunan has several well-known landmarks and tourist attractions, but the sector is underdeveloped and there is little awareness of regional collaboration. hunan is a significant tourist destination with a wide variety of tourist attractions. according to certain estimates, hunan is one of the top eight chinese cities for overall tourist resources. 2.2.2. unreasonable development of tourism resources hengshan and dongshan are two of the many natural tourist attractions in hunan. and although this is a significant factor in the rise of customers coming in person in recent years, there are some issues with the growth of the resources. first of all, there is not enough preparation. hunan has a lot of resorts for tourists, but they are primarily small-scale and individual. in particular, some areas solely take into account local interests while ignoring the bigger picture. additionally, the growth of tourist resorts will not take into account the full benefits without a cohesive framework (johnston, crooks, & ormond, 2015). second, it unravels invisibly. the national tourist business has been booming in recent years. particularly with the growth of tourists, some underdeveloped and impoverished places have thrived, and many towns and industries have started to promote tourism recklessly. regardless of the specific circumstances in any location, numerous tourist initiatives are nearing their conclusion. last but not least, the former administration has been fired. major oversights existed in the prior administration of a number of tourist sites. they drew a lot of tourists and produced a lot of money, yet they nevertheless seriously harmed the environment's ecology. 2.2.3. tourism brand construction is backward problems with hunan's tourist brand are mostly seen in the following areas: first off, hunan has numerous tourist resorts, although they are often of good quality. however, the placement of the tourism brand is unclear. innovative brand architecture in the tourism industry is lacking, and many businesses struggle to define themselves (guo & shi, 2022) because it is challenging to draw attention to the same kinds of tourist attractions. second, hunan province has not paid enough attention to the development of its tourist brand and influence. advertising is insufficient, and marketing in a single channel has not been effective enough in recent years. while zhangjiajie wulingyuan scenic spot has awareness in local and international markets at the moment, other tourist attractions still need to increase their brand impact. 3. research methods 3.1. variable selection and data sources this paper uses tourism income as the dependent variable and the nine independent variables of railway mileage, road mileage, civil air passenger traffic, total number of people receiving tourism, art performance groups, gross domestic product of hunan province, disposable income of urban residents, disposable income of rural residents, and food and beverage companies as the independent variables. the research data used in this work covers the years 2003 to 2019, and they were gathered from the hunan statistical yearbook and the hunan tourism statistical bulletin between those years, taking into account the accessibility of research data and the stability of research findings. the following introduces the pertinent variables (table 1). tourism income (ti). revenues from tourism there is a clear correlation between tourist earnings and the growth of tourism. tourist income is a significant measure of hunan's tourism economic growth, hence (bano, alam, khan, & liu, 2021). railway mileage (rm). in general, cross-regional consumption experiences for visitors are what we mean by tourism. as a more convenient and affordable form of transportation than other modes of transportation in the economy, 2025, 12(1): 8-20 11 © 2025 by the author; licensee asian online journal publishing group current day, rail travel is often chosen by visitors. the construction of china's high-speed rail infrastructure in recent years, which significantly reduces the travel time for visitors to their destinations, is one factor that has accelerated the growth of the country's tourism industry. it is clear that railroad operating miles may have a direct impact on how the tourist industry develops (xu & yang, 2020). highway mileage (hm). the ease of direct access to tourist destinations has a direct impact on tourists' travel intentions. family self-drive vacations have gained popularity since the turn of the twenty-first century, particularly as people's living standards have increased. thus, a region's ability to draw visitors will be directly influenced by the degree of development of its transportation infrastructure. for the growth of the tourist industry, the sophistication of the highway network has a particularly large influence. as a result, one of the aspects considered impacting the expansion of the tourist industry is road miles (cheng et al., 2021). civil air passenger traffic (capt). nowadays, travelers often prefer to travel by plane if their destination is far away. however, civil air traffic includes both domestic and incoming air travel, so to some degree, the volume of passenger traffic is a direct reflection of how appealing an area is to both local and foreign visitors. in order to completely describe how much civil air traffic influences the tourist industry, one of the factors used in this article is civil air traffic (shekarrizfard et al., 2020). total number of tourists received (tntr). tourism numbers: includes the number of inbound international tourists, the number of outbound residents and the number of domestic tourists. when it comes to tourism, a strongly dependent on tourism economic sector, the number of visitors may be a good indicator of how appealing a region is. it is essential to take into account the volume of visitors as a significant influencing element in the tourism sector in order to analyse the development of the tourism economy (salazar, swanson, mozo, clinton white jr, & cabada, 2012). performing arts group (pag). the term "artistic performance groups" refers to all varieties of professional artistic performance groups and professional folk troupes that are organized by the cultural industry or managed by the sector (approved by the administrative department of the cultural market or those who have declared their registration and obtained the necessary license) and specialize in performing arts and other activities. the degree to which professional arts performance organizations have developed in hunan province is reflected in this metric. if performing arts organizations provide a specific contribution to the tourist economy, it is worthwhile to thoroughly examine this. such an assumption serves as the foundation for this work, making it a key variable in the analysis of the effect on the tourist industry (knudsen, bookheimer, & bilder, 2019). table 1. an example of a table. year ti rm hm diur dirr 2003 294.07 2771 85233 7674.2 2532.9 2004 371.59 2774 87875 8617.5 2837.8 2005 453.57 2802 88200 9524 3117.7 2006 588.39 2806 171848 10504.7 3389.7 2007 732.71 2799 175415 12293.5 3904.3 2008 851.75 2795 184568 13821.2 4512.5 2009 1099.47 3693 191405 15084.3 4910 2010 1425.8 3695 227998 16565.7 5622 2011 1785.78 3693 232190 18844.1 6567.1 2012 2234.1 3825 234051 21318.8 7440.2 2013 2681.86 4028 235396 24352 9028.6 2014 3050.7 4532 236250 26570.2 10060.2 2015 3712.91 4521 236886 28838.1 10992.5 2016 4707.43 4716 238273 31283.9 11930.4 2017 7172.62 4698 239724 33947.9 12935.8 2018 8355.73 5070 240060 36698.3 14092.5 2019 9762.32 5579 240566 39841.9 15394.8 year pag gdp capt tntr acc 2003 86 4659.95 186 5970.11 251.17 2004 91 5542.62 260 6486.34 299.09 2005 91 6369.87 304 7180.98 356.9 2006 93 7431.55 363 9195.31 389.76 2007 96 9285.45 430 10897.47 461.13 2008 98 11307.36 419 12829.97 569.39 2009 110 12772.8 548 16065.03 573.96 2010 201 15574.32 606 20398.03 701.88 2011 114 18914.96 664 25328.29 828.83 2012 141 21207.23 708 30506.33 945.64 2013 227 23545.24 757 36058.12 1096.03 2014 271 25881.28 870 41202.53 1206.42 2015 273 28538.6 935 47330.73 1349.09 2016 439 30853.45 1091 56547.79 1531.34 2017 534 33828.11 1241 66934.58 1710.06 2018 510 36329.68 1403 75300.53 1862.99 2019 575 39752.12 1542 83154.1 2080.22 economy, 2025, 12(1): 8-20 12 © 2025 by the author; licensee asian online journal publishing group gross product of hunan province (gdp). on the one hand, it demonstrates hunan province's current economic foundation and its capacity to invest in and develop tourist infrastructure; on the other hand, it shows how the population's ability to enjoy tourism is influenced by their level of living. therefore, the gdp affects both the population's demand for tourism as well as the supply side of tourist development (ai, zhong, & zhou, 2022). disposable income of urban residents (diur). to appreciate the well-being that tourist activities provide, it is necessary to have a certain financial basis since tourism is a spiritually consuming activity. in particular, the level of the locals' desire for tourism is highly correlated with their spare income after meeting their fundamental needs. like this, urban inhabitants are the primary tourist market consumers in hunan province, and the growth of the tourism industry is strongly influenced by their disposable income (xia, liao, wu, & liu, 2020). disposable income of rural residents (dirr). rural inhabitants have also emerged as a significant consumer segment in china's tourist industry as a result of the societal advancements that have led to an increase in rural residents' incomes and a steady improvement in their quality of life. in 2019, 25.6% of china's tourist sector was made up of purchases made by rural residents. therefore, one of the key factors influencing the growth of china's tourist industry is the disposable income of rural populations (lei, fan, yang, & si, 2022). amount of catering consumption (acc). people directly spend money on food and drink when travelling, and the quantity eaten provides an insight into how quickly the tourist sector is growing. food and beverage consumption is a crucial kind of consumption because when individuals travel, they immediately spend money on hotels and accommodations. therefore, the economics of tourism is impacted by the consumption of food and drink (neto, 2020). 3.2. factor analysis 3.2.1. standardized processing of data direct data analysis was not feasible due to the vast number of variables used for this study, non-uniformity of units, and differences in magnitudes across variables; thus, standardization was necessary, leveraging square and normalization to convert to dimensionless data. equation 1 contains the standardization of the data formula (1). 𝑆𝑆𝑁𝑖 = 𝑥 √∑ 𝑥𝑖 2𝑛 𝑖=1 (1) the goal of normalizing the sum of squares is to use the "sum of squares" as the reference standard; all data is then divided by the "sum of squares," and the resulting data is equivalent to a percentage of the "sum of squares." this is accomplished by using equation 1's method, in which all data is adjusted by the "sum of squares," which serves as the unit of measurement for all data. in this study, all variable data is standardized in accordance with formula (1) to take into account the law of normal distribution and to remove the impact of the dimension. thereafter, factor analysis and regression analysis can be performed on the standardized variable data to further investigate the relationship between the variables. table 2 displays the fundamental data of the variables after the standardization procedure. table 2. basic indicators. variable sample min. max. average standard deviation median ti 17 294.070 9762.320 2898.871 2953.964 1785.780 rm 17 2771.000 5579.000 3811.588 924.348 3695.000 hm 17 85233.000 240566.000 196819.882 57543.499 232190.000 capt 17 186.000 1542.000 725.118 406.104 664.000 pag 17 86.000 575.000 232.353 174.484 141.000 gdp 17 4659.950 39752.120 19517.329 11551.030 18914.960 tntr 17 5970.110 83154.100 32434.485 25446.380 25328.290 diur 17 7674.200 39841.900 20928.253 10422.246 18844.100 dirr 17 2532.900 15394.800 7604.059 4267.174 6567.100 acc 17 251.170 2080.220 953.759 583.733 828.830 figure 2. comparison of mean values. economy, 2025, 12(1): 8-20 13 © 2025 by the author; licensee asian online journal publishing group the general image of the data is described by descriptive analysis using means or medians (figure 2). because there are no outliers in the data in the table above, descriptive analysis can be performed directly on the mean. finally, the data are normal, and descriptive analysis can be performed directly on the mean. table 3. kmo and bartlett test. kaiser-meyer-olkin 0.829 bartlett test approximate chi-square 479.852 d f 36 p-value 0.000 3.2.2. inspection the study data was first examined to determine its eligibility for factor analysis (table 3), as can be seen from the table above; the kmo was 0.829, which is more than 0.6, satisfying the necessary conditions for factor analysis, indicating that the data may be used for factor analysis research. additionally, the data passed the bartlett's sphericity test (p<0.05), indicating that they are appropriate for factor analysis. 3.2.3. factor analysis the aforementioned table examines the process of factor extraction and the volume of data that was taken from the factors (table 4). from the above table, we can see that the factor analysis yielded a total of 2 components, each of which has a variance explained by rotation of 69.782 and 29.04 percent, respectively. rotation explains 98.823 percent of the total variance. economy, 2025, 12(1): 8-20 14 © 2025 by the author; licensee asian online journal publishing group table 4. table of variance explained rates. factor number feature root rotational front difference explained rate explained rate of variance after rotation feature root variance interpretation rate (%) cumulation (%) feature root variance interpretation rate (%) cumulation (%) feature root variance interpretation rate (%) cumulation (%) 1 8.446 93.847 93.847 8.446 93.847 93.847 6.28 69.782 69.782 2 0.448 4.976 98.823 0.448 4.976 98.823 2.614 29.041 98.823 3 0.059 0.656 99.479 4 0.031 0.343 99.822 5 0.013 0.142 99.965 6 0.002 0.018 99.983 7 0.001 0.012 99.995 8 0.000 0.004 99.998 9 0.000 0.002 100 economy, 2025, 12(1): 8-20 15 © 2025 by the author; licensee asian online journal publishing group table 5. table of factor loading coefficients after rotation. variable name factor loading coefficient degree of commonality (common factor variance) factor 1 factor 2 ssn_rm 0.832 0.519 0.961 ssn_hm 0.373 0.925 0.994 ssn_diur 0.856 0.514 0.997 ssn_dirr 0.872 0.484 0.995 ssn_pag 0.947 0.268 0.968 ssn_gdp 0.834 0.548 0.995 ssn_capt 0.872 0.479 0.991 ssn_tntr 0.911 0.41 0.997 ssn_fbc 0.881 0.471 0.997 note: if the figures in the table are colored, blue means that the absolute value of the load coefficient is greater than 0.4, and red means that the common degree (common factor variance) is less than 0.4. to determine the correlation between the variables and the research items, the data from this study was rotated using the maximum variance rotation technique (varimax) (table 5). the table above displays how well the factors extracted information from the study items and the correspondence between the factors and the study items. it is clear that all of the study items have a commonality value above 0.4, indicating a strong correlation between the study items and the factors as well as the factors' ability to effectively extract information. analyze the connection between the factor and the research item after confirming that the factor can extract the majority of the information from the research item (when the absolute value of the factor loading coefficient is greater than 0.4, it means that the item and the factor have correspondence). as can be seen from the above table, the four variables of civil air passenger traffic (capt), total number of tourists received (tntr), performing arts groups (pag), gross domestic product (gdp) of hunan province, and the five variables of restaurant consumption (acc) convert on the first common factor (f1), whereas the four variables of railway mileage (rm), road mileage (hm), disposable income of urban residents (diur), and disposable income of rural residents (dirr) convert on the second (f2). the component score coefficient matrix, as shown in table 6, may be used to determine the linear connection between each common factor and the variables once the two common factors have been extracted. (tip) 1. a research item corresponds to multiple factors, which factor should be judged by combining professional knowledge. 2. the corresponding relationship between a research item and the factor is completely inconsistent with the psychological expectation, so the research item may be considered to be deleted. 3. a factor has no corresponding relationship with the research item, in this case, it can be considered to reduce one factor. 4. if there is no corresponding relationship between a study item and a factor, the study item may be considered to be deleted. table 6. component score coefficient matrix. variable name component component 1 component 2 ssn_rm 0.088 0.079 ssn_hm -0.611 1.185 ssn_diur 0.108 0.050 ssn_dirr 0.147 -0.015 ssn_pag 0.402 -0.444 ssn_gdp 0.061 0.126 ssn_capt 0.152 -0.024 ssn_tntr 0.244 -0.175 ssn_acc 0.167 -0.046 the table of "component score coefficient matrices" is disregarded if the goal of factor analysis is information enrichment (table 6). if factor analysis is used to weight the research items, the "component score coefficient matrix" is utilised to produce the relationship equation between the factors and the study items (based on standardised data to create a relationship expression). 𝐹1 = 0.088 ∗ 𝑆𝑆𝑁_𝑅𝑀 − 0.611 ∗ 𝑆𝑆𝑁_𝐻𝑀 + 0.108 ∗ 𝑆𝑆𝑁_𝐷𝐼𝑈𝑅 + 0.147 ∗ 𝑆𝑆𝑁_𝐷𝐼𝑅𝑅 + 0.402 ∗ 𝑆𝑆𝑁_𝑃𝐴𝐺 + 0.061 ∗ 𝑆𝑆𝑁_𝐺𝐷𝑃 + 0.152 ∗ 𝑆𝑆𝑁_𝐶𝐴𝑃𝑇 + 0.244 ∗ 𝑆𝑆𝑁_𝑇𝑁𝑇𝑅 + 0.167 ∗ 𝑆𝑆𝑁_𝐴𝐶𝐶 𝐹2 = 0.079 ∗ 𝑆𝑆𝑁_𝑅𝑀 + 1.185 ∗ 𝑆𝑆𝑁_𝐻𝑀 + 0.050 ∗ 𝑆𝑆𝑁_𝐷𝐼𝑈𝑅 − 0.015 ∗ 𝑆𝑆𝑁_𝐷𝐼𝑅𝑅 − 0.444 ∗ 𝑆𝑆𝑁_𝑃𝐴𝐺 + 0.126 ∗ 𝑆𝑆𝑁_𝐺𝐷𝑃 − 0.024 ∗ 𝑆𝑆𝑁_𝐶𝐴𝑃𝑇 − 0.175 ∗ 𝑆𝑆𝑁_𝑇𝑁𝑇𝑅 − 0.046 ∗ 𝑆𝑆𝑁_𝐴𝐶𝐶 economy, 2025, 12(1): 8-20 16 © 2025 by the author; licensee asian online journal publishing group figure 3. lithotripsy. the reference number of components extracted when the line abruptly turns smooth is the number of factors extracted from the steep to smooth line (figure 3). the gravel diagram only aids in the selection of a few parameters. in practical research, the number of variables is often determined by a thorough balancing judgement based on professional expertise, along with the circumstance of the connection between factors and study items. table 7. component score coefficient matrix. name factor 1 factor 2 composite scoring coefficient weighted (%) feature root (after rotation.) 6.280 2.614 variance interpretation rate 69.78% 29.04% ssn_rm 0.3320 0.3208 0.3287 11.27% ssn_hm 0.1486 0.5719 0.2730 9.36% ssn_diur 0.3415 0.3181 0.3346 11.47% ssn_dirr 0.3479 0.2996 0.3337 11.44% ssn_pag 0.3777 0.1658 0.3154 10.81% ssn_gdp 0.3327 0.3388 0.3345 11.46% ssn_capt 0.3481 0.2964 0.3329 11.41% ssn_tntr 0.3633 0.2535 0.3311 11.35% ssn_acc 0.3515 0.2910 0.3337 11.44% factor analysis can use load coefficient information for weight calculation (table 7). the calculation is divided into three steps, which are as follows. first, calculate the linear combination coefficient, the formula is: loading matrix /sqrt (eigen), that is, the load coefficient divided by the square root of the corresponding characteristic root. second: calculate the comprehensive score coefficient, the formula is: cumulative (linear combination coefficient * variance explanation rate)/cumulative variance explanation rate, that is, the linear combination coefficient and variance explanation rate, respectively, multiply and accumulate, and then divide by the cumulative variance explanation rate. third: calculate the weight, and normalize the comprehensive score coefficient to get the weight value of each index. fourth: the above loading matrix, characteristic root eigen, variance interpretation rate or cumulative variance interpretation rate are all the corresponding values after rotation. table 8. component score coefficient matrix. non-standardized coefficients normalized coefficients t p 95% ci vif b standard error beta c 0.172 0.009 20.145 0.000*** 0.156 ~ 0.189 f1 0.165 0.009 0.94 18.71 0.000*** 0.148 ~ 0.182 1 f2 0.050 0.009 0.286 5.703 0.000*** 0.033 ~ 0.068 1 note: dependent variable: ssn_ti. *** p<0.01. 3.3. regression analysis with f1, f2 acting as the independent variables and ssn ti acting as the dependent variable, a linear regression analysis was conducted, as can be seen from the above table (table 8), from which the model equation can be observed. 𝑆𝑆𝑁_𝑇𝐼 = 0.172 + 0.165 ∗ 𝐹1 + 0.050 ∗ 𝐹2 according to the model's r-squared value of 0.965, f1 and f2 can account for 96.5 percent of the variance in ssn ti. the model passed the f-test (f=191.293，p=0.000<0.05), indicating that at least one of the factors f1, f2 would have an impact on ssn ti. the regression coefficient value for factor f1 was 0.165 (t=18.710，p=0.000<0.01), indicating that factor f1 would have a substantial positive impact. with a regression economy, 2025, 12(1): 8-20 17 © 2025 by the author; licensee asian online journal publishing group coefficient of 0.050 (t=5.703，p=0.000<0.01), f2 significantly influences ssn ti in the positive. as a result of the investigation, it is clear that f1 and f2 significantly impact ssn ti. figure 4. model diagram. figure 5. model result diagram. note: ***p < 0.01. table 9. model summary (intermediate process). r r 2 adjust r 2 model error-rmse dw aic bic 0.982 0.965 0.960 0.032 0.800 -62.746 -60.246 a linear regression analysis was carried out using ssn ti as the dependent variable and f1,f2 as the independent variables (figure 4), as shown in the table above (table 9). as observed in the above table, the model's r-squared value is 0.965 (figure 5), which indicates that f1 and f2 can account for 96.5 percent of the change in ssn ti's cause. table 10. anova table (intermediate process). sum of squares df mean square f p-value regression 0.477 2 0.238 191.293 0.000 residuals 0.017 14 0.001 total 0.494 16 the model was evaluated and, as can be seen from the table above (table 10), it passed the f-test (f=191.29，p=0.000<0.05). this indicates that the model design is valid. 4. conclusions and suggestions 4.1. research conclusions this paper chooses nine variables that may affect tourism economic development through quantitative empirical research based on the tourism economic development data of hunan province over the 17 years from 2003 to 2019, including: railway mileage (rm), road mileage (hm), civil air passenger traffic (capt), total number of tourists received (tntr), performing arts groups (pag), hunan province gross production value (gdp), disposable income of urban residents (diur), and amount of catering consumption (acc). two common factors were derived from these nine variables by factor analysis (f1, f2). regression analysis revealed that both f1 and f2 contributed significantly to tourist revenue. the regression equation for the factors affecting tourist revenue was developed using the score matrices for each variable and the vector of common factor regression coefficients. according to the findings of the regression, all of f1 and f2 will have a strong positive effect on tourist revenue. it can be deduced that the following factors significantly affect the relationship between tourism income and railway mileage (rm), road mileage (hm), civil air passenger traffic (capt), total number of tourists (tntr), performing arts groups (pag), hunan provincial gross domestic product (gdp), disposable income of urban residents (diur), disposable income of rural residents (dirr), and amount of catering consumption (acc). 4.2. research recommendations based on the examination of the variables influencing the development of the tourist sector in hunan province, this article proposes the following suggestions in order to better promote its growth. 4.2.1. strengthen the pillar status of tourism, increase investment, and form a joint force for development. 4.2.1.1. further increase investment and give full play to the driving role of tourism hunan's tourist resources are now developing in an uncertain manner with just financial backing. long building cycles and significant capital consumption are characteristics of the creation and growth of tourist resources. although the government has also established a tourism development fund, which is allocated on a yearly basis, it is still a drop in the ocean, leading to some promising tourism projects whose development pace is economy, 2025, 12(1): 8-20 18 © 2025 by the author; licensee asian online journal publishing group far from reaching the fast surge in visitor demand owing to financial issues. the growth of tourism in hunan has been hampered by matching debts for transportation, energy, product development, and tourist security measures. in order to fully exploit the significant contribution of the tourism sector to increasing employment rates and boosting consumption, it is necessary to increase investment, accelerate the improvement of the hunan tourism industry system, further strengthen the tourism element system, tourism destination system, tourism product system, and tourism safety and quality assurance system (mccrossan, martin, & hill, 2021). 4.2.1.2. try to solve the bottleneck problem of tourism development the limited ability to control the tourist sector is a problem that is being addressed. despite being the government, the ministry of tourism has limited resources and is unable to adequately supervise spatial planning, project viability, big corporate investments, etc. to ensure that the tourist industry is able to properly carry out its duties, a platform for government intervention in the aforementioned areas is advised (vovk, beztelesna, & pliashko, 2021). 4.2.2. focus on the establishment of tourism brands to improve the competitiveness of hunan tourism 4.2.2.1. strengthen tourism publicity and create a unique image of hunan tourism over the last several years, hunan province's tourism industry has expanded dramatically. 90% of counties, prefectures, and municipalities have tourism as a local pillar business. however, as shown by poor management principles, attractive locations are separated into political spheres, which hinders the overall image of hunan's tourist industry and does not support the development of a favourable brand for hunan's tourism industry. in particular, to increase the degree of worldwide attention, there is not enough external exposure. for the objective reality outlined above, this essay suggests the following remedies. first, travel marketing. create and enhance a public relations and marketing campaign for the travel industry, with picturesque locations serving as the default spokespersons. a promotional and publicity force are created by big corporations to promote tourist goods in picturesque places, so enhancing their appeal and competitiveness (bulatovic & iankova, 2021). secondly, regional cooperation and joint advocacy. encouraging collaboration with tourist organisations, travel firms, as well as media outlets in order to acquire complementary benefits, exchange resources, and mutually encourage each other via passenger routes is a vital part of the strategy for promoting mutual growth. third, utilise all available media. create a brand image for "charming hunan" through media such as television, the internet, newspapers, and other channels of communication. boost the primary media in hunan's public image and enhance the procedures for media collaboration. take advantage of the chance to substitute programmes promoting tourism over the holidays. strengthen the tourist network, update the hunan tourism network, create connections with the major online media, and provide integrated tourism services for the platform that hosts tourism information. fourth, fully exploit the tourist season. utilize tourism, cultural events, and major festivals as appropriate. to increase the efficacy of the festival's impact, it is carefully planned and tailored to the local environment, highlighting features and qualities while adding brightness. 4.2.2.2. highlight the characteristics of hunan and establish a tourism brand tourism depends on well-known brands to entice, maintain, and attract customers. zhangjiajie's tourist resources are uncommon and unique on the globe, making it famous both domestically and internationally for its distinctive quartz sandstone peak forest scenery. making zhangjiajie a well-known travel destination is crucial. the historic cities of phoenix, shao shan, dong ting lake, yue yanglou, and nan yue will be combined with it at the same time in an attempt to establish a golden path that will affect both local and foreign visitors. an information system for tourism is required. tourist and tourism marketing, as well as tourism and tourism management, are all included in the exquisite creation and digital administration of the "digital landscape." to accomplish online synchronous opening, online ticketing, online booking, online group, online tourist consultation, and other e-commerce via the "digital environment." in order to offer excellent, efficient, and compassionate services that satisfy visitors, it is even more important to increase the building of supporting facilities in scenic places to incorporate standards and norms for the industry (shahzad, qu, rehman, & zafar, 2022). 4.2.3. develop tourism products and expand the tourism market 4.2.3.1. strengthen regional cooperation the significance of these guidelines for regional openness and cooperation should be better understood. the focus should be turned to the need for regional collaboration based on sustainable development in order to support the creation of a regional cooperation model. beginning with the fundamental requirement for sustainable development, we will progressively include ecological restoration, pollution prevention and control, social governance, and the raising of people's standards of living in the scope of regional cooperation and examine practical and effective forms of cooperation (ferraresi & gucciardi, 2022)). to attain inclusive outcomes, we must secondly embrace a dictatorial and long-term vision. in order to prevent the temptation to emphasise individual interests, we must take into account both the overall interests of the cooperative area and all of the party's individual interests. for the sake of long-term growth, transparency and cooperation should be prioritized (j. yang, zhang, liu, li, & liang, 2022). future stability should not be sacrificed for immediate benefit, and a fixation on outward appearances should not get in the way of real collaboration. to increase the size of the cake for the advantage of all parties and in the interest of mutual benefit and shared progress, we should aggressively seek openness and collaboration. thirdly, we must foster a culture of openness and cooperation while broadening our perspectives. we'll keep coming up with new ways to collaborate, broaden the scope of what we collaborate on, and increase the frequency and depth of our collaboration. resources, technology, and money will be attained via openness and cooperation, as well as knowledge of management systems. it may take the form of ad hoc communication and conversation or a method for ongoing cooperation to increase its influence and fortify its right to speak (rocca & zielinski, 2022). economy, 2025, 12(1): 8-20 19 © 2025 by the author; licensee asian online journal publishing group 4.2.3.2. integrate the source market and develop characteristic tourism products the markets in and surrounding hong kong, macau, taiwan, the republic of korea, japan, and asean should be stabilised. we should also aggressively analyse the eu market, which is controlled by germany, and start to investigate the markets in eastern europe, north america, australia, and new zealand. it is crucial to stabilise the korean market since it is the largest source of international tourists to hunan. there will be efforts made to sustain the japanese market's steady expansion since it is a high-end market that is comparatively stable. traditional tourist destinations for hunan include hong kong and macau. in order to collaborate with hong kong and macau on a multilateral basis and create mutually beneficial outcomes, we must make use of the "pan-pearl triangle cooperation zone." hunan has access to the market in southeast asia. the benefits of close proximity and cultural affinity need to be used more consistently. we must keep up our marketing initiatives in the taiwanese market in order to promote cross-strait collaboration and trade as well as the reunion of the homeland. to boost high-end tourism and inbound tourism, we should concentrate on european and north american countries, like germany, and develop markets like australia, new zealand, and the united states. for tourists, there should be a diversified source market. to further strengthen tourism products such as holiday and leisure products, sightseeing and leisure, residential leisure, hot spring recreation, sports and leisure, film and television tourism, and travel and tourism, it is necessary to adjust how they are used. this will benefit the rapidly expanding domestic tourism market. to meet the demands of public leisure and entertainment, concentrate on developing green ecology, ethnic classics, history and culture, folk customs, geological wonders, archaeological discoveries, water recreation, rafting, hot spring resorts, industrial tourism, rural experience, and urban leisure, and actively guide the development of branded hotel chains and resort industries to meet the various types of special rural needs. improve the development of campsites, hotels, and self-drive camps to facilitate the creation of routes. it is critical to cater to the various levels and types of visitor demands in order to support the diversification of the tourism industry. 4.2.4. speed up the construction of tourism legal system and promote the rapid and healthy development of tourism 4.2.4.1. strengthen laws to standardize the order of tourism and improve the tourism environment in hunan province, the absence of a legislative framework for tourism has significantly hampered the growth of the industry. we must move quickly with the research to construct and improve the legal social security system for the growth of the tourist industry, as well as to increase knowledge of, and capacity for, legal development and governance. to widen the route of tourist growth in hunan and establish a larger tourism development environment, it is essential to fully exploit regional assets and adopt relevant tourism policies. in order to keep up with the demands of hunan's growing tourist sector, the legal framework for travel and tourism is being built at a faster pace than before, putting the sector on a path toward standardisation and legalisation (hauptmeier & kamps, 2022). 4.2.4.2. we should adjust the industrial structure and promote the balanced development of all factors of tourism hunan tourism's weakest link is shopping. increasing the percentage of visitors' spending on tourism is crucial since tourism goods are the most robust of the industry's primary components (zou, wei, ding, & xue, 2022). in order to understand the market demand focused on the production, supply, and marketing of a specific tourism commodity, the government should improve cooperation and relevant departments should collaborate to provide guidance and management to producers of tourism goods who have been shortlisted (fernandez-navia, polomuro, & tercero-lucas, 2021). this can be done through macro-guidance, policy support, and equipment investment. brand, brand figure, and the formation of a large-scale production of tourism products by actively cultivating a variety of special local products for the tourism industry, including handicrafts, food, books, audio and video products, and other consumer goods, in combination with the distinctive features of hunan tourism. the development of coordinated tourism commodity sales businesses, the creation of tourism commodity stores, a multi-channel, multi-form sales network, active innovation in tourism commodity marketing, the creation of tourism commodity exhibitions, and the development of tourism commodity market bazaars all continued to grow in the state to boost tourism-related income and generate 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(2022). the relationship between place attachment and tourist loyalty: a meta-analysis. tourism management perspectives, 43, 100983. https://doi.org/10.1016/j.tmp.2022.100983 asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. https://doi.org/10.1155/2022/5465488 https://doi.org/10.1016/j.jenvman.2021.113051 https://doi.org/10.1016/j.ejpoleco.2022.102187 https://doi.org/10.1016/j.jik.2022.100232 https://doi.org/10.1007/s11356-021-12706-2 https://doi.org/10.1186/s12992-015-0113-0 https://doi.org/10.1037/abn0000416 https://doi.org/10.1371/journal.pone.0255508 https://doi.org/10.3390/ijerph18052731 https://doi.org/10.1016/j.evalprogplan.2021.101961 https://doi.org/10.1007/s11356-021-14956-6 https://doi.org/10.1007/s00484-019-01799-7 https://doi.org/10.1007/s00266-021-02251-1 https://doi.org/10.1016/j.scitotenv.2019.135300 https://doi.org/10.1016/j.jik.2022.100230 https://doi.org/10.3389/fpubh.2021.764977 https://doi.org/10.1016/j.tmp.2022.100985 https://doi.org/10.1111/j.1708-8305.2012.00606.x https://doi.org/10.1016/j.jik.2022.100231 https://doi.org/10.1016/j.envres.2020.109326 https://doi.org/10.1371/journal.pone.0252842 https://doi.org/10.1007/s11356-021-14837-y https://doi.org/10.3390/ijerph182111205 https://doi.org/10.3390/ijerph17051760 https://doi.org/10.3390/ijerph181910414 https://doi.org/10.3390/s20174945 https://doi.org/10.1016/j.tmp.2022.100982 https://doi.org/10.1007/s11356-021-14932-0 https://doi.org/10.1371/journal.pone.0258407 https://doi.org/10.1016/j.tmp.2022.100983 1 © 2025 by the authors; licensee asian online journal publishing group economy vol. 12, no. 2, 1-11, 2025 issn(e) 2313-8181: / issn(p) 2518-0118: doi: 10.20448/economy.v12i2.6775 © 2025 by the authors; licensee asian online journal publishing group towards the development of the tourism sector in palestine: challenges and recommendations ahd hinnawi1 nurul zarirah2 ( corresponding author) 1,2faculty of technology management and technopreneurship, technical university, malaysia melaka (utem), malaysia. email: ahdhinawi96@gmail.com email: zarirah@utem.edu.my abstract this study explores the challenges facing the palestinian tourism sector and provides recommendations for its development. a systematic review methodology was used to analyze relevant studies, categorizing challenges into three areas: (1) occupation-related barriers, (2) internal structural obstacles, and (3) marketing and technological limitations. key recommendations were extracted and synthesized. findings indicate that the israeli occupation imposes severe movement restrictions, site destruction, and misinformation campaigns. internal obstacles include weak infrastructure, economic constraints, and inadequate professional capacity. marketing and technological limitations hinder global visibility. addressing these challenges requires political advocacy, infrastructure development, economic investment, and digital marketing strategies. palestinian tourism has strong potential but is hindered by political, economic, and marketing barriers. a comprehensive strategy integrating political resolutions, economic development, and modern marketing approaches is essential for sustainable growth. the study provides actionable insights for policymakers and tourism stakeholders, emphasizing infrastructure improvement, digital marketing, and global advocacy to enhance the sector’s sustainability. keywords: challenges, digital marketing, economic development, obstacle, palestine, tourism sector. citation | hinnawi, a., & zarirah, n. (2025). towards the development of the tourism sector in palestine: challenges and recommendations. economy, 12(2), 1-11. 10.20448/economy.v12i2.6775 history: received: 1 march 2025 revised: 26 march 2025 accepted: 6 june 2025 published: 16 june 2025 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. institutional review board statement: not applicable. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. this study followed all ethical practices during writing. data availability statement: the corresponding author may provide study data upon reasonable request competing interests: the authors declare no conflict of interest. authors’ contributions: both authors contributed equally to the conception and design of the study. both authors have read and agreed to the published version of the manuscript. contents 1. introduction ......................................................................................................................................................................................... 2 2. problem statement ............................................................................................................................................................................. 3 3. methodology ........................................................................................................................................................................................ 3 4. review of literature and previous studies ................................................................................................................................... 4 5. extracting results .............................................................................................................................................................................. 8 6. extracting recommendations .......................................................................................................................................................... 8 7. conclusion and suggestion ............................................................................................................................................................... 9 references .............................................................................................................................................................................................. 10 https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v12i2.6775 https://orcid.org/0009-0009-1613-527x https://orcid.org/0000-0002-6559-2962 economy, 2025, 12(2): 1-11 2 © 2025 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study examines key challenges hindering the development of palestine’s tourism sector and proposes practical solutions. its novelty lies in employing a systematic review methodology to synthesize challenges and recommendations from previous studies, offering an analytical framework for policymakers and stakeholders to develop effective strategies that enhance the sector’s growth and impact. 1. introduction the importance of the tourism industry is increasing, and its developmental and strategic role is growing in countries distinguished by their civilization, religious and cultural heritage, historical sites, and attractive nature, as is the case in palestine. palestine is a region steeped in history, with human habitation dating back over half a million years. its rich archaeological landscape has been shaped by numerous civilizations, including the canaanites, pharaonic egyptians, assyrians, hebrews, babylonians, phoenicians, greeks, romans, byzantines, and islamic cultures, each contributing to its unique cultural heritage. so, palestine is rich in religious and archaeological tourism, it is pivotal to the development of monotheistic religions, housing vital sites, and numerous historical antiquities. moreover, palestine serves as a crossroads connecting asia, africa, and europe, which has historically facilitated cultural exchange. the region also offers medical tourism opportunities, particularly due to the dead sea's therapeutic properties, in addition to the geographical and climatic diversity in palestine that attracts visitors throughout the year. all of these characteristics make palestine a unique tourist destination. the tourism industry currently plays an important role in the global economy, sometimes surpassing other economic sectors. many countries have realized that the tourism industry is the largest and most important industry in the world, due to the various benefits it generates (belhadef & qaytoun, 2022). tourism sector is emerging as one of the largest and fastest-growing segments of the economy, often regarded as a powerful tool for regional development. the economic activity generated by tourism contributes to regional development, highlighting its pivotal role in fostering social, cultural, and economic interactions on a broader scale (ha, 2025). tourism is a multifaceted phenomenon encompassing religious, social, cultural, and economic dimensions, involving individuals traveling to countries or destinations beyond their habitual environment for various reasons, including personal, business, or professional purposes (mkwizu, 2020). tourism types are classified according to geographical areas into three categories: domestic tourism, which means the movement of individuals within the same country, and this type of tourism requires encouraging prices for the country's citizens in addition to a variety of services. regional tourism, which refers to travel and movement between neighboring countries and is characterized by lower overall costs. international tourism, which means receiving foreign tourists in a country, is sought after by all countries in the world, and they are keen to develop and encourage it to obtain foreign currency. this type of tourism requires the provision of diverse services and high-quality infrastructure, in addition to ensuring security, stability, and respect for tourists (kafi, 2015). tourism is also classified according to its purpose into: medical tourism, which is motivated by the need to treat diseases and recover or alleviate the symptoms and pains associated with them. recreational tourism, which involves the need to rest and restore the individual's psychological and physical strength by escaping the routine of daily work and changing the place of residence for a specific period during which the individual enjoys and spends his time entertaining himself. sports tourism: which may be for the purpose of actually participating in sports matches and competitions, or for watching sports matches and celebrations. cultural tourism, which aims to familiarize the individual and increase his culture about regions and countries, and is linked to learning about the history of regions and countries, their archaeological sites, the heritage of their peoples, their customs and traditions. official tourism, which is when members of delegations or specific individuals travel to participate in specific activities and various purposes such as business meetings or official talks or participating in conferences or international celebrations or watching trade and industrial exhibitions. religious tourism, which is one of the oldest types of tourism, and is represented in visiting religious sites, performing religious rituals and worship, and visiting sites and landmarks of a religious or religious-historical nature (assaf, 2016). countries around the world place great importance on activating and developing tourism due to the unique benefits and gains that this sector provides, which are difficult to achieve through other sectors in the country. these benefits and gains vary in economic, social, cultural heritage, historical identity, and political fields. in the economic field, the tourism sector is one of the largest industries in the world that contributes to supporting the economies of countries and achieving comprehensive development through increasing national output, providing job opportunities, helping to solve the unemployment problem, and impacting the balance of payments through the influx of foreign currencies, attracting capital, and drawing in foreign investments (bin ghadban, 2020). in the social field, tourism allows for cultural interaction between the communities of different countries, the exchange of ideas, social integration, interaction, and closeness among them. in the political field, tourism contributes to improving relations between countries and creating positive impressions and strong ties among their peoples. as for cultural heritage and historical identity, tourism helps affirm the historical identity of the state, cling to its cultural heritage, take pride in it, and care for archaeological sites to protect them from decay, theft, or obliteration. therefore, tourism significantly contributes to preserving the cultural heritage of the state and the historical identity of its peoples (al-qurna, 2019). palestine is considered one of the most important tourist areas in the world, despite its small size, due to its many unique features. it is distinguished by its numerous and diverse tourist attractions, as well as its ancient monuments and sites. palestine has distinguished itself as a cradle for many ancient civilizations that have inhabited, colonized, or conquered it throughout history, such as the canaanites, egyptians, babylonians, assyrians, greeks, phoenicians, romans, christians, hebrews, and muslims, which has left priceless traces (palestinian news and information agency, 2024a). palestine constitutes a focal point for the three heavenly religions, embracing many of the sacred religious sites, making it a temple that the hearts of believers yearn for. it is a center that houses the holiest of churches for followers of christianity and the second greatest mosque for muslims (suliman & al-qadi, 2022). economy, 2025, 12(2): 1-11 3 © 2025 by the authors; licensee asian online journal publishing group the tourism sector has become more linked to the climate, as the climate characterizes the tourist destination, and it is indeed a strong driver of tourist satisfaction. the climate also determines the length and quality of the tourism season and plays an important role in choosing tourist destinations. palestine has natural and climatic components that qualify it to be one of the prominent regions as a tourist destination. it is characterized by the diversity of its topography and climatic environments in terms of elevation and depression from sea level, temperature, and rainfall amounts, as well as climatic variation from one area to another during a single season. all these factors are confined to a small geographical area, giving the region a unique characteristic that contributes to tourism development. thus, palestine becomes a tourist attraction throughout the year, where tourists can resort to recreational and entertainment sites in the mountainous areas during the summer, where the climate is mild. in winter, recreational and entertainment areas are concentrated along the shores of the dead sea and the city of jericho, located in the jordan valley, the lowest point on earth, which is characterized by its warm winter climate (al-daajna & alqam, 2018). the moderate summer and warm winter climate in palestine has made it a destination for various interests and tastes from different regions and backgrounds. it is worth mentioning that palestine includes moderate hot areas in the valleys, and moderate cold areas in the highlands that extend from north to south. palestine also contains several contradictions, as it includes the lowest region on earth, high mountains, vast plains, valleys, deserts, and some rivers. it also includes the dead sea, known for its extreme salinity unmatched anywhere else in the world. the geographical contradictions in this small area have resulted in a remarkable diversity of natural resorts that invite visitors to enjoy its magnificent landscapes (palestinian news and information agency, 2024a). 2. problem statement tourism sector in palestine is considered to be in a phase of growth, despite having significant resources that enable it to contribute to the palestinian economy with factors of success, prosperity, and attracting foreign and local investments. however, the tourism sector in palestine has suffered and continues to suffer from challenges and obstacles that hinder its development. by comparing the main indicators of hotel activity in the west bank between the years (2014-2020) showed in the table 1 and figure 1. table 1. comparison of the main indicators of hotel activity in the west bank between the years (2014 2020). years no. of hotels average no. of available rooms average no. of available beds no. of guests no. of overnight stays 2014 109 6,666 14,769 610,347 1,537,311 2015 112 6,791 15,059 484,394 1,420,264 2016 125 6,878 15,145 448,247 1,310,824 2017 130 7,343 16,117 545,814 1,579,143 2018 130 7,404 16,252 653,744 1,833,687 2019 125 7,245 15,770 746,911 2,009,934 2020 89 3,927 8,328 180,632 338,596 source: palestinian central bureau of statistics (2021). figure 1. comparison of the main indicators of hotel activity in the west bank between the years (2014 2020). source: palestinian central bureau of statistics (2021). it is noticeable from the statistical data in table 1 and figure 1 that there was a relative stability in hotel activity and a lack of significant development and prosperity during the period 2014-2019, and there was a significant decline in 2020 due to the circumstances of the coronavirus pandemic. as the years that followed the stage of the corona pandemic faced obstacles and challenges leading to instability in tourist activities and fluctuations between increase and decrease. the palestinian central bureau of statistics (2023) indicated a decrease in the number of workers in the tourism sector during the second quarter of 2023, with a decrease of 8% compared to the same period in 2022. the number of workers in the tourism sector reached 50.3 thousand workers during the second quarter of 2023, accounting for 4.3% of the total workers in palestine. despite the challenges and obstacles, there are many hopes and aspirations for this sector in the future, as it is expected that the tourism sector in palestine will account for a significant share of the palestinian national income if good planning and proper development are followed, along with addressing the obstacles and challenges it faces. therefore, the study problem is represented in answering the main question: what are the challenges and obstacles facing the tourism sector in palestine, and what are the recommendations for addressing them? 3. methodology in order to achieve the objectives of the study, the systematic reviews methodology was adopted. systematic reviews are powerful tools in scientific research, providing a comprehensive overview of a specific topic and helping economy, 2025, 12(2): 1-11 4 © 2025 by the authors; licensee asian online journal publishing group to understand the existing evidence. they are used across various fields, for development and evidence-based decision-making. it is a research methodology aimed at systematically collecting and evaluating all available evidence related to a specific topic in a transparent and structured manner. a comprehensive search for relevant literature is conducted, with every step documented to ensure transparency. descriptive or statistical analyses may be performed on the extracted data. results are interpreted in the context of the research question, considering the reliability of the evidence. findings should be presented clearly, to enhance transparency and accuracy in reporting (higgins et al., 2024). this was done in accordance with the prisma framework. the prisma statement (preferred reporting items for systematic reviews and meta-analyses) is a set of guidelines designed to improve the quality of reporting in systematic reviews and meta-analyses. the prisma statement aims to enhance transparency and reliability by providing a checklist for researchers to ensure that essential items are included in their reports, facilitating peer review and increasing the credibility of research findings (page et al., 2021). therefore, the researcher used systematic reviews methodology to gather, review and summarize the results and recommendations of a set of literature and previous studies related to the challenges and obstacles facing tourism in palestine, relying on the most recent and available evidence references (2018-2024) collected using the google scholar academic database. the researcher then extracted from those previous studies the challenges and obstacles and classified them into three axes, as well as extracted recommendations that could address or mitigate those challenges and obstacles and classified them into its three axes as well. in the end, the researcher reached conclusions. 4. review of literature and previous studies tourism in its contemporary concept is an integrated industry that significantly contributes to achieving economic and social development for many countries around the world that have focused on their development. in contrast, palestine, despite having the components for successful tourism that make it an effective tourist destination, has not received the same level of attention compared to other sectors. this is due to a number of obstacles and challenges, including internal obstacles and challenges on one hand, and obstacles imposed by the occupation on the other hand (abbadi, 2018). tourism in any country is exposed to external hindering factors; these factors can disrupt the tourism industry, lead to a decrease in the number of tourists, and affect their choice of destination. in palestine, the israeli occupation of the palestinian territories is the main factor that negatively affects the palestinian tourism sector. therefore, it is necessary for the palestinian government, represented by the ministry of tourism and antiquities, to increase its interest in tourist areas and palestinian heritage sites. likewise, the local community and its institutions must be aware of the necessary means to protect palestinian archaeological and cultural heritage sites. undoubtedly, it will be very difficult for the tourism industry in palestine to grow and develop without ending the occupation (abahre & raddad, 2016). the reality of the occupation that has existed for decades prevents the palestinian tourism sector from benefiting from many available tourism opportunities, depriving this sector of achieving sustainable tourism development, achieving the desired market share, and attaining market growth rates that align with the capabilities of this sector. it is not an exaggeration to say that palestine, once it achieves complete independence and full sovereignty over its lands, will be one of the most attractive countries for tourists globally due to its vast tourism wealth (suleibi & abu fara, 2018). the tourism sector in palestine has suffered numerous setbacks due to the conflict imposed by the occupation and its practices at various stages, which have made tourism a fluctuating activity and limited its development and benefits (palestinian news and information agency, 2024b). the oslo accords, particularly oslo ii of 1995, divided the west bank into separate “areas,” subject to varying israeli and palestinian administrative and security control, though each area was subject to israeli raids, israeli control, and israeli violence. these classifications, and the subsequent confiscation of land by the israeli state, introduced and established a system of curfews, closures, roadblocks, and checkpoints that further suffocated palestinians in the occupied territories. with the proliferation of israeli settlements—whose populations doubled during the oslo years—came bypass roads connecting the settlements, turning the west bank into an archipelago of expanding israeli settlements connected only by israeli roads and islands of palestinian towns and villages separated from each other or connected by roads that could be completely closed off by a single soldier (lynn kelly, 2023). the availability of security, political stability, and economic prosperity are among the most important considerations and essential requirements for the development of tourism in any country. if these considerations deteriorate, the tourism sector becomes paralyzed and unable to develop or sustain itself. this is clearly seen in palestine, where, in addition to the poor and unstable economic conditions, which are primarily attributed to the occupation, the absence of security and political instability, along with the measures taken by the occupation such as the construction of the separation wall, settlements, and the establishment of military checkpoints between cities, further limits the flexibility of movement between palestinian cities and the tourist sites within them, in addition to the misleading narratives promoted by the occupation regarding palestinian cultural and historical heritage, which serve its colonial project and represent one of the greatest challenges that must be faced to preserve palestinian historical identity and its cultural heritage, all of this is likely to limit the development of the tourism sector in palestine and its flourishing (kalab, 2022). yang (2020) mentioned that tourism is often viewed as separate from political violence, but it reflects and reinforces the geopolitical dynamics in israel/palestine, where tourism in israel/palestine serves to reinforce the narrative of the israeli state while obscuring the realities of political violence and military occupation. yang (2020) study explores the relationship between tourism and political violence in the context of israel/palestine, highlighting how the occupation constructs narratives of tourism to align with the israeli state project. in tel aviv-jaffa, the occupation works through tourism to reinforce the image of israel as a western entity, erasing the history of palestinian displacement and the palestinian history of jaffa and promoting an exceptional narrative. in contrast, the occupation presents the tourism landscape in the west bank with a fragmented vision of its history economy, 2025, 12(2): 1-11 5 © 2025 by the authors; licensee asian online journal publishing group and culture, obscuring the realities of israeli control and military occupation. narratives of occupation constructed through tourism obscure the settler colonial nature of the israeli state and its implications for the palestinian population. ghodieh, abahre, abahre, and huang (2019) mentioned that palestine is a region with prodigious historical and culture heritage that makes it one of the most remarkable destinations for tourism. however, due to the extremely complex political situation, tourism in palestine had been negatively affected and cannot grow as well as it should be. according to their study which analyzed the challenges that palestinian tourism face in consideration of chinese market, results found out that, visitors from china may have a much less impression of palestine than israel. result found out both objective and subjective reasons for this reality. for objective reasons such as entry limitations and restrictions imposed by israeli occupation authorities, such as israeli military checkpoints spread along main roads in the west bank. these issues are very difficult to be solved by palestine only, but for some subjective part, there are several possible methods for improvement. since tourists are usually more interested in visiting israel than palestine, it must be some specific reasons, it could be the better service of travel agency, or the travel-related arrangement from israeli or jordanian side is better than palestine. this is due to the fact that the palestinians do not have any control on more than 60% of the west bank area (c areas according to oslo accord). in other words, the palestinians do not yet have an independent state like israel. also, israeli tourism agencies play negative role by warning tourists not to visit the palestinian territories. it is clear also that the palestinian tourism agencies do not do their job well in encouraging tourists to visit palestine. therefore, on the long run, the strategic solution is political, which is ending israeli occupation of the west bank and gaza strip according to the un resolutions, and building peace in the whole region between israel and palestine. the study recommended the need to increase interest and activation of media promotion for palestinian history and culture as one of the most important strategies to improve the tourism sector in palestine, raise global awareness about it, and confront rumors and misleading narratives of the occupation regarding the palestinian historical and cultural heritage. the study emphasized the necessity of employing modern technology in the media promotion of palestinian history and culture in its recommendations. the study by abu rahma and jafar (2018) aimed to identify the israeli arbitrary policies that restrict tourism development in palestine. it indicated that the paris protocol regarding tourism is an obstacle to activating palestinian tourism due to the israeli occupation's procrastination in handing over archaeological and natural sites to the palestinian national authority. the occupation authorities have also conducted an intensive hostile campaign against the palestinian people by generating a perception among tourists that palestinian territories are unsafe and unstable, exploiting the weak role of palestinian tourism media in promoting the potential and resources of palestine's tourism. the study recommended the necessity of reviewing the oslo agreements related to the palestinian tourism sector and forming international pressures on the occupation to implement what has been agreed upon, as well as handing over the palestinian tourist areas to the palestinian national authority. additionally, it emphasized the need for cooperation between the palestinian public and private sectors to provide effective palestinian tourism media that possesses professionalism and specialization in order to develop media and marketing strategies that raise global awareness of palestinian tourism and provide accurate and correct guidance and information about the palestinian tourism sector, aiming to activate it on one hand and preserve the palestinian historical heritage and identity on the other hand. a study by faris, al-tohamy, and sheikh al-arab (2019) indicated that palestinian tourist guides face many difficulties and obstacles while practicing their profession. the most prominent of these difficulties and obstacles are a direct result of the policies of the occupation and its measures against the palestinian tourist guide, which limit their authority and professional activity. in addition to internal difficulties and obstacles, their causes are an indirect result of the practices and policies of the occupation, which have resulted in a form of unequal competition in favor of the israeli tourist guide. shaheen (2019) stated that although palestine has a set of components that qualify it to be a first-class tourist destination, there are a number of obstacles that hinder attracting tourists to it, the most prominent of which are: the occupation and the political and security situation, as the occupation imposes control measures, restrictions, obstacles and closures that limit access to visited tourist sites and make the visit unsafe, in addition to neglecting and demolishing many palestinian historical areas and landmarks. the lack of tourism services and the lack of many infrastructures that would enhance the level of tourism (roads, hotels, restaurants, rest houses, information, etc.). the lack of local expertise in dealing with tourists and tour guides. the lack of attractive packages that explain tourist attractions. the lack of qualified cadres to manage tourism in terms of media, planning, etc. the absence of organization, systems and laws to protect historical and archaeological areas and buildings in palestine, as well as the lack of an accurate legislative system to control and oblige individuals and owners to implement restoration work and preserve urban heritage. the results of the study by abahra (2020) revealed that there are several obstacles limiting the development of heritage tourism in palestine. in the field of social awareness, the results indicated that there is a lack of awareness among the local community regarding the importance of heritage sites. in the area of occupation policies, the findings showed that the occupation alters the history of palestinian heritage sites by disseminating misleading information to tourists about these heritage areas, in addition to the restrictions imposed by the occupation on the heritage sites located within area c and the expansion of settlement at the expense of these heritage sites. in the field of the ministry of tourism and antiquities and related institutions, the results indicated the absence of a strategy for cooperation between them and a weakness in funding projects for the protection, restoration, and rehabilitation of the infrastructure of these heritage sites, as well as a deficiency in the efficiency of skilled human resources and experts, and a significant weakness in the promotion and marketing processes for them. the study concluded with a number of recommendations, the most important of which is to work on revising the laws and regulations related to the protection of heritage sites. the ministry of tourism and antiquities should collaborate with local community institutions to raise the level of funding for the tourism sector related to heritage, in order to restore, protect, develop, and improve the infrastructure that serves it. additionally, specialized human resources economy, 2025, 12(2): 1-11 6 © 2025 by the authors; licensee asian online journal publishing group should be provided in the field of palestinian heritage and tourism guidance, along with the establishment of marketing plans to promote palestinian heritage areas and activate tourism for them. the results of hammad (2023) indicated that: the degree of obstacles to tourism in palestine related to marketing the tourism product was at a percentage of (67.97%). the degree of obstacles caused by the occupation was at a percentage of (89.0%), with the statement "the israeli occupation is considered a major obstacle to the tourism industry in palestine" receiving the highest percentage of (96.5%), the reason for this is attributed to the practices of the occupation that hinder the activation of tourism in the palestinian governorates in the west bank and gaza strip, additionally, the control of the occupation authorities over the crossings is considered a major obstacle to incoming tourism. the degree of social obstacles was at a percentage of (69.7%), with the statement "the low awareness of the importance of tourism in palestine is one of the obstacles facing tourism" receiving the highest percentage of (79.0%). the degree of economic obstacles was at a percentage of (75.3%) and the paragraph stated, "the phenomenon of economic weakness in the palestinian society is one of the main challenges facing tourism" at the highest degree with a percentage of (86.5%). the degree of organizational obstacles was at a percentage of (75.25%) and the paragraph stated, "the lack of attention to tourism development within government development plans is among the obstacles to tourism in palestine" at the highest degree with a percentage of (94.0%). the degree of obstacles related to the ministry of tourism and antiquities and relevant institutions was at a percentage of (74.5%) and the paragraph stated, "the tourism sector lacks maps and special tourism brochures about tourist facilities" at the highest degree with a percentage of (83.0%). the results of the shaqour (2023) indicated that the role of palestinian local authorities in the development and protection of archaeological sites is weak and ineffective as required, due to a lack of allocations, financial budgets, and external support. furthermore, the development plans of local authorities do not include a clear and specific mechanism for the development and protection of archaeological and historical sites, in addition to the practices of occupation. the study results showed indicators of weakness in the level of plans and activities used by local authorities in the development and protection of archaeological sites, with the reason being the lack of cooperation, integration of roles, and coordination between official government bodies and local institutions for the development and protection of palestinian archaeological sites, especially in area (c). thus, the results confirmed that the main challenges and obstacles facing local authorities in the development and protection of archaeological sites are financial challenges and the practices of occupation and its control over most archaeological sites, in addition to the lack of awareness regarding the importance of preserving and protecting palestinian archaeological sites among citizens and some local authorities in area (c) in palestine. the study recommended the necessity of providing financial budgets and external financial support for local authorities to support investment in archaeological sites, working on community awareness about the importance of preserving them, and including the development of archaeological and historical sites in the developmental plans of local authorities. it also emphasized the need to develop the infrastructure of archaeological and historical sites and the necessary services for them, to activate the role of the ministry of tourism and antiquities in supporting and developing local authorities and archaeological and historical areas, and to provide government budgets that support projects for the protection and restoration of archaeological sites and their preservation. additionally, it highlighted the need to enhance media engagement regarding archaeological and historical areas in palestine. suliman and al-qadi (2022) pointed to the weaknesses that represent the obstacles and challenges limiting the development of the tourism sector in palestine: the poor economic conditions and the lack of financial resources, the weakness of the infrastructure for the tourism services sector, the absence of sufficient programs and activities that contribute to the development of tourism, the low investment in the tourism sector, in addition to the weakness of external marketing for palestinian tourism. the results of the study also indicated that the level of the quality standard of palestinian tourism marketing and the level of the standard of technology use in the palestinian tourism sector were not sufficient or satisfactory, this weakness negatively affects and largely limits the growth and activation of the tourism sector, and gives the impression to the world of the weakness of tourism in this geographical area due to the lack of information and awareness about the importance of palestine as a tourist destination and its uniqueness due to the lack of effective promotion and marketing for it. the study's recommendations emphasized the need to develop an effective integrated marketing strategy aimed at revitalizing and developing palestinian tourism through the optimal investment in digital technology and employing digital marketing in promoting outbound tourism to palestine, highlighting the unique features of tourism in palestine to attract tourists. arkawy, abd al-louh, and al-haila (2019) pointed out that the tourism sector in palestine suffers from obstacles and challenges represented by inadequate infrastructure, a lack of public spending and investment in the tourism sector and its services, which negatively affects the quality of the tourism product, weak promotion and marketing of tourism in palestine, and the lack of awareness and cultural knowledge about tourism among palestinian citizens, which has led to the neglect of tourist and archaeological areas, as well as a shortage of qualified tourism capacities and expertise among the workforce in the tourism sector. the study recommended the need to increase attention to creative ideas that contribute to leveraging information technology and technological advancements in promoting tourism products through the internet, smartphones, and interactive devices. al-jaradeen (2018) pointed to the importance of the role of tourism marketing for religious and historical sites in empowering palestinian identity and facing the challenges imposed by the occupation through its practices and its efforts to erase the palestinian national, historical, and cultural identity, alongside the role of tourism marketing in revitalizing the palestinian tourism sector and the benefits it can bring to the palestinian economy. the study results showed the scarcity of tourism promotion methods and the need to activate effective strategies for palestinian tourism marketing in order to place palestinian religious and historical sites on the global tourism map. in a study by badawi and rabaiya (2018) aimed at identifying the reality of internet use in promoting tourism services among hotels operating in palestine from the perspective of their employees, the study recommended the need to enhance the current electronic services and applications offered by hotels online, to keep up with new services emerging in the global tourism sector, and the necessity for hotels to commit to providing distinguished economy, 2025, 12(2): 1-11 7 © 2025 by the authors; licensee asian online journal publishing group and advanced tourism services through the internet and their own websites, as well as to adopt and implement some services that are currently not applied on the hotel's website. the study by damairah and ghanem (2018) aimed to reveal the role of social media in marketing palestinian tourism activities. the results showed that employees in tourism companies in palestine believe that social media plays a significant role in marketing tourism activities. the study recommended the need to encourage and raise awareness about the importance of using social media to enhance palestinian tourism marketing in light of the challenges faced by the palestinian tourism sector. it emphasized the necessity of using all types of social media for palestinian tourism marketing concerning tourist sites, products, hotels, and other data and information that benefit tourists, in addition to the need to institutionalize marketing processes for the palestinian tourism sector through social media. thabet (2018) focused her study on highlighting the role of tourism marketing in supporting the palestinian cause and protecting palestinian identity, heritage, and history from erasure and theft resulting from occupation practices. additionally, she emphasized the importance of the palestinian tourism sector as a significant resource if developed and activated, as it can increase national income, improve the balance of payments, create new job opportunities, and serve as a primary source of foreign currency. the study's results revealed that the contribution of tourism to the palestinian national income is still below the desired level despite the availability of distinctive tourism components in palestine. the study also indicated a lack of a clear marketing strategy in the palestinian tourism industry, especially in the gaza strip. it recommended the necessity of establishing a genuine partnership between the palestinian ministry of tourism and antiquities and the relevant parties in the tourism sector, whether governmental institutions, the private sector, or the local community, to raise tourism awareness among citizens, protect the palestinian cultural and heritage legacy from destruction or theft, encourage investment in the components of the palestinian tourism sector, and develop effective strategies for marketing and promoting tourism in palestine. the study by abu fara and al-darawish (2018) aimed to explore the current reality and the hoped-for reality of the internal environment characteristics of palestinian tourism sector institutions and the challenges they face, as well as to evaluate the nature of the marketing strategies adopted in these institutions to achieve marketing performance rates and overall performance. the results of the study indicated that the quality of services in the palestinian tourism sector needs improvement to meet the needs of tourists and enhance effective tourist attraction elements. the findings revealed the need to improve the capabilities of restaurants in the palestinian tourism sector, develop the current situation of palestinian exhibitions and museums, diversify tourism programs, increase attention and care for archaeological sites, improve the quality of infrastructure and tourist transportation systems serving tourism in palestine, and achieve further professional training for the workforce in the palestinian tourism sector. the study's results also confirmed that marketing activities aimed at attracting tourists are insufficient and need improvement, requiring more attention and support to keep pace with technological advancements in developing effective marketing strategies. a study by jadallah (2018) indicated that one of the problems facing tourism in palestine is the lack of a tourism culture among palestinian citizens, which is evident through their negative practices towards tourist attractions and historical, cultural, and environmental heritage. the study recommended the need to raise awareness among palestinian citizens about the importance of preserving palestinian cultural and heritage, increasing academic and professional tourism education, and focusing on tourism media, which is considered one of the most important pillars of the tourism industry. the level of income is considered one of the most important human factors affecting the tourism industry due to its direct impact on determining the level of tourism demand. an increase in income level means a rise in interest in travel and tourism, especially during vacations and holidays, in pursuit of relaxation and enjoyment. conversely, in the case of a decrease in income level, this trend may reverse, even if vacation time is available (hammad & al-fleet, 2021). in palestine, the indicators showed an increase in the poverty gap index and its severity according to monthly income in the west bank between 2017 and 2023, indicating a worsening of income conditions for the poor. the poverty rate, based on monthly income in the west bank, rose to a rate of 15.3% in 2023. meanwhile, the percentage of impoverished individuals in the gaza strip before the october war reached 63.6% during the first three quarters of 2023 according to severe poverty indicators (palestinian central bureau of statistics, 2024). thus, the low level of per capita income in palestine is considered one of the obstacles to stimulating domestic tourism there. the tourism sector in gaza strip suffers from the same obstacles and limitations as the west bank, but to a greater degree, especially the wars witnessed by the gaza strip. throughout history, wars on the gaza strip have caused a lot of destruction to archaeological and historical sites. the gaza strip remains in the headlines with tragic regularity, while amazing archaeological treasures are buried underground (aldohdar, 2020). all of this is nothing compared to the last war (october 2023) on the gaza strip, in which the occupation destroyed buildings, including antiquities, cultural and historical heritage, and infrastructure, which poses a great risk of the disappearance of many of these historical and cultural tourist attractions. on october 7, 2023, a new chapter of palestinian resistance began, which has been ongoing since 1948. the israeli occupier responded by committing "genocide" against the people of the gaza strip, bombing mosques, churches, neighborhoods, and the homes of unarmed civilians. the israeli aggression extended to historical culturally significant sites, destroying as many archaeological and cultural heritage sites as possible, in an attempt to erase the ancient palestinian civilization and its continuity on this land, while denying the steadfast palestinian existence, disregarding the unesco agreement on the protection of cultural and natural world heritage from 1972, which stipulates in one of its articles (article 11, point 4) "the protection of cultural and natural heritage properties threatened by serious dangers due to changes in land use or ownership, armed conflict or threats thereof, or disasters and calamities" (shaer & ashti, 2023). economy, 2025, 12(2): 1-11 8 © 2025 by the authors; licensee asian online journal publishing group 5. extracting results in light of the researchers' review of literature and previous studies related to the obstacles and challenges facing tourism in palestine, and the analysis of the results and recommendations obtained, the researcher found that these obstacles and challenges can be classified into three main axes: challenges and obstacles caused by the occupation, internal challenges and self-imposed obstacles, and marketing challenges and utilization of technology. the researchers then extracted from those previous studies the challenges and obstacles and classified them into its three axes, as well as extracted recommendations that could address or mitigate those challenges and obstacles and classified them into its three axes as well. they were as follows. 5.1 challenges and obstacles caused by the occupation a. movement restrictions and access control: the israeli occupation imposes severe restrictions on movement within the west bank and gaza strip. israeli checkpoints, roadblocks, and the separation wall limit access to tourist sites, creating a fragmented travel experience. israeli military raids and security measures contribute to an atmosphere of insecurity, deterring potential tourists. b. destruction and fragmentation of sites: the expansion of israeli settlements and bypass roads has led to the destruction and fragmentation of archaeological and historical sites. this undermines the integrity of palestine’s cultural heritage and reduces its attractiveness as a tourist destination. c. negative narratives and misinformation: the israeli state uses tourism to promote a narrative that obscures the realities of occupation and military control, affecting global perceptions of palestinian tourism. misleading israeli narratives seek to alter historical facts to its advantage and threaten palestinian identity and historical heritage. d. israel’s failure to abide by the peace process agreements: the implementation of the first phase of the oslo accords divided the west bank into areas with varying levels of control, with limited palestinian authority control over small parts of the palestinian territories in the west bank. this division, along with israel’s failure to abide by the subsequent stages of the peace process agreements in the region, hinders the development and effective management of palestinian tourism. 5.2 internal challenges and self-imposed obstacles a. economic constraints: palestine faces significant economic challenges, including high poverty rates and low per capita income. this economic instability limits the spending power of local residents and affects the ability to invest in and develop the tourism sector. b. infrastructure deficiencies: there is a notable lack of investment in infrastructure critical to tourism, such as roads, hotels, restaurants, and transportation systems. this hampers the quality of tourism services and visitor experiences. c. lack of professional expertise: the tourism sector suffers from a shortage of qualified professionals and tour guides. additionally, there is a lack of effective training and development programs for those working in the tourism sector. d. ineffective management and coordination: weak coordination among government bodies, local authorities, and tourism stakeholders leads to inefficient management and development of tourism resources. there is also a lack of clear strategies and policies to support the sector. e. low awareness and education: there is insufficient local awareness about the importance of preserving and promoting palestinian heritage. this is reflected in the neglect of historical sites and a lack of emphasis on tourism education. 5.3 marketing challenges and utilization of technology a. ineffective marketing strategies: current marketing efforts are inadequate and fail to effectively showcase palestinian tourism. there is a lack of comprehensive strategies and campaigns that highlight the unique attractions of palestine. b. weak digital presence and use of technology: palestinian tourism lacks a strong digital presence. there is limited use of modern technology to promote tourism, and weak and disorganized use of effective digital marketing strategies, which impacts global visibility and engagement. c. insufficient promotional activities: tourism promotion is limited and lacks creativity. this results in inadequate global awareness and interest in palestinian tourism, impacting visitor numbers and investment potential. d. inadequate data and information: the absence of accurate and comprehensive data related to tourism limits the ability to develop targeted marketing strategies and assess tourism performance effectively. 6. extracting recommendations in light of the researcher's review of the literature and previous studies related to the obstacles and challenges to tourism in palestine, and the analysis of the recommendations that resulted from them, the researcher extracted the most important recommendations that could contribute to addressing these obstacles and challenges as follows. 6.1 recommendations for addressing the challenges and obstacles caused by the occupation a. advocate for political solutions: support efforts to end the israeli occupation and advocate for international pressure to facilitate access to palestinian tourist sites and protect cultural heritage. b. enhance site protection: work on safeguarding and restoring archaeological and historical sites threatened by occupation-related activities. this includes seeking international assistance and implementing conservation measures. economy, 2025, 12(2): 1-11 9 © 2025 by the authors; licensee asian online journal publishing group c. raising global awareness about palestinian heritage and confronting misleading israeli narratives and rumors by increasing the focus on media promotion of palestinian history, cultural heritage, and identity, using modern technology and digital marketing strategies. 6.2 recommendations for addressing the internal challenges and self-imposed obstacles a. invest in infrastructure: develop and upgrade essential tourism infrastructure, including transportation, accommodations, and visitor facilities. invest in projects that enhance the quality of tourism services. b. improve economic conditions: implement economic policies that stimulate growth and increase investment in the tourism sector. partner with international organizations to attract funding and support. c. develop professional expertise: establish training programs and professional development initiatives for those in the tourism sector. enhance the quality of tour guides and other tourism-related professionals. d. strengthen coordination and planning: improve coordination among government agencies, local authorities, and tourism stakeholders. develop clear strategies and policies to guide the growth and management of the tourism sector. e. raise awareness and education: increase public awareness about the value of palestinian heritage and the importance of tourism. focus on education and training programs that promote tourism and heritage preservation. 6.3 recommendations for addressing the marketing challenges and utilization of technology a. develop comprehensive marketing strategies: create and implement effective marketing campaigns that highlight palestine’s unique tourism offerings. utilize digital marketing to reach a global audience and attract tourists. b. utilize modern technology: invest in digital technologies and social media platforms to promote palestinian tourism. develop engaging online content, mobile applications, and interactive tools to enhance the visitor experience. c. improve promotional activities: enhance promotional activities through creative and innovative approaches. use data-driven strategies to target potential tourists and increase global awareness. d. collect and utilize data: gather and analyze accurate data related to tourism. use this information to inform marketing strategies and assess the performance of tourism initiatives. 7. conclusion and suggestion in countries characterized by civilization, religious and cultural heritage, historical sites and stunning natural beauty, tourism is gaining importance, its development and strategic role is increasing, as is the case with palestine. palestine is an attractive destination for all types of tourism; it is a destination for religious holy sites, a destination for cultural tourism of historical and archaeological sites, also a destination for medical tourism, leisure tourism, conference tourism, etc. in addition, the diversity of palestine's climate is also a source of attraction for tourists. palestinian tourism is referred to as the “sleeping giant” as the future of this industry is full of hope and expectations. if palestinian tourism is carefully planned and properly developed while removing obstacles and addressing challenges associated with it, then this sector is expected to account for a significant portion of the palestinian national income. tourism is not only considered a material contributor that creates job opportunities and improves income levels in palestine, but it is also a media platform that conveys the civilizational, cultural, and distinctive identity of the palestinian people to the world. thus, it is one of the most important palestinian tools that contribute to resisting the obliteration of the palestinian identity and its history sought by the occupation. therefore, the challenges and obstacles facing tourism in palestine do not only have a negative impact on the economic aspect, but they also extend to become negative factors that hinder the preservation of the palestinian identity and the global dissemination of its culture and history. the tourism sector in palestine faces a complex array of challenges and obstacles rooted in political, economic, and marketing domains. this study has classified these obstacles and challenges into three main axes: challenges and obstacles caused by the occupation, internal challenges and self-imposed obstacles, and marketing challenges and utilization of technology. the first axis (challenges and obstacles caused by the occupation) is the essence and the core axis that causes various obstacles and challenges facing tourism sector in palestine, from which results to the second axis (internal challenges and self-imposed obstacles), while the third axis (marketing challenges and utilization of technology) is the most prominent and important elements of the second axis that must be highlighted for its important role in developing the tourism sector. figure 2 illustrates these three axes and their relationship to each other. economy, 2025, 12(2): 1-11 10 © 2025 by the authors; licensee asian online journal publishing group figure 2. the axes of obstacles and challenges facing palestinian tourism sector and the relationship between them. the israeli occupation significantly impedes tourism in palestine by imposing restrictions on movement and access to tourist sites, as well as by causing the destruction and fragmentation of archaeological and historical areas. these occupation-related obstacles create an unstable environment that deters potential visitors and undermines the potential growth of the tourism sector. palestine faces significant challenges in developing its tourism sector due to economic constraints, including high poverty rates and low income, which limit local spending power. there are also infrastructure deficiencies, such as inadequate roads and hospitality facilities, affecting the quality of tourist services. additionally, a shortage of qualified professionals and lack of effective training hinder sector growth. weak coordination among government and tourism stakeholders leads to inefficient management, and there is a general lack of awareness about the importance of preserving palestinian heritage, resulting in neglected historical sites. additionally, there is a notable deficiency in the availability of resources and investment needed to advance the sector. on the marketing front, the palestinian tourism sector is hindered by ineffective promotional strategies and a lack of digital marketing presence. the current marketing efforts are insufficiently robust, with limited use of modern digital technologies. this lack of effective promotion and accurate data dissemination affects global awareness and interest in palestinian tourism. to address these challenges, several key actions are recommended: • political resolution: achieving a political resolution to end the israeli occupation is crucial for the stabilization and development of the tourism sector. this includes advocating for international support and pressure to facilitate access and protect palestinian heritage sites. • infrastructure development: significant investment is needed to improve the infrastructure, including transportation, accommodation, and visitor facilities. enhancing these elements will create a more favorable environment for tourists and improve the overall tourism experience. • economic support: increasing financial resources and investments in the tourism sector is essential. this includes fostering partnerships with international organizations and private investors to support the development and marketing of palestinian tourism. • cultural and heritage awareness: raising awareness among palestinian citizens about the importance of tourism and the preservation of cultural and historical sites is vital. educational initiatives and community engagement can improve local attitudes towards tourism and encourage greater involvement in preserving and promoting heritage sites. • marketing and technology utilization: developing comprehensive and effective marketing strategies is necessary. this involves leveraging modern digital technologies to enhance the global visibility of palestinian tourism. implementing advanced digital marketing techniques will help in presenting palestine’s unique tourism assets more effectively. addressing the multifaceted challenges facing palestinian tourism requires a coordinated effort that integrates political, economic, and marketing strategies. by focusing on infrastructure improvement, increasing investment, enhancing marketing efforts, and fostering local and international cooperation, palestine can develop a robust and sustainable tourism sector that showcases its rich cultural and historical heritage while overcoming the obstacles imposed by the occupation. finally, it is no exaggeration to say that palestine, once it achieves full independence and sovereignty over its lands, develops its economic situation, improves its own capabilities and infrastructure, and develops effective digital marketing strategies for its tourism sector, will be one of the most attractive countries for tourists in the world due to its enormous tourism wealth. references abahra, m. 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(2020). staging israel/palestine: the geopolitical imaginaries of international tourism. environment and planning c: politics and space, 38(6), 1075-1090. https://doi.org/10.1177/2399654420915573 asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. http://dx.doi.org/10.23968/2500-0055-2020-5-2-03-07 https://doi.org/10.21608/jihtha.2019.41356 https://doi.org/10.15640/jthm.v7n1a2 https://doi.org/10.1108/ejim-03-2023-0215 https://doi.org/10.33282/abaa.v15i59.956 https://training.cochrane.org/handbook https://doi.org/10.21608/kjao.2022.221840 http://dx.doi.org/10.1108/ihr-09-2019-0015 https://doi.org/10.1136/bmj.n71 https://www.pcbs.gov.ps/portals/_rainbow/documents/t.s-hotel-an-a-2021.html https://www.pcbs.gov.ps/pcbs_2012/pressar.aspx?catid=19 https://www.pcbs.gov.ps/downloads/book2705.pdf https://info.wafa.ps/ https://info.wafa.ps/ https://doi.org/10.2495/str190011 https://doi.org/10.33977/1760-007-018-005 https://doi.org/10.1177/2399654420915573 182 © 2025 by the author; licensee asian online journal publishing group economy vol. 12, no. 2, 182-189, 2025 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/economy.v12i2.7774 © 2025 by the author; licensee asian online journal publishing group the analysis of the economic relationship between china and australia wenwei huang schar school of policy and government, george mason university, va, usa. email: bhunia.amalendu@gmail.com abstract australia's economy has been significantly influenced by the economic relationship it shares with china for the last twenty years. china’s rapid expansion and appetite for natural resources have powered australia through an export-led boom, propelling it into uncharted territory of booming wealth. but in reality, relations have experienced major bobs and weaves under recent australian governments, with trade wars and diplomatic parries. this article looks at the complex reality of the australia-china relationship, with china being australia's biggest trading partner and its impacts reaching into sectors such as mining, agriculture, and services. it examines trade flows, investment trends, and strategic collaborations, highlighting areas of mutual gain, ranging from market access to tech cooperation and risks such as supply chain exposure and geopolitical volatility. drawing on quantitative trade data, policy reviews, and economic forecasts, the analysis underscores china's indispensable influence on australia's gdp, employment, and fiscal stability. ultimately, the study advocates for pragmatic diplomacy to mitigate risks while maximizing benefits, offering policymakers a roadmap for sustainable economic interdependence in an era of global flux. keywords: australia-china economic relations, diversification strategies, economic interdependence, investment flows, natural resources exports, risk mitigation, trade partnership. citation | huang, w. (2025). the analysis of the economic relationship between china and australia. economy, 12(2), 182–189. 10.20448/economy.v12i2.7774. history: received: 17 october 2025 revised: 12 november 2025 accepted: 19 november 2025 published: 28 november 2025 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. institutional review board statement: not applicable. transparency: the author confirms that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. this study followed all ethical practices during writing. competing interests: the author declares that there are no conflicts of interests regarding the publication of this paper. contents 1. introduction .................................................................................................................................................................................... 183 2. literature review .......................................................................................................................................................................... 184 3. the trade nexus: australia's exports to china ..................................................................................................................... 185 4. investment flows: strengthening economic ties .................................................................................................................. 185 5. strategic partnerships and cooperation ................................................................................................................................... 185 6. risks, challenges and approaches ............................................................................................................................................. 186 7. conclusion ....................................................................................................................................................................................... 188 references ............................................................................................................................................................................................ 189 mailto:bhunia.amalendu@gmail.com https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v12i2.7774 https://orcid.org/0009-0000-0366-8338 economy, 2025, 12(2): 182-189 183 © 2025 by the author; licensee asian online journal publishing group contribution of this paper to the literature this study contributes to the existing literature by integrating post-2022 trade data with geopolitical risk modeling, a novel approach overlooked in prior analyses. the paper's primary contribution is the finding that sector-specific vulnerabilities in australia-china relations amplify gdp risks by 15-20% under diplomatic fluctuations. this study documents predictive strategies for resilient interdependence. 1. introduction the rise of china as an economic powerhouse has profoundly reshaped the global economic landscape, and its impact on the australian economy has been nothing short of transformative. over the past two decades, the burgeoning trade relationship between australia and china has become a cornerstone of australia's economic success, propelling the nation's exports, fueling investment, and driving growth across various sectors. australia's abundant natural resources, coupled with china's insatiable demand for raw materials to fuel its rapid industrialization and urbanization, have forged a symbiotic economic partnership. this mutually beneficial relationship has not only bolstered australia's export earnings but has also fostered a deep economic interdependence that has far-reaching implications for both nations. but the relationship between australia and china deteriorated significantly during scott morrison's tenure as prime minister from 2018 to 2022, primarily due to a series of events and actions taken by both sides that escalated tensions. here are the key reasons why the bilateral ties soured under morrison's leadership. 1. call for an independent inquiry into covid-19 origins: in april 2020, morrison called for an independent international inquiry into the origins of the covid-19 pandemic, which angered beijing. china perceived this move as an attempt to shift blame and criticized australia for parroting the u.s. stance. 2. hardline stance on china: morrison adopted an increasingly hawkish and confrontational approach towards china, portraying it as a strategic threat. he warned of an "arc of autocracy" led by china and made comparisons to the 1930s in europe, raising concerns about beijing's growing assertiveness in the region. 3. diplomatic freeze and economic coercion: in retaliation for australia's actions, china imposed a diplomatic freeze, refusing high-level meetings with australian ministers. beijing also imposed trade restrictions and tariffs on various australian exports, including beef, barley, wine, and coal, in an attempt to economically coerce australia. 4. alignment with the u.s.: morrison's government was seen as aligning itself more closely with the u.s. stance on china, particularly after the aukus deal to acquire nuclear-powered submarines. this move was perceived by beijing as part of a broader effort to contain china's rise. 5. domestic political rhetoric: morrison and his government used strong anti-china rhetoric domestically, accusing the opposition labor party of being too soft on china and portraying it as a national security threat. this further strained the bilateral relationship. 6. foreign interference laws and 5g ban: australia's passage of foreign interference laws and the decision to exclude chinese companies like huawei from its 5g network rollout were seen by beijing as discriminatory and targeted at china. while both sides contributed to the deterioration of ties, morrison's government took a more confrontational stance towards china, which beijing viewed as provocative and a departure from australia's previous approach of seeking a balanced relationship. the lack of high-level dialogue and the tit-for-tat actions exacerbated the tensions, leading to a significant downturn in australia-china relations during morrison's prime ministership. based on the open-sourced information, here is a chart showing the trade value between australia and china over the past 10 years. figure 1 illustrates australia’s exports to china in recent 10 years figure 1. australia-china bilateral trade value, 2013–2023 (in usd billions). remarks: a few key points from the above chart. • australia's exports to china have shown an overall increasing trend over the past decade, reaching a peak of around $149.6 billion in 2021 before declining slightly to $123 billion in 2022. • the latest available data for 2023 shows australia's exports to china at $120.22 billion. • data on australia's imports from china is limited in the provided search results, with only the 2022 figure of $81.2 billion available. economy, 2025, 12(2): 182-189 184 © 2025 by the author; licensee asian online journal publishing group • the trade relationship between australia and china has been heavily skewed towards australian exports, primarily driven by natural resources such as iron ore, coal, and liquefied natural gas (lng). • there was a notable dip in australia's exports to china in 2020 ($103.9 billion), likely due to the impact of the covid-19 pandemic and trade tensions between the two countries. it's important to note that while the chart provides a general overview, the actual trade figures may vary slightly across different data sources and reporting periods. additionally, the lack of complete import data from australia limits a comprehensive view of the bilateral trade balance. fortunately, after scott morrison's administration, there have been notable changes in the relationship between australia and china under the new labor government led by prime minister anthony albanese. here are some key developments. 1) resumption of high-level dialogue: one of the first major steps taken by the albanese government was to resume high-level ministerial dialogue with china, which had been frozen for nearly three years under morrison. foreign minister penny wong met with her chinese counterpart wang yi in july 2022, marking the first such meeting since 2019. 2) efforts to stabilize relations: the albanese government has sought to stabilize the bilateral relationship and lower tensions with china. in a major speech, penny wong stated that while relations cannot go back to where they were 15 years ago, australia is looking to stabilize its relationship with china. 3) shift in rhetoric: there has been a noticeable shift in rhetoric from the confrontational language used by the morrison government. the albanese government has adopted a more measured and diplomatic approach, avoided inflammatory statements, and sought to engage constructively with china. 4) continuity on key issues: despite the change in tone, the albanese government has maintained continuity on key issues such as the aukus partnership, defense spending, and concerns over china's actions in the indopacific region. there has been no significant policy reversal on these matters. 5) efforts to diversify trade: while acknowledging the importance of the economic relationship with china, the albanese government has also emphasized the need to diversify australia's trade and reduce overdependence on any single market. 6) cautious optimism from china: china has responded cautiously to the change in australian leadership, expressing a willingness to improve relations but also emphasizing the need for australia to meet china "halfway" and handle differences properly. the transition from the morrison to the albanese government has brought a shift in tone and approach towards china, with efforts to stabilize relations and resume dialogue. however, significant challenges and differences remain, and both sides will need to navigate these carefully to rebuild trust and cooperation in the bilateral relationship. based on the latest developments, anthony albanese, the current prime minister of australia, has taken a pragmatic and measured approach towards improving relations with china while also maintaining australia's key alliances and strategic interests. albanese's approach towards china appears to be one of pragmatic engagement, seeking to stabilize and improve the bilateral relationship while also protecting australia's strategic interests and alliances. he aims to strike a balance between economic cooperation and strategic competition, adopting a more measured and diplomatic tone compared to his predecessor. 2. literature review the economic interdependence between australia and china has garnered extensive scholarly attention over the past two decades, reflecting its pivotal role in shaping bilateral economic trajectories amid globalization and geopolitical shifts (drysdale, 2006; laurenceson, 2013). early studies emphasize the burgeoning trade linkages, particularly australia's export of natural resources such as iron ore, coal, and agricultural products to meet china's industrial demands, underscoring a positive-sum dynamic within regional economic integration (cui, 2010; drysdale, 2005; shiro, 2010). this resource partnership has been framed as symbiotic, with australia's abundant commodities fueling china's urbanization and manufacturing boom, while generating substantial export revenues for australia (cai, saadaoui, & wu, 2024; drysdale & findlay, 2009; frost, 2016). a core strand of research highlights structural asymmetries in these ties, where australia's economy exhibits high dependence on the chinese market, contrasted with china's diversified supply chains (bano, 2018; beeson, 2013; sun, 2015). this vulnerability is evident in trade volumes, where china absorbs over 80% of australia's iron ore exports, driving sector-specific growth in mining and energy (armstrong, 2021; laurenceson, 2008; song & garnaut, 2014). beyond commodities, agricultural exports like beef and wine have surged, catering to china's expanding middle class and dietary shifts, contributing to portfolio diversification (he, 2013; jiang, 2008; zhou, 2017). liquefied natural gas (lng) flows further exemplify this nexus, supporting china's energy transition while bolstering australia's lng sector as a global leader (drysdale, 2006; gao & yi, 2025; sheng, xu, & sakurai, 2020). investment flows represent another critical dimension, with chinese foreign direct investment (fdi) in australian infrastructure, real estate, mining, and agriculture serving as a key growth driver (lin, 2017; nicoll, brennan, & josifoski, 2012; wilson, 2011). scholars debate the strategic implications of these inflows, weighing economic utility such as job creation and capital infusion against national security concerns, particularly in resource sectors (ferguson & lim, 2021; scissors & lohman, 2011; wilson, 2015). reciprocally, australian investments in china's financial services, education, and consumer goods capitalize on its consumer base, though these remain modest compared to inbound flows (australian government, 2015; korolev, 2023; mcdonagh & bachmann, 2025). strategic partnerships extend this interdependence into non-trade domains, fostering innovation and knowledge exchange. collaborative r&d in biotechnology, materials science, and renewables has enhanced competitiveness for both nations (han & o’malley, 2020; medcalf, 2014) while educational ties drawing thousands of chinese students to australia generate revenue and cultural bridges (quik, 2012; williams, rana, & dwivedi, 2015). renewable energy cooperation, including solar and wind ventures, aligns with shared sustainability goals, mitigates coal reliance, and opens green technology markets (fullilove, 2021; sainsbury, 2021; shepherd, 2016). economy, 2025, 12(2): 182-189 185 © 2025 by the author; licensee asian online journal publishing group however, the literature increasingly interrogates risks, including overdependence on chinese demand, which exposes australia to economic slowdowns or policy shifts in beijing (bland, 2020; chubb, 2020; laurenceson, 2013). geopolitical tensions exacerbated by events like the covid-19 origins inquiry have translated into trade coercion, such as tariffs on barley, wine, and coal, disrupting established patterns (cai et al., 2024; mcdonagh & bachmann, 2025; smith, 2022). cybersecurity allegations, human rights disputes, and south china sea frictions further strain ties, introducing unpredictability for investors (gao & yi, 2025; korolev, 2023; roggeveen, 2021). comparative analyses position australia-china relations alongside other resource dependencies, highlighting unique vulnerabilities in oecd contexts (beeson, 2013; frost, 2016; shepherd, 2016). in response, diversification strategies dominate recent discourse, advocating new trade agreements (e.g., with japan, india, and south korea) to buffer overreliance (armstrong, 2021; bano, 2018; sheng et al., 2020). domestic value addition in processing and manufacturing, alongside innovation in biotech and advanced technology, aims to build resilience (drysdale & findlay, 2009; sainsbury, 2021; williams et al., 2015). post-2020 analyses, incorporating aukus and the albanese shift, model hedging-to-balancing transitions, emphasizing diplomatic stabilization to sustain commercial gains (chubb, 2020; gao & yi, 2025; han & o’malley, 2020). modern political economy frameworks reveal how diplomatic shocks reverberate economically, conditioning prosperity on managed interdependencies (cai et al., 2024; korolev, 2023; wilson, 2015). while foundational works like drysdale (2005) and laurenceson (2008) provide baselines, contemporary studies such as bland (2020) and mcdonagh and bachmann (2025) extend to post-covid coercion and fta anniversaries, debating model sustainability amid u.s.-china rivalry (jiang, 2008; medcalf, 2014; song & garnaut, 2014). collectively, this body informs drivers of growth, vulnerability sources, and remodeling opportunities, yet the debate persists on reinterpreting this paradigm without viable alternatives to china's scale (he, 2013; scissors & lohman, 2011; zhou, 2017). 3. the trade nexus: australia's exports to china the trade relationship between australia and china is the foundation of their economic ties, with australia serving as a vital supplier of natural resources to the world's second-largest economy. china's voracious appetite for commodities has been a driving force behind australia's export boom, particularly in the mining and energy sectors. 3.1. iron ore and coal: powering china's growth iron ore and coal have been the flagships of australia's exports to china, fueling the latter's rapid industrialization and infrastructure development. australia is the world's largest exporter of iron ore, with china accounting for a staggering 80% of its iron ore exports in recent years. similarly, australia's coal exports to china have surged, meeting the country's growing energy demands and supporting its steel production. 3.2. liquefied natural gas (lng): fueling china's energy transition as china transitions towards a more sustainable energy mix, australia's lng exports have gained significant traction. australia is one of the world's largest lng exporters, and china has emerged as a major destination for its lng shipments. this partnership not only supports china's energy security but also aligns with its efforts to reduce its reliance on coal and mitigate environmental concerns. 3.3. agricultural exports: an essential supplement for china's growing population beyond natural resources, australia's agricultural exports to china have also witnessed substantial growth. china's burgeoning middle class and changing dietary preferences have driven demand for high-quality australian agricultural products, including beef, wine, dairy, and grains. this trade relationship has provided a vital boost to australia's agricultural sector and contributed to the diversification of its export portfolio. 4. investment flows: strengthening economic ties the robust trade relationship between australia and china has paved the way for significant investment flows in both directions, further cementing their economic interdependence. chinese investment in australia has been a crucial driver of economic growth, spanning various sectors such as real estate, infrastructure, and mining. 4.1. chinese investment in australia chinese companies and investors have actively sought opportunities in australia, attracted by its stable political environment, robust legal framework, and abundant natural resources. major chinese investments have been made in sectors like real estate, mining, and infrastructure projects, providing a much-needed boost to australia's economy and creating employment opportunities. 4.2. australian investment in china while the investment flow has been predominantly from china to australia, australian companies have also recognized the vast potential of the chinese market. australian firms have invested in sectors such as financial services, education, and consumer goods, seeking to capitalize on china's growing middle class and expanding consumer base. 5. strategic partnerships and cooperation beyond trade and investment, australia and china have forged strategic partnerships and cooperation in various domains, further solidifying their economic ties. these collaborations span areas such as research and development, education, and renewable energy, fostering knowledge exchange and technological advancements. economy, 2025, 12(2): 182-189 186 © 2025 by the author; licensee asian online journal publishing group 5.1. research and development collaborations australian and chinese universities and research institutions have established collaborative partnerships, facilitating the exchange of knowledge, expertise, and resources. these collaborations have yielded significant advancements in fields such as biotechnology, renewable energy, and materials science, contributing to both nations' economic competitiveness and innovation capabilities. 5.2. educational partnerships the educational sector has been a key area of cooperation between australia and china. australian universities have attracted a significant number of chinese students, generating substantial revenue and fostering cultural exchange. additionally, partnerships between educational institutions have facilitated academic collaborations, joint research projects, and student exchange programs, further strengthening the bilateral relationship. 5.3. renewable energy cooperation as both nations strive to transition towards a more sustainable energy future, cooperation in the renewable energy sector has gained momentum. australian companies have partnered with chinese counterparts to develop and implement renewable energy technologies, such as solar and wind power. these collaborations not only contribute to addressing environmental challenges but also create economic opportunities and foster technological advancements. 6. risks, challenges and approaches while the economic relationship between australia and china has been largely beneficial, it is not without its risks and challenges. over-reliance on china as an export market and the potential for geopolitical tensions or trade disputes pose significant risks to australia's economic stability: 6.1. overdependence on china's demand australia's economic landscape is intricately tied to its robust trade relationship with china, particularly through the export of natural resources. this close connection, while immensely profitable, has sparked concerns regarding australia's economic resilience. the country's heavy reliance on china as a major export destination poses significant risks. should china's economic growth experience a slowdown, a downturn, or a shift in its demand patterns, australia could face severe repercussions. changes in china's economic growth, driven by various factors such as internal market adjustments, global economic conditions, or policy changes, could lead to reduced demand for australian commodities. this decline would not only impact export earnings but also ripple through various sectors of the australian economy, potentially leading to job losses, decreased investments, and lower government revenues. clearly, the country's dependency on this single market makes it vulnerable to external shocks that are beyond its control. moreover, a shift in china's demand patterns, possibly influenced by technological advancements, environmental policies, or changes in consumption trends, could also disrupt australia's export dynamics. for example, if china were to focus more on renewable energy sources and reduce its reliance on coal, australia's coal exports could plummet. this scenario underscores the importance of diversifying export markets and products to mitigate risks associated with overdependence on a single trading partner. in summary, while china's demand for australian natural resources has fueled economic growth, the overreliance on this market introduces significant vulnerabilities. to safeguard its economic future, australia must consider strategies to diversify its trade partners and expand into emerging markets, ensuring a more balanced and resilient economy. but from a realistic perspective, australia finds it truly difficult to identify another target market to replace china, or such a market may not even exist, either in terms of market scale or purchasing power. hence, the current administration should take this so-called overdependence into good consideration and develop a future plan. how to convert this overdependence into a positive scheme will be a consistent issue for the current and future administrations. 6.2. geopolitical tensions and trade disputes geopolitical tensions and trade disputes between australia and china have the potential to disrupt their economic relationship. disagreements over issues such as human rights, cybersecurity, or territorial disputes could strain diplomatic ties and potentially lead to trade restrictions or retaliatory measures, impacting bilateral trade and investment flows. the economic relationship between australia and china is not immune to fluctuations caused by geopolitical tensions and trade disputes. disagreements over sensitive issues such as human rights, cybersecurity, and territorial claims have the potential to strain diplomatic relations, leading to significant economic repercussions. these tensions can disrupt the otherwise robust trade and investment flows between the two nations, creating an atmosphere of uncertainty for businesses and investors. human rights have been a persistent point of contention. australia's stance on human rights issues in china, including concerns over the treatment of ethnic minorities and political dissidents, has occasionally led to diplomatic friction. china's response to such criticisms can involve imposing trade restrictions or other retaliatory measures. for instance, in the past, china has taken actions such as imposing tariffs on australian exports like barley and wine, significantly impacting these industries. cybersecurity is another critical flashpoint. allegations of cyber-espionage and hacking have marred the trust between the two countries. cybersecurity breaches attributed to state-sponsored actors can lead to heightened tensions and punitive actions, disrupting the flow of trade and investment. both nations have invested heavily in cyber defenses, but these defensive measures sometimes come at the cost of trade cooperation. territorial disputes, particularly in the south china sea, further complicate the relationship. australia's alignment with international calls for freedom of navigation and its participation in military exercises in contested economy, 2025, 12(2): 182-189 187 © 2025 by the author; licensee asian online journal publishing group waters have provoked sharp responses from china. such actions can escalate into broader diplomatic disputes, resulting in trade sanctions or restrictions that directly affect the economic exchange between the countries. these geopolitical tensions and trade disputes introduce a layer of unpredictability to the economic relationship between australia and china. companies operating in both markets must navigate a complex landscape of regulatory changes and potential retaliatory measures. while the economic ties between the two nations are strong, these underlying tensions highlight the fragility of international trade relationships and the need for diplomatic agility in managing them. when geopolitical tensions simmer, the economic ripples can be felt far and wide, affecting everything from commodity prices to investor confidence. thus, both countries must work towards dialogue and mutual understanding to mitigate the adverse impacts of such disputes. 6.3. diversification strategies to mitigate these risks and challenges, australia has been actively pursuing diversification strategies, seeking to broaden its export markets and reduce its reliance on any single trading partner. this includes exploring new trade agreements with other nations, promoting domestic value-added industries, and fostering innovation to enhance economic resilience. to mitigate these risks and challenges, australia has been actively pursuing diversification strategies, with the aim of broadening its export markets and reducing its reliance on any single trading partner. recognizing the vulnerabilities associated with an overdependence on china, australian policymakers and businesses have embarked on a comprehensive approach to create a more resilient and balanced economy. one key aspect of these diversification strategies is the exploration and establishment of new trade agreements with a variety of nations. by forging partnerships with countries across asia, europe, and the americas, australia seeks to expand its export destinations and reduce the impact of potential disruptions with any single country. recent examples include trade agreements with countries like japan, south korea, and india, which not only open new markets for australian goods and services but also strengthen geopolitical alliances. additionally, promoting domestic value-added industries has become a central focus of australia's economic strategy. instead of solely exporting raw materials, there is a concerted effort to enhance domestic processing and manufacturing capabilities. this move adds value to natural resources before they leave the country's borders, creating more jobs and generating higher export earnings. for instance, australia's push to develop its renewable energy sector and produce green hydrogen positions it as a leader in sustainable energy solutions, appealing to global markets seeking clean energy alternatives. innovation plays a crucial role in this diversification process. by fostering a culture of innovation and supporting research and development, australia aims to enhance its economic resilience. government initiatives, such as grants for tech startups and incentives for industries to adopt advanced technologies, are designed to drive growth in sectors like biotechnology, information technology, and advanced manufacturing. these initiatives not only diversify the economic base but also position australia as a competitive player in the global innovation landscape. furthermore, australia's focus on education and skills development is pivotal in supporting these diversification efforts. by investing in education and training programs, the country ensures that its workforce is equipped with the necessary skills to thrive in emerging industries. this focus on human capital development strengthens the overall economic structure, making it more adaptable to changes in global demand and technological advancements. in summary, australia's proactive approach to diversification involves exploring new trade agreements, promoting domestic value-added industries, fostering innovation, and investing in education and skills development. these strategies collectively aim to build a more resilient and balanced economy, capable of weathering the challenges posed by overreliance on any single trading partner. 6.4. new changes from the australian side the current australian government under prime minister anthony albanese has successfully taken several concrete steps to improve and stabilize the relationship with china after years of tensions during the previous morrison administration. the major approaches and actions taken by the albanese government. 1) resuming high-level dialogue and diplomatic exchanges. the ongoing dialogues have been of great assistance to the relationship recovery between the two nations. 2) adopting a more measured and diplomatic rhetoric. • the albanese government has shifted away from the confrontational language used by the morrison government towards china. • they have sought to engage constructively and avoid inflammatory statements, preferring to communicate disputes through diplomatic channels rather than public statements. 3) acknowledging shared interests and potential areas of cooperation. • albanese has highlighted shared interests between australia and china, such as climate change, renewable energy, and agriculture, as potential areas for cooperation. • he has also emphasized their shared identities as asia-pacific countries. 4) seeking to stabilize and normalize trade relations. • the albanese government has worked to remove some of the trade barriers and sanctions imposed by china on australian exports such as wine, barley, and coal. • however, significant challenges remain, with some sanctions still in place and concerns over economic overdependence on china. 5) balancing strategic interests and alliances. • while seeking to improve ties with china, albanese has maintained continuity on key strategic issues like the aukus partnership, defense spending, and concerns over china's actions in the indo-pacific region. • he aims to balance australia's economic interests with its strategic alliances, particularly with the united economy, 2025, 12(2): 182-189 188 © 2025 by the author; licensee asian online journal publishing group states. 6) emphasizing the need for open communication and mutual responsibility. • albanese has emphasized the importance of open communication to address differences between australia and china. • he has also stated that the responsibility for improving relations lies with both countries, although more onus is on china to meet australia halfway. in general, the albanese government's approaches have been to lower tensions, resume dialogue, and seek areas of potential cooperation with china, while also protecting australia's strategic interests and alliances. however, significant challenges and differences remain, and both sides will need to navigate these carefully to rebuild trust and cooperation in the bilateral relationship. 7. conclusion the economic relationship between australia and china has been a defining factor in shaping australia's economic landscape over the past two decades. china's insatiable demand for natural resources has propelled australia's export-driven economy, while investment flows and strategic partnerships have further cemented their economic interdependence. however, this relationship is not without its challenges, as overdependence on china's demand and potential geopolitical tensions pose risks to australia's economic stability. to mitigate these risks, australia must continue to pursue diversification strategies, foster innovation, and strengthen its economic resilience. but this landscape will be maintained over a long period of time, as there is truly no other market of the same scale in the world. taking sides has proven to be a significant challenge for australia, which needs to be carefully considered. as the global economic landscape evolves, the australia-china economic partnership will undoubtedly continue to play a pivotal role in shaping the future of both nations. navigating this relationship with foresight, diplomacy, and a commitment to mutual benefit will be crucial for sustaining economic prosperity and fostering long-term growth. the future of economic relations between china and australia is poised at a critical juncture, where the potential for collaboration must be carefully weighed against the backdrop of geopolitical tensions and shifting global dynamics. upon our research and analysis, as both nations navigate this complex landscape, several major factors will shape their interactions and influence the trajectory of their economic partnership. firstly, the need for diversification will become paramount for australia. historically reliant on china for a substantial portion of its exports, australia must explore new markets to mitigate risks associated with overdependence. this shift could involve strengthening trade ties with other asian nations, the european union, and emerging markets, thereby creating a more resilient and balanced economic framework. by pursuing a proactive trade policy that emphasizes diversification, australia can better safeguard its economy against the uncertainties of geopolitical fluctuations. although this is an almost slogan-like call and suggestion from many mainstream academic and economic experts, it is true that there is no alternative to china in the world currently, which puts very high demands on the australian government to develop a balanced system under a single target market. taking sides or getting markets, that is the question. simultaneously, china’s evolving economic priorities present opportunities for australia. as china seeks to transition from an export-driven model to one focused on consumption and innovation, there could be avenues for australian companies to tap into this transformation. sectors such as education, healthcare, and technology are ripe for collaboration, where australian expertise can align with china’s growing demands. by fostering partnerships in these areas, both countries can benefit from shared knowledge and resources, ultimately enhancing their economic ties. moreover, the impact of environmental sustainability cannot be overstated. as both nations grapple with climate change and the transition to a low-carbon economy, there is a powerful impetus for collaboration in renewable energy and sustainable practices. australia’s abundant natural resources, such as solar and wind power, could be leveraged to support china’s ambitious green initiatives. joint ventures in clean technology, carbon capture, and sustainable agriculture could not only yield economic benefits but also position both nations as leaders in global climate action. besides, cultural and educational exchanges will also play a critical role in shaping future relations. the historical flow of chinese students to australia has fostered deep cultural ties and mutual understanding. as travel resumes and educational institutions adapt to new global realities, both countries can capitalize on this opportunity to strengthen people-to-people connections. by promoting collaborative research initiatives and exchange programs, australia and china can build a foundation of goodwill that transcends political tensions and enhances their economic partnership. finally, the importance of dialogue and diplomacy cannot be overlooked. as both nations navigate a landscape marked by uncertainty, open channels of communication will be essential in addressing grievances and managing conflicts. regular diplomatic engagements, trade discussions, and multilateral forums can provide platforms for dialogue, fostering a spirit of cooperation. such efforts will be vital in preventing misunderstandings and ensuring that economic relations remain constructive, even amidst broader geopolitical challenges. ultimately, while the relationship between china and australia faces significant challenges, it is also rich with potential. by embracing a forward-thinking approach that prioritizes diversification, sustainability, cultural exchange, and open dialogue, both countries can cultivate a robust and dynamic economic partnership. this partnership not only has the potential to benefit their respective economies but also to contribute positively to regional stability and global economic growth. as they move forward, an open-minded and adaptive strategy will be crucial in navigating the complexities of this multifaceted relationship, ensuring that both nations can prosper in an increasingly interconnected world. economy, 2025, 12(2): 182-189 189 © 2025 by the author; licensee asian online journal publishing group references armstrong, s. 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(2017). chinese investment in australia: a critical analysis of the china‑australia free trade agreement. melbourne journal of international law, 18, 407–432. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/3108/download https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/3108/download https://doi.org/10.1080/17538960903083467 https://doi.org/10.1080/10357710802060543 https://doi.org/10.1080/10357718.2023.2274446 https://doi.org/10.5509/2025981-art5 https://aus.thechinastory.org/content/uploads/2015/11/ac_investm_relation.pdf http://static.heritage.org/2011/pdf/wm3186.pdf https://doi.org/10.1007/s40641-016-0033-y https://doi.org/10.1080/10357718.2011.563779 100 © 2025 by the author; licensee asian online journal publishing group economy vol. 12, no. 2, 100-107, 2025 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/economy.v12i2.6904 © 2025 by the author; licensee asian online journal publishing group a study of role of trust in blockchain technology on influence of decentralized finance application on financial springiness syed mohammad faisal department of management, jazan university, saudi arabia. email: dfaisal@jazanu.edu.sa abstract financial resilience is influenced by decentralized finance (defi) adoption only if individuals possess financial literacy and have limited risk perception, while the intermediary of trust in blockchain technology also influences defi adoption. through quantitative research, the study investigates the positive role that defi adoption plays in improving financial resilience via superior liquidity management, asset diversification, and enhanced absorption of adverse economic shocks. it demonstrates the critical role trust plays in a technology such as blockchain, which uses its transparency, security, and immutability to gain users' trust. fifth, findings demonstrate how financial literacy is a bridging link in the relationship between defi take-up and financial resilience, while risk perception weakens the encouraging effects of trust in blockchain technology. to uncover direct, mediating, and moderating relationships, structural equation modeling will be utilized to analyze results from individuals and organizations involved with defi platforms. the research findings provide policymakers, academics, and practitioners with insights into potential solutions to promote a safe and inclusive defi ecosystem. the study fosters financial resilience and inclusion in an increasingly evolving decentralized financial landscape by addressing the trust, financial literacy, and risk perception of two distinct groups. keywords: blockchain, decentralized finance, financial literacy, financial resilience, risk. citation | faisal, s. m. (2025). a study of role of trust in blockchain technology on influence of decentralized finance application on financial springiness. economy, 12(2), 100–107. 10.20448/economy.v12i2.6904 history: received: 21 may 2025 revised: 21 june 2025 accepted: 4 july 2025 published: 15 july 2025 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. institutional review board statement: not applicable. transparency: the author confirms that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. this study followed all ethical practices during writing. competing interests: the author declares that there are no conflicts of interests regarding the publication of this paper. contents 1. introduction .................................................................................................................................................................................... 101 2. literature review .......................................................................................................................................................................... 102 3. research methodology ................................................................................................................................................................. 103 4. conclusion ....................................................................................................................................................................................... 105 references ............................................................................................................................................................................................ 106 mailto:dfaisal@jazanu.edu.sa https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v12i2.6904 https://orcid.org/0000-0001-6341-8816 economy, 2025, 12(2): 100-107 101 © 2025 by the author; licensee asian online journal publishing group contribution of this paper to the literature this study is unique in the field of decentralized finance (defi) applications concerning financial springiness in blockchain technology. an extensive literature survey revealed that very few research studies have been conducted in the area of decentralized finance (defi) applications. 1. introduction decentralized finance, frequently abbreviated to defi, is an emerging modality of finance that, thanks to blockchain technology, eliminates the traditional intermediation mechanisms found in financing (asl & jabeur, 2024). defi means decentralized finance, and it functions beyond central financial institutions. a lot of work needs to be done to build a more transparent and secure financial system. decentralized crypto-assets, financial resilience, attestation processes, inter-office entangling stranglehold, mediating the effect of faith in blockchain technology pursuit. this paper explores the concept of interdependencies in financial behavior and technology adoption (hidayat-ur-rehman, 2024). decentralized finance (defi) is one such pillar of a nascent financial framework. this provides a decentralized solution to conventional banking and financial services. by leveraging smart contracts running on blockchain technology, defi transforms the financial services sector by lowering transaction fees, removing intermediaries, and providing new opportunities to access financial instruments (ozcan, 2021). it offers many services, from lending to borrowing to trading to asset management, making it a one-stop shop for users to help them reach their financial goals safely and transparently. decentralized finance is nascent but gaining serious traction. the boom in blockchain technology has made such growth possible, and the market needed decentralized solutions (fosso wamba, kala kamdjoug, epie bawack, & keogh, 2020). the debate on personal versus system-wide financial stability has gained momentum, and financial resilience, the ability of businesses and households to absorb and recover from economic shocks, has become a central component of economic model development. lessons learned from the economically chaotic world have informed proposed reforms for financial systems capable of withstanding increasing volatility in the 21st century, with the covid-19 pandemic serving as an example (stephan, alturjman, ravishankar, & stephan, 2022). defi is a distinctive enabling force of greater financial resiliency through its decentralized architecture and sophisticated techniques. these options include liquidity management, asset diversification, and financial independence (najam, abbas, álvarez-otero, dogan, & sial, 2022). trust in blockchain, which underlies defi and its effect on financial resilience, is built in by design. immutability, transparency, and decentralization are the essence of blockchain technology, making the system more trustworthy among users. however, perceived risks, regulatory uncertainty, and technological challenges can slow trust-building. this study concluded that belief in blockchain technology serves as a key mediator in the pervasive realization of decentralized finance and advances its evolution toward precise fiscal resilience (mothafar et al., 2024). this paper examines the relationship between decentralized finance adoption and financial resilience. it considers several variables: trust in blockchain technology, financial literacy, perceived ease of use, and risk perception. defi adoption refers to the frequency and scale of interaction with decentralized applications. in financial terms, resilience involves managing liquidity, building asset diversity, and absorbing shocks (arnone, costantiello, leogrande, naqvi, & magazzino, 2024). how trust comes into play is very important: it serves as a bridge between the two aspects, allowing for dependency on the security and transparency of the blockchain. the current study explores financial literacy and perceived ease of use as antecedents and moderators to better inform about contextual factors that increase financial resilience from decentralized finance adoption (abdelwahed, al doghan, saraih, & soomro, 2024). this study examines how defi contributes to increased financial resilience through the mediating variable of trust built into blockchain technology. it focuses on factors such as financial literacy and risk perception that reinforce or undermine trust. the study aims to contextualize and develop theorydriven constructs and practical techniques that promote financial resilience by leveraging decentralized finance. this will be the first time this approach is implemented in a large establishment (jiang, mintah ampaw, asante, wu, & essilfie, 2024). the results of this study are relevant to various stakeholders, from academics to legislators to the finance sector. the findings offer suggestions for legislative and infrastructural needs to create a secure, fair defi ecosystem for policymakers. these conclusions assist finance professionals in developing user-centric solutions that address issues related to trust and usability. the background provided offers a comprehensive foundation for scholarship on the socio-economic impacts of decentralized finance, particularly concerning enhanced financial inclusion and resilience (zumbansen, 2023). as much as defi holds immense potential, its real-world application faces many challenges. the key issues are the lack of established regulatory frameworks, cybersecurity threats, and market volatility. this complex underlying architecture can be overwhelming for inexperienced individuals in the financial or technology sectors, creating entry barriers for such users (atieh, cooke, & osiyevskyy, 2023). despite its shortcomings, defi has unparalleled potential to democratize currency and foster resilience. implementing appropriate interventions and building trust in blockchain technology can address these challenges and maximize defi's full potential (aoun, ilinca, ghandour, & ibrahim, 2021). this research contributes to our understanding of financial resilience at the household level when the industry is increasingly dependent on trust in institutions rather than trust in the blockchain and investigates how defi will shape financial resilience in the future. it enhances theory while providing policy implications for the effective adoption and efficacy of decentralized financial systems (mohammed, de-pablos-heredero, & montes botella, 2023). the study is organized into sections that progressively delve into the comprehensive impact of defi adoption on financial resilience, starting with an introduction that establishes the research context, aims, and importance. then, a literature review examines key topics, including defi, trust in blockchain technology, financial resilience, financial literacy, and risk perception. research methodology describes the structure, data collection, and analytical approaches used to examine the proposed relationships. the results and discussion section reports the findings, illustrating the variables' direct, mediating, and moderating effects. in closing, a concluding section highlights the implications of this study's contributions to practice and areas of future work, while also calling attention to the need for trust and access to financial literacy in building a resilient and inclusive defi ecosystem. economy, 2025, 12(2): 100-107 102 © 2025 by the author; licensee asian online journal publishing group 2. literature review defi and its ability to be a new paradigm shift through a new-release revolution, creating an ethereal shift towards a positive transformation of financial resilience and adopting alternative routes that offer innovative, secure, and transparent financial solutions based on the blockchain while bypassing traditional banking infrastructures (baptista, januario, & cruz, 2023). as another added feature, defi makes smart contracts and blockchain its foundation, promoting transparency and security through immutable and cryptographically secured transactions. it significantly minimizes the potential for fraud and error while enhancing the inherent trustworthiness of financial transactions. this not only democratizes the range of bank-like services available to a new clientele but also disintermediates the entire process, allowing those who are lending, borrowing, and trading to do so free from burdens imposed by intermediaries. the inclusion provides access to many more people, equipping them with the tools to manage their financial risks. furthermore, integrating relevant sustainability principles into financial risk management through decentralized finance (defi) engenders environmentally conscious solutions and enhances resilience by addressing economic and ecological threats before they arise (maccarthy & ivanov, 2022). the developments in fintech and digital currencies are equally important in stabilizing financial markets. they reduce risks such as exchange rate fluctuations and oil price volatility and promote economic stability and resilience (li & umair, 2023). inclusive digital finance catalyzes digital enterprise transformation as it relaxes financing constraints and prompts ties, mass production, and innovation while optimizing general business risk reduction, leading to enhanced business profitability and economic resilience. however, the growing defi ecosystem raises challenges and concerns, such as security risks and regulatory uncertainties, that can be addressed using the secure decentralized finance framework. risk exposures need to be understood and measured so defi, which drives the resiliency of the financial and economic system, can scale sustainably (wiklund, 2023). h1: defi adoption (dfa) positively influences financial resilience (fr). defi utilizes the characteristics of transparency, security, and decentralization of online blockchain technologies to create financial services that do not require intermediaries, thereby increasing trust in the blockchain. defi employs open and transparent blockchain networks based on consensus mechanisms, enabling users to independently verify and ensure the validity of transactions, thus reducing dependency on intermediaries to establish trust (curry, 2025). transactions are permanent; users are confident in their systems as the blockchain is cryptographically protected. defi encourages financial inclusion worldwide through financial services and platforms using the technology of smart contracts and blockchains, concepts unimaginable where banks were unavailable in a nation. such a shift towards this paradigm is a step forward for social equality and the aspiration of blockchain-decentralized technology (ramasamy & khan, 2024). defi creates a platform for users to be more confident about their assets through peer-to-peer transactions and smart contracts, further increasing blockchain technology's decentralization and equality. as a result, in this new development model, financial solutions can interact between blockchains, creating space for innovation and informal relationships. an integral element of the near-infinite potential of the blockchain, this open-source, transitory sphere pushes the boundaries of what financial applications on the blockchain are already capable of nain, pattanaik, and sharma (2022). over usd 100 billion in security has been accrued on defi smart contracts without any protocol hack. seeing consumers recognize blockchain as a legitimate replacement for traditional financial systems is tremendous validation. the progress has been significant, but regulatory uncertainty, safety concerns, and weaknesses in smart contracts are some of the usual drawbacks referred to by the experts. such issues must be addressed if trust in blockchain is to be maintained and strengthened as defi remakes the financial system (wronka, 2023). h2: defi adoption positively influences trust in blockchain technology (tbt). the rise of decentralized finance, the core strengths of blockchain transparency, security, and immutability have been its building blocks, and confidence in numerous regions of blockchain technology is once again established upon the birth of defi (schueffel, 2025). defi allows users greater control over their assets, and deals eliminate intermediaries, reducing the risk of fraud and error. data written on the blockchain is almost tamperproof thanks to the technology's transparency feature and consensus mechanism, which enables users to verify transactions independently. simultaneously, its cryptographic security offers an additional layer of protection, safeguarding users from fraud and providing access to confidential (sensitive) information (almuzaini et al., 2022). these elements and attributes are foundational for a safe, credible environment for defi environments. by disrupting those intermediaries, defi is making crypto even more trustless, eradicating human error and superfluous costs to unlock the potential for peer-to-peer transactions. smart contracts define an agreement that can be executed automatically once certain conditions are fulfilled; such contracts reduce the need for a middleman and shift the trust towards a developed blockchain ecosystem with security and reliability (bruel & godina, 2023). in particular, the borderless and permissionless properties of defi enable financial inclusion for uninsured or underbanked users neglected by traditional financial institutions, positioning blockchain as a universal and trusted financial system. the programmability and interoperability of defi solutions further drive innovation and blockchain is rapidly emerging as a trusted, go-to infrastructure for financial services. however, regulatory clarity, the potential for hacks, and the implementation of various security measures are needed to ensure this trust and, ultimately, the continued growth of defi platforms (wronka, 2023). h3: trust in blockchain technology (tbt) positively influences financial resilience. 2.1. relationship between trust in blockchain technology (tbt), defi adoption and financial resilience more importantly, the interactions between defi adoption and financial resilience are affected by the nature of confidence that society's people place in the benefits of blockchain technology. the foundation of defi is blockchain, a decentralized and open technology that enables secure transactions of various types without relying on traditional intermediaries (auer, haslhofer, kitzler, saggese, & victor, 2024). the need for decentralized trust, supported by the immutability and transparency of blockchain transactions, is essential to inspire confidence in defi platforms, ensuring that financial transactions are legitimate. this all comes thanks to the trust in blockchain economy, 2025, 12(2): 100-107 103 © 2025 by the author; licensee asian online journal publishing group technology that gave us defi, where rules are enforced via smart contracts so that human error and fraud seem significantly reduced, and financial services are, for instance, more accessible (chen & bellavitis, 2020). the risk capacity allows for greater resiliency in prosperity and social arrangements through the financial services enabled by defi, which are less susceptible to systemic failures that plague traditional financial systems. breaking it down further, cover the digital business strategies that lead to enhanced financial performance and operational innovation, and finish with a use case of how they can drive the implementation of capabilities that lead to improved outcomes through blockchain (bag, rahman, gupta, & wood, 2023). however, unlocking the power of this ecosystem could depend on overcoming a host of challenges, including regulatory ambiguity and potential fragility such as bugs and scams in defi systems. as a credit market ecosystem based on trust architecture forms the foundation of the blockchain, appropriate governance, antifraud protocols, and regulatory frameworks should be adopted, thereby promoting a secure, resilient, and reliable financial ecosystem (rawhouser, vismara, & kshetri, 2024). h4: trust in blockchain technology (tbt) influences between defi adoption and financial resilience. fl improves fr and also boosts the positive effect of dfa on fr. greater financial literacy equips individuals with the tools to navigate financial risks, make informed decisions, and optimize the use of intricate defi products and services. financial literacy is important for a stable economy, supporting national economic health (goyal & kumar, 2021). in montenegro, for instance, better financial practices (e.g., saving money and using credit responsibly) were associated with higher financial literacy, and in china, socioeconomic development was associated with lower exposure to household financial risk, allowing households to recover more quickly from economic shocks. similarly, a recent study out of cyprus demonstrates that financial literacy is a strong predictor of financial resilience, as literates are more likely to be prepared for financial shocks (roszko-wójtowicz, deep sharma, dańska-borsiak, & grzelak, 2024). it thus indirectly feeds defi adoption, as these financial literacy components directly contribute to a user's financial resilience, and users make more informed decisions when entering the defi space. however, the issue with many defi products is that they exist at a fairly high level of sophistication many people have limited financial literacy, which limits their ability to harness defi's potential to widen resilience (xu, zhu, yang, lu, & xu, 2024). this makes user financial education a critical area of focus to maximize the benefits that defi adoption can provide to those who access the sector, and the solutions it offers will only add profit and value to their experience (remund, 2010). h5: financial literacy (fl) strengthens the positive relationship between defi adoption and financial resilience. risk perception (rp) might be a potential moderator in the relationship between trust in blockchain technology (tbt) and financial resilience. privacy concerns, technology maturity, and individual risk perception contribute to a lack of confidence in blockchain and blockchain-based financial solutions, which can reduce their financial sustainability (hassani, avdiu, unger, & mazinani, 2023). high perceived risks undermine trust and optimism in the cryptocurrency space; however, these factors are also essential for the perceived value and efficacy of such technologies in increasing the financial resilience of the population. therefore, controlling the effect of risk perception can help maintain a more robust tbt-fr nexus. education and financial literacy are essential in mitigating perceived risks, enhancing trust, and promoting blockchain technologies. furthermore, these more professional and security-focused companies will decrease risk perceptions and increase trust and willingness for blockchain solutions by addressing governance and awareness measures (singh et al., 2022). high-risk perception remains a challenge, yet it is surmountable; effective measures that address these concerns can help pave the way for building trust in blockchain and unleash its transformative potential for enhancing financial resilience (kumar, 2024). h6: risk perception (rp) weakens the positive relationship between trust in blockchain technology (tbt) and financial resilience. the integration of defi into existing paradigms has enormous potential to increase access to financial tools and, ultimately, strengthen financial resilience, with notable gaps in the literature; notably, studies examining the mediating impact of trust in blockchain technology (tbt), the moderating role of financial literacy (fl), and risk perception (rp) on financial resilience (fr) have yet to be conducted. few studies have considered these factors and their relevance to defi adoption. to address these shortcomings, the researcher selected the topic of his study to be "the impact of defi adoption on financial resilience: the mediating role of trust in blockchain technology," aiming to explain how trust, literacy, and risk perception can affect defi adoption and, in turn, provide actionable insights to policymakers to promote financial inclusion and the sustainability of defi ecosystems. 3. research methodology this study adopts a multi-method research approach to explore the relationship between defi adoption and financial resilience, the mediating effect of trust towards blockchain technology, and the moderating effects of financial literacy and risk perception. the research takes a quantitative approach, including model conceptualization from individuals and organizations actively engaging with defi platforms. a structural equation modeling (sem) methodology reflected in the model will investigate the hypothesized relationships between proposed variables such as defi adoption, trust in blockchain technology, financial resilience, financial literacy, and risk perception. the majority of the data-collection instruments were designed to measure these constructs using scales already established in the literature, ensuring validity and reliability. the sample selection aims to gather survey participants’ views on the practical aspects of defi adoption and its consequences. it utilizes robust statistical tools to measure direct, mediating, and moderating effects and provides detailed comparative evidence on the drivers behind financial resilience within the defi context. the findings are intended to inform theoretical development, practical implementation, and regulatory recommendations concerning confidence and resilience in trustless financial infrastructures. economy, 2025, 12(2): 100-107 104 © 2025 by the author; licensee asian online journal publishing group 3.1. research objectives • to examine the role of decentralized finance adoption as a financial resilience factor based on liquidity, asset diversification, and economic shocks. • to explore blockchain technology trust as a mediator between defi adoption and financial resilience. • to investigate the moderating effect of financial literacy on defi adoption and financial resilience. • to investigate the effect of risk perception as a moderator on the relationship between trust in blockchain technology and financial resilience. • to explore how financial literacy and perceived ease of use increase financial resilience in adopting the defi context. the findings on trust, risk perception, and financial literacy will inform the formulation of policy recommendations for creating an environment conducive to a secure, fair, and inclusive defi ecosystem. • figure 1. conceptual framework showing the mediating role of trust in blockchain technology and the moderating role of financial literacy in defi adoption and financial resilience. 3.2. interpretation and discussion of the model this activity diagram in figure 1 illustrates the presumed relationships between all constructs concerning defi adoption, financial resilience (fr), and trust in blockchain technology (tbt), as well as the moderating variables. the reason is that dda is the independent variable, and the diagram is set to defi adoption as the economy, 2025, 12(2): 100-107 105 © 2025 by the author; licensee asian online journal publishing group reference value. focus mainly on the question of whether dfa has any effects on other constructs in the model. a decision node clarifies if the dfa has any effects. in case of no influence, the process ends, but if dfa shows significant effects, it moves the flow towards two constructs: fr (financial resilience) and tbt (trust in blockchain technology). as shown in the figure, dfa positively directly affects fr, consistent with h1, which argues that people who embrace defi are more financially robust. at the same time, h2 aligns with the observed positive relationship between dfa and tbt, implying that attending defi platforms improves individuals' trust in blockchain technology as an underlying mechanism. then, the model examines whether tbt mediates the relationship between dfa and fr, as posited in h4. first, create a decision node that determines if there is mediation. if the mediating effect is not established, the process stops here. however, if there is a mediator, the flow continues, recognizing that tbt is a bridge by which dfa indirectly contributes to fr. this mediating effect highlights the important function of trust in blockchain technology in converting the benefits of adopting defi into real financial survival. the model also incorporates moderating variables to account for conditional effects. a second decision node (2a) inquires whether moderators influence the connections within the model. if no moderators are present, the process concludes. however, if moderators exist, the flow proceeds to the moderating effects. based on h5, financial literacy (fl) is identified as a positive moderator because it enhances the relationship between dfa and fr. this suggests that individuals with higher financial literacy are more likely to benefit from defi adoption. conversely, risk perception (rp) acts as a negative moderator (h6), reducing the tbt-fr relationship. this indicates that individuals perceiving greater risk may experience lower gains from blockchain trust when pursuing financial resilience. the flow concludes after demonstrating all paths in the proposed model. the activity diagram generally encapsulates the theoretical framework, including direct effects, mediating effects, and moderating influences. this clearly communicates the logical progression of relationships and interactions and provides a strong visual representation of the conceptual model underlying the research. this method allows for a better interpretation of how defi adoption, trust in blockchain technology, financial literacy, and risk perception act together to support financial resilience. 4. conclusion in summary, the activity diagram serves not only as a pictorial representation of their hypothetical interaction but also illustrates the possible representations and interactions between defi adoption, financial resilience, and trust in blockchain technology (tbt) as moderating variables of financial literacy (fl) and risk perception (rp). these immediate impacts are then built upon a base, depicted in the chart, where dfa is a main contributing factor to fiscal health, not to mention merchant trust in blockchain technology. the relationship between dfa and fr (h1) shows that decentralized finance positively affects people's ability to make transactions. today, even if one does not discuss extreme dfa (h2), the role of tbt is emphasized. defi demystifies trust in underlying technological information; one must effectively be fairly pressured or incentivized for adoption alone. recent theoretical developments could also benefit from understanding how tbt, as indicated in h4, mediates the relationship between dfa and fr, thus indirectly providing a mechanism by which dfa can enhance fr. this mediation suggests that trust in blockchain technology is necessary to transform fi adoption into greater economic resilience. it indicates that establishing trust in blockchain platforms amplifies the benefits of defi adoption, offering useful implications for practitioners seeking to boost user confidence in decentralized systems. this is valuable due to the addition of moderating variables, which enhance the model by recognizing individual difference variables that affect these relationships. results: financial literacy (h5) is a significant positive moderator, implying its magnifying role in the relationship between dfa and fr. this indicates that our conclusion aligns with the literature that people with higher financial literacy would be better prepared to understand and leverage defi platforms, leading to better economic resilience. in contrast, risk perception (h6) is a negative moderator, weakening the relationship between tbt and fr. this highlights the difficulty arising from high-risk perception, which can neutralize the positive effect of blockchain trust on financial outcomes. the activity diagram captures the direct, mediating, and moderating effects illustrated in this table and integrates them into a cohesive theoretical model. it also provides practical implications for researchers, policymakers, and practitioners by pinpointing important mediation mechanisms for strengthening financial resilience through defi adoption. by removing barriers such as risk perception and focusing on financial literacy, it accelerates the positive potential of defi and blockchain technologies, moving towards more inclusive and sustainable financial systems, thus presenting a model with implications for society to use defi and trust for better financial resilience. expanding the scope of future research in this field is significant, as defi, trust, financial resilience, and personal moderating factors continue to develop at a rapid pace. several potential areas for future exploration emerge from this framework: 1. contextual and regional variations: further research could explore the hypothesized relationships in different geographic, cultural, and economic contexts. a more refined approach to financial governance, which integrates defi, is probable, although its specific adoption and effects on financial resilience will depend on the regulatory environment, technological infrastructure, and cultural attitudes toward financial innovation. additionally, cross-country studies (e.g., between developed and developing economies, or between regions with differing levels of blockchain adoption) could be very informative. 2. longitudinal analysis: this approach offers a longitudinal perspective, enabling researchers to evaluate how defi adoption, trust in blockchain technology, and financial resilience change over time. it may facilitate a better understanding of how these relationships develop, particularly in response to technological evolution, market conditions, or regulatory initiatives. 3. expanded constructs and variables: incorporating additional constructs, including perceived ease of use, social influence, and safe economic shocks, would further strengthen the model. examining other possible economy, 2025, 12(2): 100-107 106 © 2025 by the author; licensee asian online journal publishing group mediators (e.g., perceived financial empowerment) or moderators (e.g., age, gender, and income level) would provide a richer understanding of the effects of defi. 4. role of behavioral and psychological factors: the role of behavioral and psychological factors such as risk tolerance, technology anxiety, and financial self-efficacy remains largely unexplored. furthermore, understanding the interaction of these factors with other parameters, such as trust and adoption, may assist in developing targeted strategies to promote defi and blockchain adoption. 5. impact on financial inclusion: defi is frequently lauded as a means of improving financial inclusion. future work could explore how it uniquely affects underserved populations such as rural areas, women, or people without formal banking systems. more research is needed on the role of financial literacy as an enabler in these contexts. 6. dynamic risk perception: investors, on the other hand, may see a further divergence of opinion as to how risky crypto is depending on sudden shifts in the crypto space such as lack of confidence in the market, acts of fraud, or a number of technological advancements. research that examines how perceptions of risk evolve over time and how they, in turn, influence trust and financial resilience would yield practical guidance for stakeholders. 7. integration with emerging technologies: exploration of the intersection of defi with other emerging technologies such as ai, machine learning, and iot is also ripe for exploration. clarifying the design criteria for how these technologies can facilitate or, conversely, constrain trust and adoption will help chart a course for how the field can make progress. 8. policy and regulatory frameworks: a key priority is to understand how policy interventions or regulatory frameworks can influence defi adoption and trust. further research could analyze how different regulatory frameworks enable a secure and diverse defi environment. future research can further elaborate upon the insights generated 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(2023). runaway train? decentralised finance and the myth of the private platform economy. transnational legal theory, 14(4), 413-452. https://doi.org/10.1080/20414005.2023.2299156 asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. https://doi.org/10.1016/j.ijhydene.2024.08.243 https://doi.org/10.1016/j.jmsy.2022.01.010 https://doi.org/10.1016/j.eap.2022.09.004 https://doi.org/10.3390/su16041563 https://doi.org/10.1007/s42786-024-00054-x https://doi.org/10.1016/j.vehcom.2022.100521 https://doi.org/10.1007/s11356-022-20997-2 https://doi.org/10.1108/jfc-09-2021-0218 https://doi.org/10.1080/20414005.2023.2299156 156 © 2025 by the authors; licensee asian online journal publishing group economy vol. 12, no. 2, 156-164, 2025 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/economy.v12i2.7649 © 2025 by the authors; licensee asian online journal publishing group entrepreneurship, inclusive growth and poverty reduction in nigeria benedict okeke ezeanyanwu1 anne chinonye maduka2 stephen obinozie ogwu3 ogochukwu theresa ugwunna4 ( corresponding author) 1,2,4department of economics, chukwuemeka odumegwu ojukwu university, igbariam, nigeria. 1email: ezeanyanwubenedict@gmail.com 2email: annymaduka@gmail.com 4email: to.ugwunna@coou.edu.ng 3department of economics, dennis osadebay university, asaba, delta, nigeria. 3email: stephen.ogwu@dou.edu.ng abstract this study empirically examined the dynamic relationship between entrepreneurship development, inclusive growth, and poverty reduction from 1990 to 2021, driven by the need to address nigeria's ongoing poverty. using data from the world bank and the central bank of nigeria, the study aimed to establish a causal relationship between these variables using strong econometric techniques, such as the granger causality test and the fully modified ordinary least squares (fmols). the main conclusions showed that, contrary to popular opinion, entrepreneurship had a negative and negligible effect on poverty, whereas inclusive growth had a significant negative effect, demonstrating the effectiveness of entrepreneurship in reducing poverty. additionally, it was discovered that entrepreneurship significantly and negatively affected inclusive growth. the results of the causality tests indicated a two-way relationship between poverty and inequality and a one-way relationship between entrepreneurship and poverty. based on these findings, the study suggests that, in order to increase innovation and productivity, strategic investment in science and technology should go beyond simple entrepreneurial promotion. to guarantee that public funds are used efficiently for inclusive economic development, it also supports increased stimulus spending to generate employment and a crucial bolstering of anti-corruption organizations like the efcc and icpc. keywords: entrepreneurship, fmols, inclusive growth, nigeria, poverty reduction. citation | ezeanyanwu, b. o., maduka, a. c., ogwu, s. o., & ugwunna, o. t. (2025). entrepreneurship, inclusive growth and poverty reduction in nigeria. economy, 12(2), 156–164. 10.20448/economy.v12i2.7649 history: received: 29 august 2025 revised: 8 october 2025 accepted: 18 october 2025 published: 3 november 2025 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. institutional review board statement: not applicable. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. this study followed all ethical practices during writing. competing interests: the authors declare that they have no competing interests. authors’ contributions: all authors contributed equally to the conception and design of the study. all authors have read and agreed to the published version of the manuscript. contents 1. introduction .................................................................................................................................................................................... 157 2. review of literature ...................................................................................................................................................................... 157 3. methodology ................................................................................................................................................................................... 159 4. result presentation and discussion ........................................................................................................................................... 160 5. discussion of findings .................................................................................................................................................................. 162 6. conclusion and policy recommendations ................................................................................................................................ 163 references ............................................................................................................................................................................................ 163 mailto:ezeanyanwubenedict@gmail.com mailto:annymaduka@gmail.com mailto:to.ugwunna@coou.edu.ng mailto:stephen.ogwu@dou.edu.ng https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v12i2.7632 https://orcid.org/0009-0004-4269-2233 https://orcid.org/0009-0000-7140-2937 https://orcid.org/0000-0002-3427-0426 https://orcid.org/0000-0001-7898-3391 economy, 2025, 12(2): 156-164 157 © 2025 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study contributes to the limited existing literature on the impact of entrepreneurship on poverty reduction and examines how poverty alleviation and entrepreneurship influence inclusive growth in nigeria. the research covers a critical period marked by significant policy shifts in the country, offering valuable insights and actionable policy recommendations for policymakers. 1. introduction entrepreneurship has been considered mainly an economic growth catalyst, job creation, and poverty reduction agent, particularly in developing economies like nigeria (audretsch, keilbach, & lehmann, 2006; urbano, aparicio, & audretsch, 2019). entrepreneurship entails value production through entrepreneurial innovations, risk-taking, and efficient use of resources, with the prospect of generating new markets, industries, and job opportunities (baumol & strom, 2007; dhar & farzana, 2017). entrepreneurs function as economic drivers of change through risk-taking, enhanced competitiveness, and economic vibrancy (bosma, content, sanders, & stam, 2018). entrepreneurship as a tool for growth is a companion of inclusive growth, which ensures that economic benefits trickle down to all classes of society, particularly the poor and marginalized groups (kabeer, 2021; ranieri & almeida ramos, 2013). inclusive growth entails everything regarding multi-dimensional involvement, fair opportunities for accessing resources, and the erasure of disparities, which are part of the long-term reduction of poverty (cerra, eichengreen, el-ganainy, & schindle, 2021; samans, blanke, corrigan, & drzeniek, 2015). in spite of the imperative need for entrepreneurship and inclusive growth, nigeria continues to grapple with persistent poverty and rising unemployment. nigeria's economic growth rate has fallen from 5.9% in 1985 to -1.8% in 2020, while unemployment increased nearly twofold over twenty years to 9.7% in 2020 (uchenna, onyekachi, & chinwe, 2018). currently, around 86.9 million nigerians live in extreme poverty, while another 93 million nigerians live below the poverty line (olayinka, olusegun, & babatunde, 2015). it is a situation equivalent to millions of nigerians lacking the capability to access basic staples such as food, shelter, healthcare, and education every day. the covid-19 pandemic has further fueled the phenomenon, which has proven nigeria's socioeconomic pillar weak (obiakor, iheonu, & ihezie, 2021). the prevalence of poverty in nigeria, despite increased entrepreneurial activity, supports the argument that nigerian economic growth has not been inclusive. nigerians, in general, are deprived of economic engagement, which has resulted in increased inequality and social exclusion. access to basic necessities such as electricity, clean water, and quality education continues to be uneven, particularly in rural areas (jaiyeola & bayat, 2019). such exclusion contradicts the function of entrepreneurship in poverty alleviation and supports the necessity of growth measures that, in addition to being dynamic, need to be inclusive. in recent years, the nigerian government has implemented various poverty eradication and entrepreneurship promotion programs. some of these programs include the directorate of food, roads and rural infrastructure (dfrri), the national directorate of employment (nde), the small and medium enterprise equity investment scheme (smeeis), and the national poverty eradication programme (napep) (farida, 2018; yero & abdu, 2024). despite these efforts, key socioeconomic indicators reveal high levels of unemployment and poverty (alaye, 2024). most nigerians, particularly youths, remain unemployed and underemployed, which perpetuates the cycle of poverty and discourages economic development. poverty in nigeria is multidimensional and extends beyond low income. it encompasses constrained health, education, basic services, social isolation, and exposure to economic shocks (deaton, 2006). entrepreneurship as a profitable venture holds significant leverage to break such a cycle by generating income, creating jobs, and economically empowering others (adenutsi, 2023). with an additional inclusive growth policy, which provides equal access opportunities for accessing markets, resources, and opportunities, this leverage is maximized, resulting in social equity and sustainability of growth (adanma & ogunbiyi, 2024; animashaun, familoni, & onyebuchi, 2024). this study aims to empirically examine how entrepreneurship development and inclusive growth contribute to poverty reduction in nigeria from 1990 to 2021. using secondary data sourced from the world bank development index and the central bank of nigeria, the study employs advanced econometric techniques, including the fully modified ordinary least squares (fmols) method and granger causality tests, to examine both the direct effects and causal relationships among these variables. the findings will provide policymakers with concrete data for formulating effective policies to promote inclusive economic growth and reduce poverty in nigeria. the paper is structured as follows: section 2 reviews the relevant literature, section 3 outlines the methodology, section 4 presents the empirical results, and section 5 concludes with policy recommendations. 2. review of literature 2.1. conceptual literature entrepreneurship has been defined as the utilization of innovative concepts to create wealth and spur economic development (shuaibu, bin kamin, muhammad isa, & musa cledumas, 2021; udukeke & usoro, 2023). entrepreneurship is the discovery and utilization of new opportunities through creating new products, new markets, and transforming resources, which collectively spur economic development. entrepreneurship also spurs poverty alleviation (apetu, egbetokun, ajani, & egbenede, 2024). entrepreneurship development in nigeria is, however, plagued with many challenges such as poor infrastructure, inadequate finance, and uncertain government policies, which hinder its full realization (odeyemi¹ et al., 2024). entrepreneurial success is greatly dependent on acquiring the necessary skills to enable individuals to innovate, generate employment, and improve livelihoods (adejoke, 2025). the nigerian government factored this in regard to youth entrepreneurship initiatives and promoting tvet for facilitating employability and entrepreneurship (diyoke, 2014). despite such interventions, there is a challenge in ensuring quality entrepreneurial training and practice for all (aly, audretsch, & grimm, 2021). inclusive growth promotes entrepreneurship because economic benefits and profits are shared fairly by all sections of society, including the poor (ranieri & almeida ramos, 2013). inclusive growth promotes participatory, economy, 2025, 12(2): 156-164 158 © 2025 by the authors; licensee asian online journal publishing group equitable, and poverty-reducing development with full access to markets, resources, and jobs (adegboyega, 2018). without inclusive growth, economic benefits will accrue to a privileged minority, causing greater inequality and poverty (cerra, lama, & loayza, 2021). nigerian poverty eradication programs like the national directorate of employment (nde) and the national poverty eradication programme (napep) have been focused on employment generation and economic empowerment to reduce poverty (abubakar, 2023; anuoluwapo, 2021). the programs have, however, long suffered from corruption, policy discontinuity, and implementation issues that have undermined their effects (ibrahim, 2024). generally, inclusive growth and entrepreneurship development are two complementary dimensions of poverty reduction. entrepreneurship creates employment and innovation, and inclusive growth ensures that the benefits of economic growth are passed on to all members of society so that standards of living are improved and inequality decreased (undp, 2013). such a postulation is supported by the present research to empirically test such linkages in the nigerian context. 2.2. theoretical review entrepreneurship has been widely seen as a driver of economic growth, and it should be to a considerable extent due to its value creation and innovation functions. schumpeter (1934) articulates this in his delineation of entrepreneurs as innovators making new products and services from novel combinations of inputs. not only does this innovation activity explain economic growth, but it also contributes to employment creation and increasing incomes, making it central to poverty elimination (ayoo, 2022). inventors are motivated by a desire for discovery, but entrepreneurs are motivated to bring their innovations to market to make them useful, to realize abstract ideas, and to transform these into marketable outputs that increase productivity and economic activity. but entrepreneurship's role in changing and reshaping present institutions into better ones has been fulfilled only when there has been an environment of equal opportunities and resources. this is the concept of inclusive growth. inclusive growth following keynesian economics (keynes, 1936) recognizes the prime role of the state in the development of the environment in which there can be economic participation by all. in government spending on infrastructure, social welfare, and measures to address increasing income disparities, inclusive growth ensures that benefits of economic growth are shared equally by society. inclusive growth integrating entrepreneurial innovation and social justice constructs an economy in which growth translates into improved living standards for everybody, especially the weaker sections (apetu et al., 2024). despite such mechanisms, poverty incidence still plagues most developing economies because it is entrenched in deeply embedded structural barriers. according to the structural poverty theory (wilson, 1996), poverty is not a matter of absolute individual failure but is explained by wider demographic and economic structures such as skills mismatch, exclusion, and marginalization in accessing opportunities. according to the theory, unless the structural barriers are removed, entrepreneurship development and inclusive growth policies cannot be expected to contribute the maximum towards poverty alleviation si, ahlstrom, wei, and cullen (2021). structural reforms are thus inevitable in order to remove these barriers and release the productive efforts of marginalized groups toward economic development. these theories present a joint model towards a multi-dimensional synergy between entrepreneurship, inclusive growth, and poverty reduction. schumpeter's innovation theory addresses the manner in which entrepreneurial activity generates economic growth; keynesian theory addresses how much a degree of equality is ensured in an inclusive setting; and structural poverty theory addresses structural barriers to be eliminated. the enlarged theoretical model underlies the empirical analysis of how entrepreneurship and inclusive growth can have reciprocal implications on long-term poverty reduction for nigeria. 2.3. empirical review there is sufficient empirical study analyzing entrepreneurship, economic growth, inclusive growth, and poverty reduction and their real-world implications for the current study. arejiogbe et al. (2023) utilized the structural equation model using data from 262 respondents and found that social innovation contributes to poverty reduction in nigeria; therefore, social innovation should be strongly promoted through government policies to support poverty reduction efforts. similarly, azamat, fayzullokh, and nilufar (2023) utilized panel fixed effects regression for different countries and found that entrepreneurship contributes positively to poverty reduction across the globe; therefore, incentives towards building entrepreneurial capacity and efficiency are needed. from education, goniri (2020) analyzed entrepreneurship education of nigeria's maiduguri graduates using regression analysis and concluded that job and wealth creation are important determinants of poverty alleviation. the study advocated that government initiatives aimed at encouraging graduates toward job creation should ensure that the graduates utilize the acquired knowledge in establishing self-employment, thereby reducing unemployment. ifeoma, purity, and yusuf (2018) also advocated entrepreneurship development as a key driver of nigeria’s economic growth, employment generation, and poverty reduction. worldwide, bonito, daantos, mateo, and rosete (2017) used philippines data and concluded that entrepreneurship leads to economic progress, thus alleviating poverty and reducing income inequality. in nigeria, ogidi (2014) demonstrated the pivotal role undertaken by women’s entrepreneurship in poverty alleviation against enugu state smes’ primary data. ali and ali (2013) have, however, demonstrated a positive but statistically insignificant relationship of entrepreneurship development toward poverty in somalia, advocating that context determinants of the relationship are required. kareem (2015) demonstrated a significant negative correlation between entrepreneurship and poverty in nigeria using chi-square and correlation statistics, indicating that entrepreneurial ventures can help alleviate poverty. there has also been a lot of research on the connection between poverty reduction and inclusive growth. abosede, adebayo, and oladele (2013) found that entrepreneurship increases economic growth through channels of inclusive growth. migapet, olayemi, and usman (2015), however, examined financial inclusion in nigeria and found that poor financial inclusion discourages inclusive growth, which increases poverty in africa. alekhina and ganelli (2021) found that inclusive growth decreases poverty significantly in asian countries, and lee and sissons economy, 2025, 12(2): 156-164 159 © 2025 by the authors; licensee asian online journal publishing group (2016) found that although the united kingdom had recorded economic growth, its non-inclusiveness discourages poverty reduction. in nigeria, adegboyega (2018) confirmed that poverty decreases as economic growth increases and determined the contribution of inclusive growth. munir and ullah (2018) quoted macroeconomic stability and structural reforms to be effective in the achievement of inclusive growth in pakistan. ozughalu and ogwumike (2015) believed that nigeria, despite economic growth, has high poverty, unemployment, and inequality because nigeria's human capital growth is low and the manufacturing sector's performance is weak. it called on policymakers to consider these issues with a view towards maximizing inclusiveness with immediate effect. arabiyat, mdanat, and samawi (2020) applied the panel data method for 1990 to 2015 and found that trade openness stimulates inclusive growth, but increasing poverty and inequality undermine its impact at the national and provincial levels. finally, folorunsho, osinubi, and dada (2021) analyzed the causality relationship between entrepreneurship and inclusive growth in 21 african nations. the research validated that entrepreneurship and economic globalization positively affect inclusive growth. causality tests validated that entrepreneurship and governance have bi-directional causality, a signal of variables' complexity in fostering inclusive development within the continent. despite the overwhelming evidence regarding the economic benefits of entrepreneurship and inclusive growth in the direction of poverty alleviation, the literature also leads us to formidable challenges. policy effectiveness, institutional quality, and resource endowment interact with each other simultaneously to influence the effectiveness of poverty reduction interventions. countries that cannot escape the traps of poverty and inequality due to governance and infrastructure weaknesses are likely to remain ensnared. however, countries that invest strategically in the development of entrepreneurship, inclusive policies, and structural reforms have a greater chance of achieving more sustainable and equitable growth. the nigerian experience exemplifies these forces in action and indicates that technological innovation and economic reforms are essential for the success of a more sustainable and inclusive economy capable of alleviating poverty. 3. methodology this research employs the fully modified ordinary least squares (fmols) method to examine the role of entrepreneurship and inclusive growth in reducing poverty in nigeria from 1990 to 2021. fmols, first introduced by phillips and hansen (1990) and later extended to panel data by pedroni (2007) is employed to estimate long-run relationships between integrated variables and sidestep issues of serial correlation and endogeneity. the variables are integrated of i(1) and there is long-run cointegration, and hence fmols is appropriate and statistically efficient to use in this research (lee & chang, 2008; onwe, bandyopadhyay, hamid, rej, & hossain, 2023). the theoretical foundation of the study is the keynesian theory of poverty, which views government expenditure and taxation as aggregate demand and welfare stabilizers. the theory is congruent with interventions such as entrepreneurship and inclusive growth policies as mechanisms for poverty reduction using demand-side policy (maku, tella, & fagbohun, 2020). 3.1 model specification guided by the keynesian framework, the study models poverty as a function of entrepreneurship, inclusive growth, government expenditure, inequality, taxation, and capital formation. the baseline functional relationship is expressed as: 𝑃𝑂𝑉𝑡 = 𝑓(𝐸𝑁𝑇𝑡 , 𝐼𝑁𝐺𝑅𝑡 , 𝐺𝐸𝑋𝑃𝑡 , 𝐼𝑁𝐸𝑄𝑡 , 𝐺𝐹𝐶𝐹𝑡 , 𝑇𝐴𝑋𝑡) the model is expressed in a log-linear econometric form as follows: 𝑃𝑂𝑉𝑡 = 𝛼0 + 𝛽1𝐸𝑁𝑇𝑡 + 𝛽2𝑙𝑜𝑔 𝐼𝑁𝐺𝑅𝑡 + 𝛽3𝑙𝑜𝑔 𝐺𝐸𝑋𝑃𝑡 + 𝛽4𝐼𝑁𝐸𝑄𝑡 + 𝛽5𝐺𝐹𝐶𝐹𝑡 + 𝛽6𝐿𝑇𝐴𝑋𝑡 + 𝜀𝑡 to assess the influence of entrepreneurship on inclusive growth, a second model is estimated as: 𝐼𝑁𝐺𝑅𝑡 = 𝛼0 + 𝛽1𝐸𝑁𝑇𝑡 + 𝛽2𝑙𝑜𝑔 𝑃𝑂𝑉𝑡 + 𝛽3𝑙𝑜𝑔 𝐺𝐸𝑋𝑃𝑡 + 𝛽4𝐼𝑁𝐸𝑄𝑡 + 𝛽5𝐺𝐹𝐶𝐹𝑡 + 𝛽6𝐿𝑇𝐴𝑋𝑡 + 𝜇𝑡 where: 𝑃𝑂𝑉𝑡 : poverty (proxied by per capita income). 𝐼𝑁𝐺𝑅𝑡: inclusive growth (proxied by total labor force). 𝐸𝑁𝑇𝑡: entrepreneurship (proxied by total self-employment). 𝐺𝐸𝑋𝑃𝑡: government expenditure. 𝐼𝑁𝐸𝑄𝑡: income inequality (gini coefficient). 𝐺𝐹𝐶𝐹𝑡: gross fixed capital formation. 𝐿𝑇𝐴𝑋𝑡: tax revenue. 𝛼0: intercept. 𝛽1 − 𝛽6: long-run parameters. 𝜇𝑡, 𝜀𝑡: error terms. 3.2. estimation technique the fmols estimator corrects for endogeneity and serial correlation in cointegrated regressions. fmols adjusts the standard ols estimator with semi-parametric corrections so that the long-run parameters are asymptotically normal and unbiased. following the panel fmols framework of pedroni (2007), with necessary modifications, the estimator is specified as follows: 𝛽𝐹𝑀 = 𝑁−1 ∑ (∑ (𝑦𝑡 𝑇 𝑡=1 − 𝑦)2)−1𝑁 𝑖=1 (∑ (𝑇 𝑡=1 𝑦𝑡 − 𝑦))𝑍𝑡 ∗ − 𝑇𝜏𝑖 (1) where: 𝑍𝑡 ∗= (𝑧𝑡 − 𝑧)−𝐿2𝑡 𝐿2𝑖 ∆𝑦𝑡,𝜏𝑖 = 𝜋21𝑡 + 𝜑21𝑡 0 − 𝐿21𝑡 𝐿22𝑡 (𝜋22𝑡 − 𝜑22𝑡 0 ), 𝐿𝑖 denotes the lower triangular decomposition of 𝜑𝑖 . the similar t-statistics are given as: 𝑡𝛽∗ = 𝑁 −1 2 ∑ 𝑡𝛽8 𝑁 𝑖=1 (2) economy, 2025, 12(2): 156-164 160 © 2025 by the authors; licensee asian online journal publishing group where 𝑡𝛽∗, 𝑖 = (𝛽𝑖 ∗ − 𝛽0)[𝜑11𝑖 −1 ∑ (𝑦𝑡 𝑇 𝑡=1 − 𝑦)2]1/2 these expressions ensure that the estimation accounts for bias and inefficiency resulting from endogeneity and heteroskedasticity in cointegrated systems. 3.3. data and sources table 1 presents the variables of the study, measurement and sources of data. the study used a secondary dataset extending the period 1990–2021, sourced from the world bank development indicators (wdi) and the central bank of nigeria (cbn). the variables used for the study included poverty, inclusive growth, income inequality, gross fixed capital formation, entrepreneurship, government expenditure, and taxation. similarly, eview was used for analysis. table 1. variables measurement and sources of data. variable measurement/abbreviation source poverty per capital income (lpov) wdi inclusive growth active labor force (lig) wdi inequality gini coefficient (inq) wdi gross fixed capital formation gfcf wdi entrepreneurship self-employment (ent) wdi taxation total tax income (ltax) oecd, cbn government expenditure total government expenditure (lgexp) wdi 4. result presentation and discussion table 2 presents the descriptive statistics for the study variables. poverty (lpov) had an average index of 7.011015 with a range of 5.599236 and 8.038832, showing overall increasing poverty over the period of study. entrepreneurship (ent), with aggregate self-employment as a proxy variable, was at a mean of 82.95162 and ranged between 79.26835 and 85.03133, indicating a continued increase, possibly due to unemployment, high poverty rates, and government momentum. inclusive growth (lig), with active labor force as a proxy variable, was at a mean of 17.653322, with very little volatility, showing slow but steady improvement. government expenditure (lgexp) was at a mean of 6.022514, with a range of 3.10135 to 7.832994, indicating increasing expenditure that has not seemingly translated into poverty reduction, perhaps due to inefficiency. inequality (inq) and gross fixed capital formation (gfcf) had means of 41.47500 and 8.977125, respectively, with inequality potentially contributing to poverty and also reflecting investment tendencies in capital formation. taxation (ltax) was at a mean of 14.01916, indicating government revenue generation. the skewness and kurtosis values suggest that most variables are approximately normally distributed, except gfcf, which is leptokurtic in distribution. table 2. descriptive statistics. lpov ent lig lgexp inq gfcf ltax mean 7.011015 82.95162 17.65332 6.022514 41.47500 8.977125 14.01916 median 7.278958 83.17810 17.68096 6.283532 40.10000 8.405000 14.70913 maximum 8.038832 85.03133 17.98186 7.832994 51.90000 18.77200 16.28155 minimum 5.599236 79.26835 17.27459 3.180135 35.00000 6.860000 10.55964 std. dev. 0.778021 1.915550 0.210734 1.247410 6.403829 2.184002 1.817988 skewness -0.244645 -0.312444 -0.238422 -0.822305 0.678807 2.910053 -0.534236 kurtosis 1.482920 1.634998 1.850343 2.863174 1.964300 13.69310 1.829098 observations 32 32 32 32 32 32 32 correlation lpov ent lig lgexp inq gfcf ltax lpov 1 ent -0.89935 1 lig 0.909275 -0.93399 1 lgexp 0.818797 -0.80747 0.944279 1 inq -0.78902 0.818612 -0.66958 -0.44419 1 gfcf 0.511617 -0.63018 0.661673 0.59387 -0.47758 1 ltax 0.930179 -0.88609 0.980932 0.936285 -0.64759 0.589188 1 the lower part of table 2 shows a strong negative correlation between entrepreneurship (ent) and poverty (lpov) at -0.8994, indicating increasing entrepreneurship and decreasing poverty in nigeria. inclusive growth (lig) is strongly and positively correlated at 0.9093, suggesting that poverty persists despite growth, possibly due to deeper underlying economic structural issues. government expenditure (lgexp) is also strongly and positively correlated with poverty at 0.8188, which may indicate wastage and diversion of public spending. inequality (inq) is strongly and negatively correlated with poverty at -0.7890. gross fixed capital formation and taxation are moderately and positively correlated at 0.5116 and 0.9302, respectively, reflecting their multi-dimensional and complex roles in nigerian poverty dynamics. economy, 2025, 12(2): 156-164 161 © 2025 by the authors; licensee asian online journal publishing group table 3. unit root test-adf. level first diff. results lpov -0.6339 -4.2918*** i(1) ent -0.3544 -5.0675*** i(1) lig -1.5495 -3.6732*** i(1) lgexp -2.3348 -6.5072*** i(1) inq -1.0525 -5.3013*** i(1) gfcf 1.9776 -5.1372*** i(1) ltax -1.8620 -5.1958*** i(1) note: *** indicates statistical significance at 1%. augmented dickey-fuller (adf) test with an intercept was used to obtain the unit root test result indicated in table 3 to determine the study variables' stationary properties. none of these variables from the results are stationary at levels and therefore have unit roots. after first differencing, all variables become stationary, showing that they are integrated of order one, i(1). this finding is significant for selecting among stationarity-at-variablelevel methods because it rules out methods like bounds cointegration tests. since these variables' integration order is equal, the study proceeds to apply the johansen cointegration test to determine whether long-run relationships exist among these variables. this approach allows for stable and accurate estimation of longand short-run dynamics in the model. table 4. johansen cointegration test summary. model test type no. of cointegrating equations test statistic critical value (5%) p-value conclusion 1 trace statistic 4 213.44 25.62 <0.001 cointegration confirmed 1 max eigenvalue 3 73.61 46.23 <0.001 cointegration confirmed 2 trace statistic 4 213.44 25.62 <0.001 cointegration confirmed 2 max eigenvalue 3 73.61 46.23 <0.001 cointegration confirmed table 4 presents evidence of four cointegrating equations for both models based on the trace statistic and three based on the maximum eigenvalue statistic, and all are significant at 5%. these findings affirm that there is a stable long-run relationship between the variables, and there is a reason why the fully modified ordinary least squares (fmols) estimator is usable in optimal long-run parameter estimation. the evidence of cointegration supports analyzing both the short-run and long-run relationships among entrepreneurship, inclusive growth, and poverty reduction in nigeria. table 5. result of the fmols for model one and two. variable model 1: dependent variable-lpov variable model 2: dependent variablelig coefficient std error t-value p-value coefficient std error t-value p-value ent -0.1379 0.0851 -1.6210 0.118 lpov -0.0425 0.0102 -4.1469 0.000 lig -4.9047 1.7715 -2.7686 0.010 ent -0.0360 0.0035 -10.178 0.000 lgexp 0.3026 0.1214 2.4927 0.020 lgexp 0.0384 0.0066 5.7753 0.000 inq -0.0469 0.0136 -3.5545 0.001 inq -0.0005 0.0009 -0.6084 0.548 gfcf -0.0166 0.0220 -0.7564 0.456 gfcf 0.0050 0.0012 3.9893 0.000 ltax 0.5443 0.1235 4.4078 0.000 ltax 0.0675 0.0056 12.035 0.000 c 97.692 34.947 2.7954 0.010 c 19.738 0.2952 66.846 0.000 r2 = 0.946 adj. r2 =0.932 r2 = 0.993 adj. r2 =0.991 the fmols regression results from table 5 reveal the complexity of entrepreneurship’s linkages with inclusive growth and poverty in nigeria. model 1 shows that entrepreneurship (ent) has a negative but insignificant effect on poverty (pov) at the 5% level. the conclusion is that although there has been growth in entrepreneurial pursuits fueled by the public and private sectors towards realizing the sustainable development goals (sdgs), entrepreneurship has yet to have its effect on poverty alleviation. the result is most likely due to issues affecting small and medium enterprises (smes) that characterize nigeria’s entrepreneurial environment. such issues emanate from economic uncertainty caused by unstable exchange rates, aggressive market competition, and high business costs, which together threaten sme growth and survival. it is thus clear that entrepreneurship’s theoretical contribution towards economic development and employment creation, as has been found from other studies (arejiogbe et al., 2023; azamat et al., 2023; kritikos, 2024) thus still lies subject to nigeria’s economic environment. conversely, however, inclusive growth (lig) has a strong negative impact on poverty, with a value of -4.9047, and each unit increase in inclusive growth lowers poverty by roughly 5%. this aligns with keynesian economic theory on mass economic participation as a primary cause of poverty alleviation (keynes, 1936). despite widespread underemployment and unemployment, even low-quality jobs help reduce poverty. this finding aligns with earlier empirical studies on nigeria (adegboyega, 2018) but refutes with others that explained little inclusive growth over decades (ozughalu & ogwumike, 2015) an indication of nigeria's dynamic and fluid nature of its economy. model two also reveals a counterintuitive outcome: entrepreneurship negatively and significantly impacts inclusive growth, contrary to its theoretical foundations as well as empirical proof in past studies (folorunsho et al., 2021; kritikos, 2024). such a negative impact may reflect the informal and unregistered nature of most nigerian smes enjoying tax holidays and operating outside formal economic streams, thus their impact on inclusive growth is not realized. this warrants their integration and regularization into formal economic streams to fully exploit their potential. economy, 2025, 12(2): 156-164 162 © 2025 by the authors; licensee asian online journal publishing group expenditure by local governments (lgexp) is a double-edged sword because it strongly promotes inclusive growth but causes poverty. the irony can only be explained through wastage, misallocation, corruption of public expenditure, theft, and political patronage that push public expenditure away from poverty-reduction programmes, on which rich elites predominantly benefit. similarly, taxation (ltax) promotes inclusive growth but discourages poverty reduction and thus must be a discriminatory tax system even towards poor people, thereby worsening economic inequalities. inequality (inq) decreases poverty significantly but has a nonsignificant, adverse effect on inclusive growth. although a decomposition of inequality is essential for poverty reduction, such impacts may or may not translate into broader economic inclusiveness. gross fixed capital formation (gfcf) unexpectedly increases poverty, possibly due to reduced investment and a declining capital stock, but positively influences inclusive growth, indicating a close relationship between capital accumulation and sustainable development. these findings reveal complex and sometimes contradictory links between entrepreneurship, poverty, inclusive growth, and fiscal policy in nigeria. they highlight the need for comprehensive policy interventions to improve the business climate, enhance public financial management capacity, reduce inequality, and formalize the entrepreneurship environment. such policies can unlock the full potential of entrepreneurship and inclusive growth as drivers of sustained poverty reduction and economic development. table 6. granger causality. null hypothesis: obs. f-statistic prob. ent does not granger cause pov 30 0.002 0.997 pov does not granger cause ent 3.947 0.032 lig does not granger cause pov 30 2.279 0.123 pov does not granger cause lig 0.359 0.701 lgexp does not granger cause pov 30 2.316 0.119 pov does not granger cause lgexp 0.132 0.876 inq does not granger cause pov 30 4.007 0.030 pov does not granger cause inq 5.603 0.009 the outcome of the granger causality in table 6 shows that a unidirectional causality exists between entrepreneurship (ent) and poverty (pov), running from poverty to entrepreneurship. this result aligns with the findings from the fmols regression for model 1. the causality indicates that the primary reason for promoting entrepreneurship in nigeria, by the government, public and private institutions, and individuals, is poverty reduction. additionally, there is no causality between inclusive growth (lig) and poverty (pov) in nigeria. similar observations are noted between government expenditure (lgexp) and poverty (pov). finally, a bidirectional causality is observed between inequality (inq) and poverty (pov) in nigeria, which runs from inequality to poverty and from poverty to inequality, although the magnitude of impact is higher in pov→inq than in inq→ pov. 5. discussion of findings the fmols regression estimates provide a comprehensive explanation of the complex relationships between entrepreneurship, inclusive growth, and poverty reduction in nigeria. statistically, entrepreneurship has a weak but negative influence on poverty, indicating that despite increased entrepreneurial activities, these have not necessarily resulted in significant poverty reduction. this may be due to structural challenges faced by smes amid economic uncertainty, intense competition, and high operational costs, which weaken their capacity to generate sustainable jobs and income. consequently, the contribution of entrepreneurship to economic growth and poverty reduction, as extensively documented elsewhere, appears limited by nigeria's current economic conditions. in contrast, inclusive growth is negatively and strongly associated with poverty, emphasizing its inherent contribution toward increasing participation and living standards. the outcome aligns with keynesian economic theory, which considers fair growth to be the key contributor to poverty alleviation. despite widespread unemployment and underemployment, inclusive growth improves access and reduces poverty. the outcome supports prevailing empirical evidence in nigeria but is contrary to evidence for narrow inclusiveness over the past few years, indicating nigeria's complex and dynamic economy. in contrast to theoretical prediction and empirical evidence, entrepreneurship is negatively and significantly influential on inclusive growth. this is due to informal and unregistered nigerian enterprises that are tax-relieved and beyond the scope of the formal economy; thus, their influence on inclusive growth is negligible and not effectively captured. this calls for faster formalization and better integration of entrepreneurial activities into the formal economy to maximize their development potential. government expenditure is a double-edged sword and a great stimulus for inclusive growth but a cause of poverty. the paradox can be attributed to the fact that government expenditure is wasteful, inefficient, and corrupt, and that political patronage bestows privileges upon vested interest groups at the cost of antipoverty programs. similarly, taxation serves as a stimulus for inclusive growth but slows down poverty reduction and indicates a regressive tax rate that is levied upon poor people and further intensifies economic inequalities. inequality impacts poverty reduction to a large extent without any adverse effect on inclusive growth, an implication that poverty reduction is very responsive to reduced inequality but that reduction by itself does not necessarily make economic inclusiveness. increased fixed capital formation increases poverty unexpectedly due to decreased investment and shortage of capital but impacts inclusive growth in a positive way, an implication of contribution to sustainable development by accumulation of capital. together, these findings reveal the complex and sometimes contradictory relationships among entrepreneurship, inclusive growth, fiscal policy, and poverty reduction in nigeria. they shed light on the imperative of policy harmonization to improve the business environment, public financial management, and reduce economy, 2025, 12(2): 156-164 163 © 2025 by the authors; licensee asian online journal publishing group inequalities, as well as formalize the entrepreneurial economy to maximize the full potential of entrepreneurship and inclusive growth as drivers of poverty reduction and economic development. 6. conclusion and policy recommendations inspired by the ongoing problem of poverty in nigeria, this study empirically examined the dynamic relationships between entrepreneurship development, inclusive growth, and poverty reduction from 1990 to 2021. using data from the world bank and the central bank of nigeria, its main goal was to demonstrate a causal relationship between these variables using strong econometric techniques, such as the granger causality test and the fully modified ordinary least squares (fmols). the main findings showed that, in contrast to popular opinion, entrepreneurship has a negative and negligible effect on poverty, whereas inclusive growth has a significant negative effect, demonstrating the effectiveness of inclusive growth in reducing poverty. additionally, it was discovered that entrepreneurship significantly and negatively affected inclusive growth. the results of the causality tests indicated a two-way relationship between poverty and inequality and a one-way relationship between entrepreneurship and poverty. the study concludes that entrepreneurship alone will not be able to fight poverty in nigeria, but inclusive growth can be a force too strong to resist poverty reduction. secondly, entrepreneurship's net effect on inclusive growth calls for its further integration within the formal economy through structural transformation. reducing inequality is a foundation for sustainable poverty reduction. priority needs to be given to bridging such gaps by creating an enabling business environment through improving credit access, regulatory simplicity, and infrastructure development. capacity and skill building through entrepreneurship development programs should be undertaken for entrepreneurs towards their catalytic contribution to poverty alleviation and economic growth. inclusive growth policies should trickle down to marginalized and vulnerable sections through investment in education, health, and social protection for equitable access to economic opportunities. public spending must be transparent, accountable, and efficient, and must be used effectively to channel resources into poverty-reducing measures. tax reform must broaden and simplify the tax base and aim to reduce the tax burden on the poor and transition to a more progressive tax system. formalization of the entrepreneurs' sector will promote enabling environments and boost the sector's contribution to inclusive growth. additionally, social protection schemes such as conditional cash transfers, food security schemes, and rural development schemes can be expanded further to improve livelihoods and economic inclusion among the poor. institution building and governance also play a critical role in ensuring sustained inclusive growth and antipoverty programs. taking a bird's-eye view, a broad and general approach to entrepreneurship, inclusive development and growth, and fiscal management and inequality is at the center of nigeria's inclusive economic growth and poverty reduction. the implications of 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(2024). effect of government policies and support for poverty alleviation of sses owners in kano and niger states, nigeria. unizik journal of marketing, 1(3), 66-83. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. https://doi.org/10.1080/10875549.2019.1668900 https://doi.org/10.1016/j.reseneeco.2007.03.003 https://doi.org/10.1177/0308518x16656000 https://doi.org/10.2478/sues-2020-0007 https://doi.org/10.1016/j.renene.2023.119302 https://doi.org/10.2307/2297545 https://www.undp.org/sites/g/files/zskgke326/files/migration/in/inclusive-growth--a-sustainable-perspective.pdf https://doi.org/10.1007/s11187-018-0038-0 https://doi.org/10.1111/j.1533-8525.1996.tb00746.x 108 © 2025 by the authors; licensee asian online journal publishing group economy vol. 12, no. 2, 108-119, 2025 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/economy.v12i2.7390 © 2025 by the authors; licensee asian online journal publishing group industrialization and economic growth in nigeria, 1990 – 2024 anibuko, chinenye florence1 godly otto2 ( corresponding author) 1department of economics, delta state university, abraka nigeria. 1email: juliedon007@gmail.com 2department of economics, university of port harcourt, nigeria. 2email: godly.otto@uniport.edu.ng this research seeks to examine the nexus between industrialization and economic growth in nigeria. the specific purpose of the study is to analyze the effects of manufacturing output, mining, electricity supply, construction, water/sewage/waste management, and labor force participation on nigeria’s real gross domestic product growth rate. this study adopts an expost facto research design. the period covered spans from 1990 to 2024. data were collected as annual time series secondary data from the central bank of nigeria (cbn) statistical bulletin (various years), world development indicators, and world energy statistics from the international energy agency. the data were analyzed using the error correction model. additional tests conducted include unit root, cointegration, and autocorrelation tests. the research employs an econometric approach. the results reveal that manufacturing, mining, electricity supply, construction, and water/sewage/waste management had a negative effect on economic growth in nigeria in the short run. however, only the effects of manufacturing, electricity, construction, and waste management on the nigerian economy were statistically significant. in conclusion, industrialization has a negative effect on nigeria’s economic growth. nigeria’s industrialization efforts have not yielded the expected positive effects on the economy, leading to declining outputs in manufacturing, mining, electricity supply, construction, and water/sewage/waste management sectors. when electricity supply and distribution to the industrial sector are adequately enhanced, coupled with increased productive capacity, nigeria’s economy will be on the path to long-term growth. keywords: construction, electricity supply, labour force participation, manufacturing, mining. citation | florence, a. c., & otto, g. (2025). industrialization and economic growth in nigeria, 1990 – 2024. economy, 12(2), 108–119. 10.20448/economy.v12i2.7390 history: received: 14 april 2025 revised: 30 august 2025 accepted: 3 september 2025 published: 9 september 2025 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. institutional review board statement: not applicable. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. this study followed all ethical practices during writing. data availability statement: upon a reasonable request, the supporting data of this study can be provided by the corresponding author. competing interests: the authors declare that they have no competing interests. authors’ contributions: methodology development and analysis, anibuko chinenye florence (acf); conceptualization and theoretical foundation, godly otto (go). both authors have read and agreed to the published version of the manuscript. contents 1. introduction .................................................................................................................................................................................... 109 2. literature review .......................................................................................................................................................................... 110 3. research methodology ................................................................................................................................................................. 113 4. data analysis and discussion ...................................................................................................................................................... 114 5. conclusion and recommendations ............................................................................................................................................. 117 references ............................................................................................................................................................................................ 118 mailto:juliedon007@gmail.com mailto:godly.otto@uniport.edu.ng https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v12i2.7390 economy, 2025, 12(2): 108-119 109 © 2025 by the authors; licensee asian online journal publishing group contribution of this paper to the literature previous studies have linked industrialization to either economic growth or development. evidence available to researchers reveals that none of the previous studies used a combination of manufacturing sector output, energy supply, agricultural output, exchange rate, and labor force participation as proxies for industrialization. 1. introduction african countries gained their independence in the 1960s, and this period coincided with the promotion of industrial development and growth as a major target for african countries. countries in africa at the time viewed industrial sector development as a way of growing local capacity and decreasing their reliance on developed nations in europe and america. african countries were held by one strong belief that developing their vast agrarian land would boost industrial development and create a progressive economy (isiksal & odoh, 2023). in nigeria, rudimentary industrial activities existed right from the pre-colonial era, but these were more agrobased, i.e., concentrated in the agricultural sector, which provided raw materials in exchange for foreign goods with the europeans during the colonial era. nigeria was dependent on agriculture up to 1972, when oil became the major foreign exchange earner in the country. during this period, the nation’s foreign earnings were below 20% of gross domestic product as a result of low-quality industrial goods, whereas almost all the capital goods were imported (bakare-aremu & osobase, 2015). at this period, about 63% to 80% of the nation’s gross domestic product (gdp) was from the exportation of primary agricultural products. the level of industrial activities in the country was very low, and most commercial activities were established and controlled by foreign companies such as the united africa company (uac) ltd, john holt, paterson zochonis (pz), companies francaise de l’afrique occidentale (cfao), societe commerciale de l’afrique occidentale (scoa), and the union trading company (bakare-aremu & osobase, 2015). these companies engaged in trade and commercial activities, especially in the importation and distribution of foreign-manufactured goods (ekpo, 2014). to stimulate economic growth, a series of industrial development policies and initiatives have been initiated, including import-substitution industrialization, export-promotion strategies, and foreign private investment industrialization (ayodele & falokun, 2023). furthermore, policy reform measures such as industrialization policies and structural adjustment programs have been devised and executed, resulting in substantial public investment in the industrial sector. from the 1970s to the 1990s, the nigerian government embarked on a series of investment projects, such as the iron and steel plant at ajaokuta, steel rolling mills at warri, kaduna, and oshogbo, aluminum smelter plant at ikot abasi, crude oil refineries at port harcourt, warri, and kaduna, petrochemical and fertilizer factories at port harcourt, cement industries at calabar and nkalagu, machine tool, sugar plants, and marble industries, petrochemical gas plant at akwa-ibom (okorontah and uruakpa (2023). nigeria's economic indices at various stages of industrialization have remained unimpressive for more than thirty years. high imports of industrial inputs, declining capacity utilization, high production costs, low value added, a slow rate of output growth, a lack of job creation, and poor connections with other economic sectors are some of the characteristics of nigeria's industrial sector (obioma & ozughalu, 2020). in 2022, the industrial sector's annual growth rate as a percentage of gdp was 30.8%; in 2023, it increased slightly to 32.2% (central bank of nigeria, 2023). ekpo (2014) also observed that the industrial sector's share of gdp in nigeria is far less than what is obtainable in other countries. with manufacturing sector output contributing a little less than 12.7% to gdp in 2023 (central bank of nigeria, 2023), nigeria’s industrialization prospects are still on the rise. nigeria boasts as one of the top five largest economies in africa, with a population in excess of 200 million as of the end of 2023, and a gdp of over $500 billion world bank (2024). nigeria is the continent’s biggest oil exporter and is home to large natural gas reserves, as noted by world bank (2024). according to world bank (2024), the nigerian economy has recorded considerable acceleration in growth; real gdp grew by 6.3 percent, 7.6 percent, and 7.4 percent in 2019, 2020, and 2021 respectively. many analysts believe the industrial sector (manufacturing and extractive) holds an undeniably key role in nigeria’s economic development, given that this sector is responsible for about 85 percent of foreign exchange earnings (central bank of nigeria, 2023). there is a need to investigate nigeria’s industrial development pattern and how this affects economic growth. 1.1. statement of the problem despite the vast array of human and natural resources available in the country, one may question why the expected level of economic growth has not been achieved. according to kpou (2024), nigeria is a major exporter of natural liquefied gas and crude oil worldwide, but the possibility of having self-consumption seems a tedious problem. it has been a supplier of power energy (electricity) to some neighboring countries like benin and the niger republic, but the nation’s industrial consumption of such energy appears very low. electric power, transportation, technological innovations, and good market facilities with effective communication systems, which are major aids to industrialization worldwide, are lacking in the country. how much the industrial sector has contributed to growth in the nigerian economy, given the current state of the drivers of industrialization, such as infrastructure and power, remains to be ascertained in this research. furthermore, since nigeria gained its independence, a great deal of research has been conducted on the country's industrialization. everyone seems to agree that the industry has performed poorly over the years. nigeria's industrial sector has been characterized by high import content of industrial inputs, falling capacity utilization, high production costs, poor value added, declining output growth, and low employment generation, according to obioma and ozughalu (2020). according to metieh and mgbomene (2025), inflation is a major factor contributing to poor employment, which impacts investment in nigeria. the average annual growth rate of industrial output as a proportion of gdp over the study period was around 28%, which is far higher than what is achieved in many emerging nations. the production of the agricultural sector as a proportion of gdp was 22% during the same period, surpassing the combined contribution of the industrial and manufacturing sectors, while the output of the manufacturing sector as a percentage of gdp was less than 15% (central bank of nigeria, 2023). economy, 2025, 12(2): 108-119 110 © 2025 by the authors; licensee asian online journal publishing group policies derived from existing research of this kind are crucial, given the current shift in emphasis toward measures that would industrialize the nigerian economy. once more, the outflow of multinational corporations from the nigerian market motivates the researcher to examine the connection between specific elements of the industrial sector and economic growth in nigeria. according to nairametrics (2023), 767 manufacturing enterprises in nigeria closed their doors in 2023 alone. additionally, a 2023 assessment by the manufacturing association of nigeria indicates that 335 businesses in nigeria's industrial sector faced significant difficulties. therefore, this study investigates how industrialization influences nigeria's economic growth. 1.2. objectives of the study the general objective of this study is to investigate the effects of industrialization on the growth of the nigerian economy. the specific objectives are to: i. investigate the relationship between manufacturing sector output and economic growth in nigeria. ii. analyze the effect of the mining sub-sector output on nigeria's economic growth. iii. investigate the extent to which electricity supply has affected nigeria’s economic growth. iv. evaluate the effect of the construction sub-sector output on nigeria’s economic growth. v. determine how output from water supply, sewage, and waste management has affected economic growth in nigeria. vi. examine the relationship between the labour force participation rate and economic growth in nigeria. 1.3. research hypotheses in line with the research objectives specified above, the following research hypotheses, stated in their null forms, will provide further guidance to the research. h01: there is no significant relationship between manufacturing sector output and economic growth in nigeria. h02: there is no significant relationship between the mining sub-sector and economic growth in nigeria. h03: there is no significant effect of electricity supply on economic growth in nigeria. h04: construction sub-sector output has no significant effect on nigeria’s economic growth. h05: water supply, sewage and waste management do not significantly affect nigeria’s economic growth. h06: there is no significant effect of labour force participation on nigeria’s economic growth. the unit scope of this research is industrialization and economic growth of nigeria. this study covers the period 1990-2024. this period is selected because of the availability of data and the suitability of the year span for fitting an econometric model. the variables for this study include real gross domestic product growth rate (dependent variable), while manufacturing output, mining output, energy/electricity supply, construction subsector output, water/sewage/waste management output, and labor force participation rate were employed as independent variables. 2. literature review the literature review is subdivided into three distinct but complementary parts. first is the conceptual review, which stems from the conceptual framework. second is the theoretical framework, and third is the empirical review. based on these various aspects of the literature review, the gap in the literature is established. 2.1. conceptual review the conceptual issues are discussed in detail under this heading. the conceptual clarifications revolve around the meaning of industrialization, the drivers of industrial sector growth, which include the manufacturing sector, the agricultural sector, energy supply, the labour market, and a sustained exchange rate. these concepts are shown in the framework below. figure 1 illustrates the conceptual framework of the study, showing the nexus between the industrialization variables and the economic development of nigeria. figure 1. conceptual framework. economy, 2025, 12(2): 108-119 111 © 2025 by the authors; licensee asian online journal publishing group 2.1.1. industrialization establishing and growing industries in a certain location, region, or nation is referred to as industrialization (obioma & ozughalu, 2020). it entails the establishment of several enterprises around the nation. a nation's numerous industries lead to the production of a wide variety of goods. therefore, industrialization is the process of increasing a nation's ability to create a wide range of commodities, including the extraction of raw materials and the production of semi-finished and finished items. industrialization, according to anyanwu, oyefusi, oaikhenan, and dimowo (1997) and ekpo (2014) is the process of turning raw materials into (a) consumer goods, (b) new capital goods that enable the production of more consumer goods, including food, using the same human resources, and (c) social overhead capital, which, when combined with human resources, offers new services to both individuals and businesses. 2.1.2. drivers of industrialization in nigeria the contribution of a robust industrial sector to output growth, employment generation, and ultimately, enhanced standards of living cannot be overemphasized. the nigerian industrial sector has been plagued by several impediments, which have resulted in sub-optimal performance, thereby making its contribution to gross domestic product (gdp) and employment generation remain far below potential. to unlock the huge potentials of the sector, several variables account for the growth of the industry, and they are discussed within the context of this research. (a) manufacturing sector output: manufacturing sector output refers to the total production made by the manufacturing sector within a particular year, expressed in monetary terms (egbulonu, dim, & agba, 2018). the market value of the products from the manufacturing sector sustains the value of the economy, and these products that drive the industrial sector are purely manufactured goods and services. similarly, manufacturing is the process or business of producing goods in factories with machines. in nigeria, the index of manufacturing production, estimated at 108.1 (1990=100), rose by 1.6% from the level in 2022, while the average capacity utilization of the manufacturing sector showed a marginal improvement, with a 1.1 percentage point increase to 57.9% in 2023. the improved performance in the cement sub-sector accounted for the growth in the manufacturing sector, including petroleum refining, sugar and confectionery, electronics and electrical components, and motor vehicle assembly. afolabi and laseinde (2019) remarked that industrialization sets the condition to achieve sustainable economic growth in all economies. it can also be stated that the dynamic benefits of the manufacturing sector are activating economic transformation in this modern-day economy, which is directly responsible for speeding up investment capital in the agricultural sector and the overall economy (afolabi & ogoh, 2017). (b) energy/electricity supply boost: industrialization without proper and constant electricity is like a skeletal framework without fresh blood, which is improper for moving or work. whereas, for any meaningful industrialization process to take place in any economy, electricity supply and demand must remain uncompromising elements of the process, as blood and flesh are very meaningful to the human body for life to exist. electric power consumption was used in the study, and it measures the production of power plants and combined heat and power plants, less transmission, distribution, and transformation losses, and own use by heat and power plants (world bank, 2024). according to data from the national bureau of statistics (2023) total installed electricity generation capacity stood at 12,232 mw in 2023, compared with 9,937 mw in 2022. the increase in generation capacity was a result of the completion of the generation plants at omotosho, ihovbor, and geregu power plants (okezie, nwosu, & marcus, 2017). a disaggregation of the installed capacity showed that thermal power and hydropower accounted for 84.5 and 15.5 percent, respectively. further analysis indicated that the erstwhile power holding company of nigeria (phcn) had 81.8 percent of the total installed capacity. meanwhile, the independent power plants (ipp) accounted for the remaining capacity (central bank of nigeria, 2023). energy consumption: at 160.3 (1990=100), the index of energy consumption fell by 10.7% compared with a decline of 5.2% recorded in 2022 (national bureau of statistics, 2023). in absolute terms, aggregate energy consumed in 2013 stood at 13.40 million tons of coal equivalent (toe), compared with 16.6 million (toe) in the preceding year, representing a decline of 19.1%. (c) mining and quarrying sub-sector: with increasing demand for energy and low-carbon technologies, an unprepared extractive industry is likely to struggle to meet rapid increases in demand for minerals and metals for production. mining involves the extraction of naturally occurring minerals such as coal, ores, crude petroleum, and natural gas (national bureau of statistics, 2023). excluding crude petroleum and natural gas activities, mining and quarrying, including coal mining, metal ores, quarrying, and other minerals, jointly contributed about 0.09% to the national gdp during the period from 2010 to 2024. this was a steady rise over the period; from the n51,877.80 million recorded in 2010, output grew by n7,691.54 million or 14.83% in 2011 to reach n59,569.34 million that year. the national bureau of statistics (2023) noted that there are about thirty-four minerals that have been identified in the country, of which only 13 are being actively mined, processed, and marketed. these include coal (which has an export potential of 15 million tonnes per annum valued at us$1 billion), kaolin, baryte, limestone, dolomite, feldspar, glass sand, gemstones (haphazard), gold (in small quantities), iron ore, lead-zinc, tin and its associated minerals, and recently gypsum. the remaining twenty-one (21) minerals, although in demand, are untapped, creating significant potential for industrialization in nigeria, which can contribute to economic development. (d) construction sub-sector: all over the world, the construction industry is continually growing. this industry is primarily concerned with the development of civil engineering works and heavy infrastructural provisions (roads, bridges, railways, etc.), residential and commercial real estate, and their maintenance (national bureau of statistics, 2021). thus, the continual growth can be explained by the dynamism of development and the need to accommodate social and demographic changes that happen over time. factors such as migration and urbanization, a rising middle class with their demands for better living conditions (better houses, road networks), and societal needs for social infrastructure all combine to give the sector the impetus for growth. according to the national bureau of statistics (2021) demands for real estate and housing, the provision of infrastructure to support economy, 2025, 12(2): 108-119 112 © 2025 by the authors; licensee asian online journal publishing group an increasing population size, the need to open up communities to foster inter-state and inter-regional trade and movement, etc., have posed a great impetus for the growth of the construction sector in nigeria. (e) water supply, sewage, and waste management: according to iyaji (2021) and mgbomene (2024), the economic development witnessed in nigeria has, to some extent, contributed to the problem of water pollution. the primary sources of water pollution in nigeria today include waste discharged into water bodies from domestic sewage, industrial effluents containing organic pollutants, and wastes from chemicals, heavy metals, and mining activities. the major water-polluting industries are refineries, fertilizer production, pesticides, chemical manufacturing, leather processing, pulp, and paper industries (fajana, 2019). globalization and its tactics of concentrating industries in african countries have also created the problem of solid and hazardous waste in nigeria. in fact, solid waste generates air and water pollution in urban areas where industries are concentrated in nigeria. as a result of globalization, urbanization, and industrialization, there is an emerging problem of unregulated urban growth lacking facilities such as waste collection, transportation, treatment, and disposal, which pollutes the atmosphere and water resources. rotting garbage and blocked drains, characteristic of many countries including nigeria in the current era of globalization, spread communicable diseases and pollute water resources (andrew, 2022). therefore, it is evident that industrialization, water, and waste management are cross-cutting issues among key sectors in nigeria, and to achieve meaningful economic development, water, sewage, and waste management must be effectively addressed. (f) labour force participation: for this study, the labour force comprises people aged 15 and older who supply labour for the production of goods and services during a specified period. it includes people who are currently employed and people who are unemployed but seeking work,, as well as first-time job-seekers (world bank, 2024). although there is no doubt that labour force participation can lead to increased labour supply for industrial production in nigeria, investment in private industries also spurs labour force participation because it not only acts as a stimulus but also "leads the way" to industrialization (yecho & ityonzughul, 2020). 2.2. theoretical framework this study is hinged on two theories. they include the unbalanced growth theory and the solow growth theory. the unbalanced growth theory is propounded by hirschman (1958). he said that a deliberate unbalancing of the economy according to a pre-designed strategy is the best way to activate growth in an underdeveloped nation. this theory assumes that, when a strategic sector is fully developed, it causes the growth of other sectors and the economy will lead to new investment opportunities and so pave the way for further economic development, as such growth stems from leading sectors of the economy to the followers (jhingan, 2012). this theory was adopted by nigeria in the 1970s, the selective credit policies. furthermore, one of the fundamental requirements for growth is that income and capital should be used to fully utilize existing resources so that economic growth can be enhanced. thus, the full development of a strategic sector causes other sectors to develop, and one ingredient for development or growth to occur is the infusion of capital and labor. following the two theories, this study specifies as follows: 𝑌 = 𝑓(𝐾, 𝐿) (1) where, y = output, k = input of capital and l = labour, (chamberlin & yuem, 2006). however, the model was modified to fit in the present study by using the function. 𝑌 = 𝑓(𝑋𝑖) (2) where y = gdp (proxy of economic growth) and xi = the products of capital and labour requirements for industrialization from various sectors. 2.3. empirical review the review of related studies is aptly shown in table 1 below, which highlights the key elements of previous studies while also identifying some gaps in these studies. table 1. summary of empirical literature review. author and date study outcome/finding method gap afolabi and ogoh (2017) relationship between industrial output and economic growth in nigeria an increase in industrial output coupled with agricultural output increases its value added to the economy. ardl model labour, mining, sewage/waste and electricity factors were not considered in their model. obioma, anyanwu, and kalu (2017) effect of industrial development on economic growth in nigeria positive but insignificant impact of industrial output on economic growth. ardl model labour, mining, sewage/waste, and electricity factors were not considered in their model. afolabi and laseinde (2019) impact of manufacturing sector output on economic growth in nigeria positive effect of manufacturing sector output on rgdp. ardl and granger causality techniques labour, mining, sewage/waste, and electricity factors were not considered in their model. attiah (2019) impact of manufacturing and the service sectors on the economic growth of developed and developing countries significant and positive relationships were found between manufacturing output and gdp. multiple regression analysis labour, mining, sewage/waste, and electricity factors were not considered in their model. sahar (2020) effect of industrialization on the economic growth of pakistan the study revealed a direct relationship between industrial output and gdp in pakistan. ardl model the study was not carried out in nigeria kida and impact of crude petroleum and error correction the variables of the study economy, 2025, 12(2): 108-119 113 © 2025 by the authors; licensee asian online journal publishing group angahar (2020) industrialization on economic growth in nigeria natural gas, manufacturing, and solid minerals significantly contributed to economic growth. model (ecm). concentrated only on the oil industry. yecho and ityonzughul (2020) challenges affecting the complementary role of agriculture to industrialization in nigeria. through agriculture, industrialization enhances sustainable development in nigeria. discussion method the research was not empirical as no data were analyzed abomayenimenibo (2021) impact of industrial policy reforms on economic transformation and diversification of nigeria human capital, labour input, and capital stock do not contribute significantly to economic growth. multiple regression analysis the variables were good, but manufacturing and mining output as critical industrialization drivers were not considered. usman and lazarus (2021) impact of industrialization on economic growth in nigeria labour-industrial output ratio also contributes negatively to per capita gdp. multiple regression technique manufacturing and mining output, as key drivers of industrialization, were not considered. ibitoye, ogunoye, and kleynhans (2022) impact of industrialization on the growth of nigeria’s economy industrial output and fdi increased growth while interest rate and exchange rate decreased growth. error correction and granger causality tests the study did not include manufacturing/mining output and even labour utilization as drivers of industrialization. isiksal and odoh (2023) relationship between gdp, agriculture, industry, and the services sector in nigeria the results revealed that agriculture, industry, and services had a significant positive relationship with gdp. ordinary least squares regression and granger causality the variables of industrialization were aggregate. okorontah and uruakpa (2023) nigeria's industrial policy and economic performance the manufacturing subsector has not contributed enough towards the economic growth of nigeria. robust least square estimates the study did not consider labor and electricity as specific industrialization variables. ekpo (2014) an analytical exploration of nigeria's industrial sector performance and policies from 1960 to 2023. the nigerian manufacturing sector, in particular, had performed below expectations. systematic literature review no data were analyzed oyeku (2024) relationship between labor force dynamics and economic growth in nigeria labor force, gross fixed capital formation, and female primary school enrollment have positive and significant long-term effects on economic growth. autoregressive distributed lag other drivers of industrialization, such as manufacturing, mining, electricity, sewage, and waste management, were not considered. ibeaja and amadi (2024) effects of restructuring the industrial sector on economic growth in nigeria manufacturing, crude petroleum, and natural gas had a positive and significant impact on economic growth in nigeria. ecm and ardl model the study did not consider the labour and power sectors as drivers of industrialization. ajmair (2024) impact of industrialization on pakistan's gdp all components of the industrial sector positively affected gdp. ardl model the study was not carried out in nigeria. it is evident from the above empirical literature review that there are disparities in the results of different investigations linking industrialization to economic growth and development. for example, ibeaja and amadi (2024); oyeku (2024) and isiksal and odoh (2023) found industrialization and its associated variables to have a positive and significant effect on the economic development of nigeria. on the contrary, there is a non-significant effect of industrialization on the economy of nigeria (ekpo, 2014; okorontah & uruakpa, 2023). attiah (2019) also found divergence in the study of the impact of the manufacturing sector and economic growth among developing and advanced countries, as the author finds a more pronounced significance among developing countries; as against the result of a pronounced significant effect of the industrial sector on economic growth for poorer nations. while these studies appear comprehensive, they are non-exhaustive. thus, conducting a contemporary study will fill perceived gaps in the literature in terms of the period of data coverage, as this present research intends to extend the data up to 2023. in addition, while previous studies have linked industrialization to economic development and growth, none of the works used a combination of the following variables: manufacturing sector output, energy supply, agricultural output, exchange rate, and labour force participation. analyzing the nexus between industrialization and economic growth from the perspective of these variables is an effort to narrow the variable gap and produce new findings. 3. research methodology the research design employed in this study is the ex-post facto research design. the adoption of the ex-post facto economy, 2025, 12(2): 108-119 114 © 2025 by the authors; licensee asian online journal publishing group design is because it is most suitable for secondary data analysis, as it involves a study that analyzes already existing data to determine their specific effect on one or a set of other data. annual time series data sourced from the central bank of nigeria (cbn) statistical bulletin (various years) were used for the analyses. the study covered the period 1990–2024. other sources of data include the world development indicators and world energy statistics from the international energy agency. the data were analyzed using the error correction model. this is justified since the data are time series and have been found to be integrated at first difference, i.e., the data are stationary at first difference (egbulonu et al., 2018). 3.1. model specification the model for this research is adopted from the solow growth theory with the infusion of the unbalanced theory. however, the contemporary model of okorontah and uruakpa (2023) was examined and modified to suit our purpose. the model of okorontah and uruakpa (2023) established a functional relationship between the gross domestic product (dependent variable), manufacturing sector output, oil export, and non-oil export (independent variables). however, by modifying their model, this study adopts the real gross domestic product growth rate instead of gdp; in addition, it considers outputs from key sub-sectors that comprise the industrial sector while also introducing the labour force participation rate as an intervening variable. the model is specified as follows: 𝑅𝐺𝐷𝑃𝐺𝑅 = 𝑓(𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑖𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛) [3] by expanding the right-hand side, we obtain: 𝑅𝐺𝐷𝑃𝐺𝑅 = 𝑓(𝑀𝐴𝑁, 𝑀𝐼𝑁, 𝐸𝑆𝑆, 𝐶𝑂𝑁, 𝑊𝑆𝑊, 𝐿𝐴𝐵) [4] where: rgdpgr = real gross domestic product growth rate (year %). man = manufacturing sector output proxied by manufacturing value added (% of gdp). min = output of the mining and quarrying sub-sector (% of gdp). ess = energy supply proxied by electricity supply (kwh/capita). con= output of the construction sub-sector (% of gdp). wsw = output of water supply, sewage and waste mgt. sub-sector (% of gdp). lab = labour force participation rate. the mathematical form of the model includes the time variant, as well as the coefficients and error terms, as follows. 𝑅𝐺𝐷𝑃𝐺𝑅𝑡 = 𝛽0 + 𝛽1𝑀𝐴𝑁𝑡 + 𝛽2𝑀𝐼𝑁𝑡 + 𝛽3𝐸𝑆𝑆𝑡 + 𝛽4𝐶𝑂𝑁𝑡 + 𝛽5𝑊𝑆𝑊𝑡 + 𝛽6𝐿𝐴𝐵𝑡 + 𝜀𝑡 [5] where: β0 =intercept of the model. β1 –β6 =unknown coefficients of the model to be estimated. εt =stochastic error term. t =period of study i.e. 1990 – 2023. by standardizing the data, we assume a log-linear function and take the natural logarithm of both sides of the linear model as follows. 𝑙𝑛𝑅𝐺𝐷𝑃𝐺𝑅𝑡 = 𝛽0 + 𝛽1𝑙𝑛𝑀𝐴𝑁𝑡 + 𝛽2𝑙𝑛𝑀𝐼𝑁𝑡 + 𝛽3𝑙𝑛𝐸𝑆𝑆𝑡 + 𝛽4𝑙𝑛𝐶𝑂𝑁𝑡 + 𝛽5𝑙𝑛𝑊𝑆𝑊𝑡 + 𝛽6𝑙𝑛𝐿𝐴𝐵 + 𝜀𝑡 [6] where ‘ln’ represents the natural logarithm of the associated variables. based on the above model, this study expects the following findings. a. manufacturing sub-sector output should have a positive relationship with rgdp growth rate, i.e., β1 > 0. b. mining sub-sector output should have a positive relationship with rgdp growth rate, i.e., β2 > 0. c. energy supply should have a positive relationship with rgdp growth rate, i.e., β3 > 0. d. construction sub-sector should have a positive relationship with rgdp growth rate, i.e., β4 > 0. e. water supply, sewage, and waste management sub-sector should have a positive relationship with rgdp growth rate, i.e., β5 > 0. f. labour force participation rate should have a positive relationship with rgdp growth rate, i.e., β6 > 0. table 2 presents the descriptive statistics of the data used in the analysis. table 2. descriptive statistics. rgdp man min ess con01 wsw lab mean 45184.33 4430.21 13097.35 118.80 1413.50 55.081 32.008 median 42044.78 3708.51 13246.85 125.44 1045.38 30.215 31.575 maximum 75142.39 6684.22 16742.15 156.80 2680.22 184.400 46.300 minimum 21462.73 2898.47 9845.97 74.49 442.274 13.002 18.91 std. dev. 20421.43 1477.83 2075.78 28.37 879.291 50.751 6.707 skewness 0.155139 0.538 0.004 -0.2616 0.359 1.148 0.051 kurtosis 1.378 1.542 1.610 1.462 1.398 3.055 2.643 jarque-bera 3.864 4.651 2.396 3.738 4.369 7.475 0.200 probability 0.145 0.098 0.302 0.154 0.113 0.224 0.905 4. data analysis and discussion the average value for real gross domestic product for the period was n45.184 trillion, and this covered the period 1990 through 2024. for other indicators of industrialization, manufacturing and mining have average figures of n4,430.2 and n13,097 trillion, respectively. the average electricity supply per capita was 118.8 kwh, while the maximum for the period was 156.8 kwh. the maximum percentage of labour force utilization by the industrial sector was 46.3%, while the maximum manufacturing, mining, and construction outputs were n6,684.2 trillion, n16,742 trillion, n2,680 trillion, and n184 million, respectively. economy, 2025, 12(2): 108-119 115 © 2025 by the authors; licensee asian online journal publishing group an examination of the skewness shows that all the data are right-tailed, i.e., they are positively skewed, except for electricity supply, which shows a negative slope. however, the negative skewness of electricity supply did not affect the other variables since they have standard deviations that are not very far from the mean. thus, the positive elasticity of the data is confirmed by the skewness of the distribution, which suggests lengthy right tails. the jarque-bera statistic shows that the data are normally distributed, since their p-values are greater than the 0.05 critical value. the null hypothesis of the jarque-bera test assumes that the data are not normally distributed. this implies that the data have a very lengthy right tail with high skewness to the right. this necessitates the logging of the data in order to normalize the distribution to be a normal distribution. table 3 shows the summary of the unit root test which ascertains the stationarity of the time series data. table 3. summary of unit root test. variables adf test statistics decision rule order of integration @level @1st difference rgdp -2.8032 0.2062) * -8.2102 (0.0000) * stationary at 1st difference i(1) man -1.0811 (0.9172) -4.8814 (0.0022) * stationary at 1st difference i(1) min -1.2669 0.8787) * -5.9728 (0.0001) * stationary at 1st difference i(1) ess -1.6698 0.7420) * -6.6344 (0.0000) * stationary at 1st difference i(1) cons -2.2805 (0.4315) -4.4697 (0.0062) * stationary at 1st difference i(1) wsw 1.0965 (0.9999) -3.8598 (0.0260) stationary at 1st difference i(1) lab -2.6956 (0.2447) -4.4649 (0.0086) stationary at 1st difference i(1) critical value at 5% level = -2.9484 critical value at 5% 1st difference = -2.9511 the unit root test above shows that real gdp (rgdp), manufacturing output (man), mining output (min), electricity supply (ess), construction (cons), water supply and waste management (wsw), and labour force participation rate (lab) were stationary at first difference, i.e., their statistical properties after first differencing were found to be constant over the time period studied. in other words, the variables are said to be integrated of order one i(1). the end point of the stationarity test carried out above is that we have an i(1) order of integration throughout, and as such, we adopt the johansen cointegration test to ascertain the existence of a long-run relationship among the variables. this was affirmed in the works of egbulonu (2019) and pesaran, shin, and smith (2001). the long-run property of the data is ascertained using the johansen cointegration test. the hypothesis of the johansen test states that h0: there is no long run relationship existing amongst the variables. h1: there is long run relationship amongst the variables. the test is summarized below. table 4. summary of the johansen cointegration test. hypothesized no. of ce eqns. trace statistic 0.05 critical value max-eigen statistic 0.05 critical value none * 189.9241 0.0000 63.57628 0.0003 at most 1 * 126.3478 0.0001 41.75573 0.0321 at most 2 * 84.59211 0.0021 31.79669 0.0868 at most 3 * 52.79542 0.0160 24.03945 0.1333 at most 4 28.75597 0.0656 15.24123 0.2723 at most 5 13.51473 0.0972 12.02750 0.1096 at most 6 1.487235 0.2226 1.487235 0.2226 the trace statistic in table 4 above has four (4) cointegrating equations at 5% level of significance. this is evidenced in the critical values which are less than 0.05 at none, at most 1, at most 2, at most 3, and at most 4. therefore, we reject the null hypothesis of no long-run relationship since there is at least one significant probability value and conclude that there is a long-run relationship between industrialization variables and the economic growth rate in nigeria. since we have confirmed the existence of a long-run relationship among the variables, we estimate the short-run parameters of the model using the error correction model (egbulonu, 2019; pesaran et al., 2001). table 5 presents the short run coefficients of the model also called the error correction model (ecm). table 5. short-run error correction model. variable coefficient std. error t-statistic prob. c 80.574 44.491 1.811 0.090 man -1.810 0.369 -4.907 0.006 min -0.086 0.047 -1.839 0.086 ess -0.030 0.013 -2.310 0.039 con01 -8.678 3.463 -2.506 0.024 wsw -6.495 2.061 -3.152 0.035 lab 0.254 0.185 1.369 0.191 ecm(-1) -0.148 0.038 -3.869 0.016 r-squared 0.730 durbin-watson stat 1.909 adjusted r-squared 0.605 f-stat. 5.807 the short-run estimates above have a speed of adjustment of 14.81 percent annually. this means that the model corrects its previous period’s disequilibrium at an estimated speed of 14.81 percent every year. furthermore, the coefficients of manufacturing sub-sector output and mining sub-sector output are negative in the short-run economy, 2025, 12(2): 108-119 116 © 2025 by the authors; licensee asian online journal publishing group period. this means that manufacturing sub-sector output and mining sub-sector decrease the economic growth rate by 1.0, 0.810, and 0.086 units in the short period, respectively. manufacturing sector output has a negative impact on economic growth by -1.810 units, which implies that the negative short-run effect of manufacturing sector output on the economic growth rate in nigeria was significant. the short-run effect of the mining sub-sector on the nigerian economy is negative, decreasing it by -0.086 units. this implies that the mining sub-sector in nigeria contributes negatively to the economy, but the negative contribution has not been found to be significant. there is a significant negative effect of electricity supply on economic growth in nigeria. by implication, the short-term effect of electricity supply on the nigerian economy is negative, decreasing it by -0.0302 units. the negative effect of electricity supply on the economy was very significant. the construction sub-sector decreases nigeria’s economic growth rate significantly by -8.678 units. the effect of water, sewage, and waste management on the economy was negative and significant, which implied that there was a decreasing effect of water supply, sewage, and waste management on the economic growth rate in nigeria, and the decreasing effect was significant. labour force participation rate increased the economic growth rate in nigeria by 0.254 units, but the positive effect it exerts on the economy was not significant. the intercept of the short-run model is positively estimated at 80.574, which indicates that, holding the industrialization variables constant, there will be a positive movement in the real gdp growth rate in the short run period. this underscores the driving force of the stochastic variables that affect economic growth positively but are not captured in the model. these stochastic variables are accounted for by the error term. 4.1. diagnostic tests the diagnostic tests are additional tests that confirm the robustness of the model. these tests, along with their test statistics, are summarized as follows: 1. the adjusted r-squared: the model has an adjusted r value of 0.605. this indicates that industrialization and its associated variables explain up to 60.5 percent of the changes in nigeria's economic growth rate. by implication, manufacturing output, mining output, electricity supply, construction output, water supply and sewage/waste management, and labor force participation rate account for 60.5 percent of the changes in nigeria’s economic development. this is a high explanatory coefficient. 2. 1. test for autocorrelation: the durbin-watson statistic is estimated at 1.909. going by the rule of thumb, there is no autocorrelation in the model since the durbin-watson statistic tends toward two. hence, the data used in formulating the model is free from the problem of autocorrelation. in other words, the error terms observed in one year did not affect subsequent years. 4.2. test of hypotheses the hypotheses formulated earlier in this research are tested under this sub-section. the hypotheses are stated in their null forms (h0). the decision rule is to reject the null hypothesis if the p-value of the t-statistic is less than the 0.05 significance level; otherwise, we accept the null hypothesis. table 6 presents a summary of the hypotheses test at 5% level of significance. table 6. summary of the hypotheses test. null hypotheses t-stat. (p-value) decision h01: there is no significant relationship between manufacturing sector output and economic growth in nigeria. t-statistic = -4.906 (p-value) = 0.0059 p-value < 0.05; null hypothesis is rejected. h02: there is no significant relationship between the mining sub-sector and economic growth in nigeria. t-statistic = -1.839 (p-value) = 0.0858 p-value > 0.05; null hypothesis is accepted. h03: there is no significant effect of electricity supply on economic growth in nigeria. t-statistic = -2.310 (p-value) = 0.0394 p-value < 0.05; null hypothesis is rejected. h04: construction sub-sector output has no significant effect on nigeria’s economic growth. t-statistic = -2.506 (p-value) = 0.0242 p-value < 0.05; null hypothesis is rejected. h05: water supply, sewage, and waste management do not significantly affect nigeria’s economic growth. t-statistic = -3.152 (p-value) = 0.0349 p-value < 0.05; null hypothesis is rejected. h06: there is no significant effect of labour force participation on nigeria’s economic growth. t-statistic = 1.368 (p-value) = 0.1913 p-value > 0.05; null hypothesis is accepted. source: researcher’s computation from eviews 9 software. 4.3. discussion of findings the findings made in this research are in line with the research objectives. the specific objectives aimed to determine the effect of industrialization and its associated variables on the growth of the nigerian economy. the model established a functional relationship between manufacturing, mining, construction, electricity supply, water/waste/sewage management, labour force participation, and economic growth in nigeria. it is expected that the values of industrialization variables, with increased labour addition, should contribute to nigeria’s economic development. having analyzed the data, the findings are discussed extensively below. the long-run test confirmed the existence of a long-run relationship between industrialization and economic growth in nigeria. the long run effect was also confirmed in the works of okezie et al. (2017); kida and angahar (2020) and isiksal and odoh (2023). the implication is that industrialization exerts a long-term effect on the growth rate of nigeria’s real gross domestic product, and as such, nigeria should pursue long-term targets with respect to growing the country’s industrial sector. economy, 2025, 12(2): 108-119 117 © 2025 by the authors; licensee asian online journal publishing group in line with the established goals of the study, the outcome of the estimations suggested that the manufacturing sub-sector's production lowered the economic growth rate in the short term. nonetheless, given its high likelihood value, the manufacturing sub-sector's production had a substantial detrimental impact on the economy. this suggests that the production of nigeria's manufacturing sub-sector has not contributed to the necessary economic growth, which has considerably slowed down overall economic development. okorontah and uruakpa (2023) identified the poor operating environment of the manufacturing sub-sector as one of the factors that can slow down overall economic development. furthermore, according to banjoko, iwuji, and bagshaw (2012) the nigerian manufacturing sector has significantly underperformed in comparison to its potential despite numerous policies and developmental initiatives implemented by successive civilian and military administrations since independence. further analysis revealed that the mining sub-sector output decreased nigeria's economic growth rate in the short term, but the decrease was not significant. this implies that as the mining sub-sector output changes, nigeria’s economic growth tends to fall into negative territory, although the negative effect was not statistically significant owing to what ekpo (2014) referred to as the miniature quantum of mining reserves in nigeria. ibeaja and amadi (2024) found an insignificant effect of mining on the nigerian economy. the mining sub-sector is not as large as the oil and gas sector, and this makes the effect of mining on the economy not significant. however, the negative effect portends great worry to the economy, as the mining sub-sector forms a substantial variable that drives the industrialization of any economy. from other economies, ajmair (2014) found positive effects of mining and quarrying on the gdp of pakistan. this is an indication that the nigerian mining sub-sector has not shown the potential to drive the industrialization of the economy. again, electricity supply showed a negative effect on economic growth. this implies that the expectation was not met for electricity supply, as the industrial sector still grapples with the problem of erratic electricity, which has affected its impact on the economy. world bank (2013) noted that electricity is unreliable from the public power supplier in nigeria, and the reliability is known to be less than 50% nationwide. iwayemi (2019) and odell (2019) found that strong demand and increased supply of electricity would stimulate increased income and higher living standards in nigeria, but the reverse is the case. ekpo (2014) submitted that electricity supply in nigeria has not helped nigeria to attain the required level of industrialization that can produce dynamic change in the economic structure of the country. the findings made in this research corroborate the majority of previous research, and this points to the fact that the electricity supply situation to the industrial sector in nigeria has remained low over the years. the construction sub-sector showed a significantly negative effect on nigeria’s economic growth in the short run, but the interesting fact is the significant negative effect of the construction sub-sector on the economy. this study does not agree with the findings of attiah (2019) and ajmair (2014) because their research was not carried out on the nigerian economy. the nigerian construction sub-sector as pointed out by afolabi and laseinde (2019) has been largely undermined by foreign multinationals, which add little or nothing to the government's industrialization drive. efforts to localize the industry through local content enactments have so far not yielded the desired results, as the construction sub-sector still persists in its inverse relationship with the economic growth rate. while it is noteworthy and expected that water/sewage and waste management will affect the economy negatively, the significant effect this variable exerts on the economy was not expected. in contrast with the finding of ajmair (2014) who posited that water supply distribution has a positive relationship with gdp of pakistan, the nigerian industrial sector has witnessed negative sewage conversion, thus leading to increased negative effects of waste on the economy. isiksal and odoh (2023) rightly pointed out that a mark of an industrialized economy is increased sewage and waste, but the expectation is that this will add value to the economy through conversion techniques. thus, the negative effect shows that nigeria is still far from being industrialized, as the economic growth rate drops with changes in water/sewage and waste management. the intervening effect of the labour force participation rate was the last objective of the study, and the results revealed that labour force participation in nigeria adds value to the economy but not significantly. this implies that labour utilization by the industrial sector is not sufficient to drive the needed growth in the economy. this corroborates the findings of usman and lazarus (2021). who asserted that the human capital and income levels have not reached the threshold to make industries contribute reasonably to economic growth in nigeria. also, okezie et al. (2017) and abomaye-nimenibo (2021) both the found labour force has a negative impact on the real gdp in nigeria in the short run. on the whole, the industrialization variables were found to have a jointly significant effect on the growth rate of the nigerian economy, accounting for up to 60.5 percent of the changes in nigeria’s economic growth efforts. there was no serial correlation of the error term in the model, thus confirming the suitability of the variables used. additionally, the speed of adjustment of the model to the long-run equilibrium was estimated at 14.8 percent. the implication is that, given a steady increase of 14.8 percent in industrialization indices in nigeria, the economy will experience an equilibrium long-run growth. 5. conclusion and recommendations based on the above revelation in this study, the study concludes that industrialization has a negative effect on the development of the nigerian economy. this conclusion stems from the fact that the various indices of industrialization which were examined (manufacturing, mining, electricity supply, construction, and water/sewage/waste management) have negative effects on the economic growth rate of nigeria. however, labor force participation exerted a positive effect on the growth rate of the economy, but this was not significant, which gives the impression of an insufficient utilization of available labor by the industrial sector. to achieve the level of economic development that is desired in nigeria, the government needs to strive to consider one or a combination of the recommendations made below. economy, 2025, 12(2): 108-119 118 © 2025 by the authors; licensee asian online journal publishing group 5.1. policy implications and recommendations 1. given that the manufacturing sub-sector exerted a negative effect on the nigerian economy, it implies that the nigerian manufacturing sub-sector has deteriorated over the years, which culminated in the exit of major players in the industry. by implication, the nigerian government will need to reform its industrial policies to promote manufacturing growth, such as providing incentives for investments, technology adoption, and innovations. 2. in a similar manner, the mining/quarrying sub-sector negatively affected economic growth. the implication is that the government may need to strengthen environmental and social regulations in the mining sector to mitigate the negative externalities, such as environmental degradation, health impacts, and community displacement. 3. also, since electricity supply negatively affects economic growth, the government may need to reform the electricity sector to promote competition, efficiency, and investment in new generating capacity, transmission, and distribution infrastructure. 4. despite the fact that the relationship between the construction subsector and economic growth is not statistically significant, the negative relationship still has implications. in this case, the government may need to strengthen the monitoring and evaluation framework to track the performance of construction projects, identify areas of improvement, and ensure that projects are delivering the expected economic benefits. 5. the government may need to invest in water supply infrastructure, upgrade the sewage system to reduce the risk of water pollution, and implement waste management reforms, including recycling programmes, waste-toenergy initiatives, and proper disposal of hazardous waste. these key industrialization variables, when properly harnessed, can propel the needed growth in the economy. since they exert a negative effect on the economy, there is bound to be retarded slowdown in the economy, which will extend to other sub-sectors. achieving a highly industrialized economy is one where electricity supply is taken with utmost priority, the mining and quarrying sub-sector is made accountable for every output, and the construction sub-sector is largely localized. with increased industrialization comes increased waste and sewage generation. thus, proper management of sewage and waste is paramount for electricity generation and increased access to factors that drive industrialization. therefore, with the right policies and actions, nigeria can achieve the desired level of industrialization. government policies are shaped by research on specific aspects of the economy. this study has shown the effects of industrialization on the nigerian economy within the period under review. the combination of industrialization variables has revealed that the industrial sector has not had the desired effect on the economy, and this knowledge is very necessary to drive policies that will reverse this trend. thus, this study has contributed to the updated knowledge of policymakers on the industrial sector–economic growth nexus in nigeria for an extended period from 1990 to 2024. references abomaye-nimenibo, s. 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(2020). agriculture and industrialization in contemporary nigeria: interrogating the nexus for enhancing sustainable development goals. research journal of humanities, legal studies & international development, 4(1), 42-59. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. www.nairametrics.com https://energyforgrowth.org/article/160-days-in-the-dark-understanding-electricity-unreliability-in-nigeria/ https://doi.org/10.1002/jae.616 29 © 2023 by the authors; licensee asian online journal publishing group economy vol. 10, no. 1, 29-38, 2023 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/economy.v10i1.5118 © 2023 by the authors; licensee asian online journal publishing group the fiscal theory of the price level: the case of morocco jamal agouram1 jamaa anoualigh2 ahmed ait bari3 mustapha amzil4 ( corresponding author) 1,2faculty of economics and management guelmim, university ibn zohr, morocco. 1email: jamal.agouram@edu.uiz.ac.ma 2email: j.anoualigh@uiz.ac.ma 3,4faculty of legal, economic and social sciences agadir, university ibn zohr, morocco. 3email: a.aitbari@uiz.ac.ma 4email: mustapha.amzil@edu.uiz.ac.ma abstract in this paper, we will use the econometric model and the price-level fiscal theory (plft), which looks at how the government surplus, debt, and inflation interact to apply a vector autoregression (var) model to the moroccan economy. we first want to figure out how fiscal and monetary policy shocks affect the economy. the second thing we want to do is study how fiscal and monetary policy affects each other. so, the theoretical limits we used to determine our model are based on an ftpl framework. the general price level budget and keynesian theories are not entirely wrong because of what we found. also, the fact that most of the variation in inflation can be explained by changes in the money supply suggests that monetary policy works well in the moroccan economy to control inflation. however, debt policy has little effect on this control. the government is worried about the level of public debt in morocco because it positively affects the economy. also, the positive effects over time should give the government confidence that the debt policy is working. so, debt dynamics still need to be a reason to worry because they would help the economy overall. because it has a negligible effect on the economy immediately and lowers inflation, the government should pay less attention to the amount of debt and how quickly it grows. keywords: deb, fiscal theory, inflation, monetary policy, moroccan economy, price-level. jel classification: c13; e00; e62. citation | agouram, j., anoualigh, j., bari, a. a., & amzil, m. (2023). the fiscal theory of the price level: the case of morocco. economy, 10(1), 29–38. 10.20448/economy.v10i1.5118 history: received: 12 july 2023 revised: 20 september 2023 accepted: 25 october 2023 published: 7 november 2023 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: this study received no specific financial support. institutional review board statement: not applicable. transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. this study followed all ethical practices during writing. data availability statement: the corresponding author may provide stu dy data upon reasonable request. competing interests: the authors declare that they have no competing interests. authors’ contributions: all authors contributed equally to the c oncept ion and design of the study. all authors have read and agreed to the p ub l ished version of the manuscript. contents 1. introduction ................................................................................................................................................................................................... 30 2. literature review......................................................................................................................................................................................... 30 3. theoretical foundation.............................................................................................................................................................................. 31 4. empirical evidence ...................................................................................................................................................................................... 32 5. discussion ....................................................................................................................................................................................................... 37 references ........................................................................................................................................................................................................... 38 mailto:jamal.agouram@edu.uiz.ac.ma mailto:j.anoualigh@uiz.ac.ma mailto:a.aitbari@uiz.ac.ma mailto:mustapha.amzil@edu.uiz.ac.ma https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v10i1.5118 https://orcid.org/0000-0002-1574-1464 https://orcid.org/0009-0009-7386-6626 https://orcid.org/0009-0007-9875-1775 economy, 2023, 10(1): 29-38 30 © 2023 by the authors; licensee asian online journal publishing group contribution of this paper to the literature the theoretical efforts made to mobilize the key concepts of our work, namely monetary policy and fiscal policy, and their effects on the moroccan economy. 1. introduction many central banks, including the central bank of morocco, battle mightily to keep inflation in check (bank almaghrib). to complete this equally massive task, describing inflation is a requirement. theoreticians place a strong emphasis on fiscal policy and hold that sound monetary policy is a necessary but insufficient precondition for managing inflation. for this reason, independent of the actions taken by the monetary authorities in pursuit of their inflation-targeting strategy, fiscal policy may be the action that establishes the level of prices in general. as a result, maintaining a level of prices that is steady and low in inflation has remained the core goal of macroeconomic management in many economies, including morocco. among the many factors that contribute to inflationary tendencies in an economy, including monetary shocks, structural shocks, demand shocks, external shocks, and demographic changes, government fiscal policy measures are also linked to the consumer price index. this topic is important because of the covid-19 environment, which forces governments to take on debt to stimulate economic growth (fiedler, gern, & stolzenburg, 2020; urquhart, 2022). the theoretical literature on the impact of fiscal policy on inflation was extensive throughout the 1990s. the writings of leeper (1991); sims (1994); woodford (1994); woodford (1995); woodford (1996); woodford (2001); cochrane (1998) and cochrane (2000) serve as the cornerstones of this idea. the traditional approach held that fiscal authorities would adjust primary surpluses to ensure government solvency at whatever price level and that the monetary aggregate was the only factor that determined the price level. contrarily, ftpl argues that price level effects from fiscal shocks are plausible if fiscal policy can set primary surpluses independent of governmental debt. it looks at the possibility that fiscal policy could provide primary surpluses regardless of the total amount of state debt. to always respect the government's intertemporal budget restriction, the price level will adjust. these two categories of fiscal policy activity are referred to as non-ricardian and ricardian by woodford (1995). ricardian fiscal policy is appropriate when primary surpluses cannot be determined independently of public debt; non-ricardian fiscal policy is appropriate when this is not the case. to promote macroeconomic stability and longterm economic growth, fiscal and monetary policy works together. however, the connection between the two initiatives might have an impact on macroeconomic metrics, particularly inflation. however, sargent and wallace (1981) contend that monetary and fiscal policies cannot be incompatible in an economy. the coordination and application of monetary and fiscal policy determines how well the monetary authority controls inflation. because of this, leeper (1991) concentrated on two reliable institutions of policy: passive fiscal policy and active monetary policy, or the opposite. the monetary and fiscal supremacy systems described by sargent and wallace (1981) are comparable to these stable organizations. leeper (1991) argues that monetary authorities maintain control over inflation rates in the long run but lose control over overall price levels in the short run. sargent and wallace (1981) show that avoiding low inflation in the near run results in high inflation in the long run. to enhance the welfare of economic agents, monetary and fiscal policy must be integrated and coordinated immediately. in this essay, we pose the question: to what extent does a state's price level get determined by its tax theory of inflation? this project will be broken into the following sections moving forward: the first section's goal is to define the basic theoretical tenets of the fiscal theory of price level and public debt. the method used in the empirical inquiry will be covered in the second section. this data will be analyzed, and the results of the empirical study will be presented in the third part. 2. literature review the classical form asserts that inflation is always and everywhere a monetary occurrence, while the more recent ftpl describes how inflation occurs. both are based on friedman's quantitative theory of money (qtm), which was published in friedman (1963). the traditional theory holds that fiscal policy is inactive, agents behave in a ricardian framework, and the requirement for liquidity has the greatest impact on the level of prices. therefore, early 1980s research on the causes of inflation prioritized monetary policy while disregarding fiscal policy, which is theoretically just as crucial in accomplishing the same goal. the majority of these studies are predicated on the notion that the monetary authority ought to have complete control. prices could increase as a result of this. in contrast, a new school of thinking started to take shape in the 1990s. it claims that agents can act in non ricardian ways. when this happens, fiscal policy takes action and no longer has to alter its primary surplus to maintain sound public finances. because the monetary authority must permit inflation to occur to maintain a balanced budget, inflation is a fiscal problem. however, the (relatively recent) fiscal theory of the price level (hence referred to as ftpl) contradicts the monetarist perspective. there are important policy repercussions to the contrast between ricardian and non-ricardian regimes. under the ricardian system, sound monetary policy is both a necessary and sufficient condition for low inflation. the fiscal authorities should be forced to conduct a responsible and suitable fiscal policy as a result of an independent central bank with a strong institutional commitment to price stability. under a non-ricardian regime, sound monetary policy alone won't guarantee low inflation unless further steps are taken to limit the fiscal authority's latitude. according to some experts, the combination of monetary and fiscal policy is the most effective method to stabilize the economy. for instance, sargent and wallace (1981) discuss this topic in their foundational work on unpleasant monetarist arithmetic. they highlight the challenges that arise when an economy's fiscal and monetary policies are not coordinated. in fact, the coordination and application of monetary and fiscal policies are essential to the regulation of inflation by monetary authorities. however, samizafy (2013) and huart (2013) contend that using debt to finance public deficits has less of a distorting effect than using seigniorage under inflationary pressures or economy, 2023, 10(1): 29-38 31 © 2023 by the authors; licensee asian online journal publishing group raising mandatory levies under conditions of declining household purchasing power and declining firm financing capacity. despite the advantages of borrowing over seigniorage or tax increases, some academics, like sargent and wallace (1981), contend that borrowing would be bad for economic growth and the level of prices in general. panizza and presbitero (2012) state that these effects could be either short-lived or long-lasting. as a result, it is important to understand the notions of dominant fiscal policy and dominant monetary policy developed by sargent and wallace (1981) to comprehend the actions of the two monetary and fiscal authorities. when monetary policy determines fiscal policy, regardless of what the fiscal authority requests, the monetary authority sets its aim for money supply expansion for the current and future periods. the amount of government credit that will be financed through seigniorage is therefore specified by the monetary authority. the fiscal authority's budget must be designed so that seigniorage and the sale of treasury bonds can both be used to close budget gaps. on the other hand, when the government creates its budget without assistance from the monetary authority , fiscal policy is in charge. this enables the government to discuss deficits and surpluses both now and in the future. because the monetary authority must attempt to cover any deficit between the supply and sales of treasury notes by seigniorage, the supply of treasury bills is a constraint in this case. this type of monetary authority can still manage inflation, but it is less effective than it would be in a coordinated system where monetary policy is the primary concern. if the fiscal authority sells just treasury bills, it might not be able to close the deficit. the monetary authority will therefore have to print more money and put up with more inflation in order to. according to the fiscal theory of price level, a state's fiscal authority primarily affects the level of prices in its economy (urquhart, 2022). the fiscal and monetary authorities are the two parties who, in theory, are in charge of this. but according to the fiscal theory of price level, this second actor will either have no part in making this decision or a minor one (buiter & sibert, 2017). sadly, this theory is challenging to put into practice since the monetary authority will always have a significant influence and because it will be difficult to persuade the fiscal authority to pursue the appropriate course of action (christiano & fitzgerald, 2000). the price level's ambiguity and volatility will therefore work in your favor. in the fiscal theory of price level, government debt is a key component, and how it is managed will affect price level. people who believe in this theory anticipate this, which is bad news for monetarists who wish to employ money management to stabilize the economy. the government budget depends on the idea of intertemporal. the budget is intended to be intertemporal in that it can, in the context of the government's contractual obligations, span several years. the central bank, which oversees monetary policy, may intervene to provide stability or greater control over how prices are determined on the market. one of the numerous variables that must be taken into account while regulating the price level is taxes. this is one of the concerns with the fiscal theory of price level, thus monetary considerations must also be made (buiter, 2002). we shall discuss interest rates, fiat money (the absence of which could support the fiscal theory of the price level), and monetary injections (such as the helicopter money created by the us federal reserve (cochrane, 2021)), which are all related to these monetary issues. if prices stay where consumers think they should be and the government is to remain solvent, these items need to change or be coordinated with fiscal policy. 3. theoretical foundation the fiscal theory of the price level has been the subject of substantial investigation and dispute among economists. sargent and wallace's fiscal dominance system, formulated in 1981, exemplifies this theory within a fixed monetary policy framework. however, it was only in the 1990s that leeper, sims, and woodford provided alternative perspectives that challenged the mainstream interpretation of fiscal dominance. these economists established the potential of fiscal policy control without relying on monetizing public spending or seigniorage. their contributions included notions such as ricardian non-equivalence and central bank neutrality. leeper (1991) extended the nature of monetary and fiscal limits, indicating that they can exhibit either an active or passive character. active regulation happens when an authority managing government debt may modify variables depending on its assumptions, effectively regulating fiscal policy. in contrast, the passive influence of government debt on the authorities can be noticed, as government activity tends to be driven by private sector optimization. consequently, the fiscal authority complies with the norms defined by the monetary authority, giving rise to what some consider a flawed fiscal theory of the price level. in this perspective, the central bank is regarded as a powerful and active authority, not bound by budgetary restrictions, capable of responding to past, present, and predicted future circumstances. however, the necessity of collecting adequate tax income to balance the budget arises due to the limits imposed by consumer optimization and the active authorities. consequently, the decision making process of the passive authority is influenced by the prevalent present and historical variables linked to public debt. contrary to the opinions, mccallum (2000) questions the assumption made by certain researchers that changes in the money supply have no impact on the price level and argues for addressing the monetary component alongside fiscal policy. according to mccallum, the weak fiscal theory of the price level, which allocates greater power to the government than the central bank, justifies skepticism. consequently, as usually understood, the fiscal theory of the price level is questioned. while accepting the soundness of the fiscal component of the theory, mccallum emphasizes the need to integrate the monetary component into the study. woodford (1998) extends the rationale underpinning the link between monetary and fiscal policy beyond the widely advocated yet undesirable alternative of relying on seigniorage as a source of government revenue. in investigating non-ricardian fiscal policy, woodford explores the wealth effect of higher government debt on the price level. these effects are consistent with rational expectations and frictionless financial markets, contradicting the premise of ricardian equivalence. woodford's methodology considers government debt maturity, indexation, and size differences. moreover, woodford criticizes the concept that a government cannot refuse to change its budget when debt reaches unsustainable levels and argues against the idea that the budget completely decides the price level within a model with several rational expectation equilibria. the inquiry also explores the consequences economy, 2023, 10(1): 29-38 32 © 2023 by the authors; licensee asian online journal publishing group of government debt on the price level under the assumption of adaptive, rather than rational, lifetime budget expectations. finally, woodford analyzes ramsey's dynamic taxation in an optimal fiscal and monetary policy context. a non-ricardian fiscal strategy is offered, wherein government purchases do not raise the present value of future tax receipts, leading to varied government bond equilibrium values. this policy regime can assure price stability when accompanied by appropriate monetary policy and government debt composition. carlstrom and fuerst (2000) take a different approach, claiming that the central bank, rather than tax rul es, holds power over the price level. this claim opposes the fiscal theory of the price level, which posits that tax rules determine price levels. christiano and fitzgerald (2000) define price stability as the notion that sustaining stable prices is a concern across all public policy domains. cochrane (2001) analyzes the link between tax theory and stock market outcomes, considering microsoft stock as a form of assessment. he proposes that if the future worth of a share of microsoft stock is known in advance, such a method could provide more precise market price measures. cochrane offers the concept of a price-level tax that could allow for economic functioning without dependency on fiat money. this strategy may also enable the government to satisfy its financial obligations over a longer intertemporal period, thereby testing the equilibrium restriction in a ricardian economy. creel and sterdyniak (2001) emphasize that the fiscal or budgetary theory of the price level is primarily a theoretical construct, lacks empirical support, and has not exerted a substantial impact in evaluating its truth. buiter (2002) critically evaluates the fiscal theory of the price level, arguing against the premise that the government's intertemporal budget constraint must be anchored in identity. according to buiter (2017), this author considers the fiscal theory of the price level as dead. mccallum (2003) believes that the overall level of price determination is essentially governed by the fiscal policies of a specific state, with monetary phenomena relegated to a secondary role. the author concludes that the tax theory of the price level, which appears to be dominant in the contemporary economic landscape, can lead to confusion. mccallum criticizes the weak fiscal theory of the price level, which believes that the fiscal authority deceives financial authorities, and highlights his disagreement with this theory. consequently, when presented with a choice between several rational expectations responses to a given model, the analyst's preference for a bubble solution involving increased asset values over an orthodox reaction entailing a rise in the quantity of money separates the fiscal theory. mccallum (2006) offers a different critique of the tax theory of the price level, criticizing it as harsh and unusual. this approach forecasts a price level that greatly deviates from the nominal money supply and is largely affected by bond stocks. bassetto (2008) investigates the fiscal theory of inflation, emphasizing the significance of public debt, present and future budgetary plans, and spending in determining the price level without direct reference to monetary policy, which, in turn, indirectly affects the price level. bajo-rubio, díaz-roldán, and esteve (2009) believe that monetary and fiscal policies have always influenced the price level. according to their interpretation, in the ricardian framework, the monetary authority performs an active role, while the fiscal authority acts passively, responding to the activities of the tax authorities. despite their legal independence, these two authorities are organically interconnected and work together continuously. buiter and sibert (2017) suggest that the fiscal theory of the price level combines fiscal restriction with the demand for a balanced budget, offering substantial obstacles. nonetheless, the authors indicate a continuous interest in the fiscal theory of the price level and advocate the introduction of flexible or dynamic price models within the framework of general monetary equilibrium with rigid nominal prices. these suggestions revive the concept of the fiscal price level. the authors also caution against potential disasters that may arise if policymakers mistakenly perceive price-level fiscal theory as the optimal approach for analyzing the effects of monetary and fiscal policies on inflation, aggregate demand, real economic activity, and the possibility of government default. ignoring the contractual responsibilities of the government could result in increased costs, force adjustments to the budget, and generate other unfavorable repercussions. cochrane (2001) says that the budgetary theory of the price level opposes the government's fiscal authority against the central bank's monetary authority. these two entities must unite to address public debt and inflation. however, the divergent expectations and practices of the fiscal and monetary authorities render the budgetary theory of the price level ultimately absurd. managing budgetary restrictions demands the adoption of fiscal initiatives by the government. the central bank observes these budgetary initiatives, which operate passively but retain a heightened awareness of government actions. the government may also adjust its fiscal policies in reaction to the active operations of the central bank. while these exchanges occur, it remains the role of the fiscal authorities to regulate debt levels and decide pricing levels. the intertemporal character of the government's budget allows for spreading debts, particularly long-term loans, based on different possibilities encompassing the fiscal theory of the price level and ricardian equivalence theory. however, such a method carries the danger of inflation and may destabilize the desired equilibrium. the non-ricardian fiscal theory of the price level reduces the degree of freedom in this regard, allowing the central bank the authority to adjust interest rates. understanding that the fiscal theory of the price level and monetary policy can vary between governments is vital. in hyperinflation, typified by extreme price increases, fiscal and/or monetary actions are required to ca lm the situation due to the instability in the value of money. 4. empirical evidence most researchers investigating debt's effects on economic growth are neither classicists nor keynesians but lie somewhere in between. the non-linear approach to the relationship between debt and economic development argues that debt positively affects economic growth up to a certain point, then becomes negative. bohn (1998) and canzoneri, cumby, and diba (2001) were the first to test the general theory of price-level budgeting in the real world. using data from 1916 to 1995 and a method called linear regression, bohn (1998) shows that the u.s. government altered its primary balance to reflect historical levels of debt in order to keep its finances stable. from 1916 to 1995, the monetary regime governed the u.s. economy. canzoneri et al. (2001) economy, 2023, 10(1): 29-38 33 © 2023 by the authors; licensee asian online journal publishing group estimate the var for 1951–1995 u.s. data and find short-run evidence for the ricardian regime hypothesis. afonso (2002) estimated a var model using canzoneri et al. (2001) for 15 countries in the area that do not adequately evaluate the price-level budget theory. however, particularly for shaposhnikov and tkachev (2006) extrapolates a var model from 1998 to 2005 to illustrate a non-ricardian regime and predict the effects of fiscal policy on the price. fialho and portugal (2005) demonstrate monetary dominance in brazil using 1995–2003 data. in this framework, monetary and fiscal policy coordination resembles a game where the fiscal authority is passive, and the monetary authority is active. monetary policy determines the surplus and debt for a given price level. the general price level theory has not been looked at much in africa, so the results are not as evident. kenkouo (2015) says that cameroon and the congo are controlled by cemac regarding money and financing, while gabon, equatorial guinea, the central african republic, and chad have had varied results. chuku (2016) discovers a financial advantage for nigeria, unlike alfredo and ribeiro (2009). most of these investigations use linear models. several regime-switching models (chuku, 2016; davig, leeper, galí, & sims, 2006; favero & monacelli, 2005) investigate the general price level theory of finance in the u.s. and some e.u. countries to resolve these shortcomings. semmler and zhang (2010) evaluated france and germany's general price level theory from 1969 to 1998 using a markov model. france's monetary and fiscal policies worked well together most of the time, particularly in the early 1970s and from 1980 to 1990. germany's first and last policies were feeble strategic substitutes and complements. according to davig et al. (2006), the two administrations alternated in the u.s. between 1948 and 2004. the average monetary-dominant regime lasts 22 quarters, while active fiscal policy lasts 15 quarters. favero and monacelli (2005) state that u.s. fiscal policy operated from 1960 to 1980. it was dormant during the 1990s but reactivated in early 2001. these two findings disprove that u.s. policy was always passive after world war ii. ayoub, farvaque, and creel (2008). the budgetary theory of the price level distinguishes between ricardian and non-ricardian economic policies and their applicability to sub-periods in a country's economic history. lebanon's transition from prosperity to conflict and reconstruction illustrates this theory. the authors want to evaluate the budgetary theory of the price level in situations where political regime changes establish macroeconomic benchmarks. thus, the authors provide a theoretical framework for understanding the economic mechanisms at work in exceptional situations and a perspective on applying this budgetary theory of the price level. lebanon's disastrous policy history allows economists to analyze changes in monetary and fiscal regimes. in this example, we show that lebanon's recent past has three phases corresponding to one of the fiscal theories of the price level regimes. thus, economic policies (monetary and fiscal) would transition from central bank dominance (1965–1974) to war economies and fiscal dominance (1975–1990) and back to monetary dominance (1991–2005) . however, segregating policy regimes does not prove the fiscal theory. in monetarism, monetization and seigniorage may reduce the economic analysis of the fiscal regime-price level relationship. thus, one must isolate monetary and fiscal relations to prove that lebanon has a non-ricardian regime. romero and marín (2017) examine whether public debt increases inflation. they study government debt, economic growth, money supply growth, and inflation. kwon, mcfarlane, and robinson (2009) use the net debtors of a sample of countries to execute a panel-based estimation. for countries with high public debt, increasing public debt is inflationary. ngambo and biligil (2019) also examine how cameroon's changing public debt impacts economic development and cemac's monetary policy. the results indicate that cameroon's short-term debt does not impair growth. the cemac budgetary theory of the general price level is true by kenkouo (2020). using cemac data, bohn (1998) estimated an msvar markov model. over the entire period, cameroon is in a monetary-dominated regime, while congo, equatorial guinea, and chad are fiscally dominated. the central african republic and gabon alternated administrations for two years each. structural monetary vector autoregression with fiscal variables and impulse responses evaluates fiscal policy actions. recently, urquhart (2022) examined public debt and inflation, considering the fiscal theory of the price level with data from paraguay. 4.1. methodology extensive cooperation is necessary between monetary and fiscal policies to effectively achieve macroeconomic policy goals. this study examines the interplay between these policies, focusing on two levels of cooperation: goal attainment, such as enhancing the financial system and establishing institutional and operational arrangements. the first level of interaction revolves around financing the budget deficit and its implications for monetary management. monetary policy stances significantly impact the government's ability to finance the budget deficit by influencing the cost of debt payment and determining the availability of financing sources. concurrently, the public sector's financing strategy and financial requirements constrain the degree of independence attainable for monetary policy. in numerous countries, fiscal policy has taken precedence over monetary policy, leading central banks to frequently finance public sector deficits, including those arising from quasi-fiscal activities. this subordination of monetary policy to fiscal demands has often resulted in inflationary tendencies. in recent years, a global effort has been made to modernize financial markets and establish institutional and operational frameworks to facilitate the design and implementation of more effective policies. these initiatives encompass utilizing market-based monetary and debt management instruments, measures to enhance central bank independence, and in some cases, establishing strict rules-based monetary arrangements like currency boards. 4.2. data & variables this study investigates the causal relationship between gross domestic product per capita (gdp/pc), the inflation rate (infl), the interest rate (i), the monetary aggregate (m3), and public debt (pd), as well as the impact of monetary policy on the administration of morocco's public debt. it also addresses coordination issues between fiscal and monetary policy in morocco. the government's financing strategy and financial requirements will restrict the monetary authority's operational independence. to analyze the interplay between monetary policy and fiscal policy and to identify the long-run relationship between the time series, the empirical demonstration of the methodology described above centers on morocco. this investigation used moroccan yearly time series from 1960 economy, 2023, 10(1): 29-38 34 © 2023 by the authors; licensee asian online journal publishing group to 2022. the world bank and international monetary fund (imf) databases provided these statistics. since policymakers use a variety of factors to figure out how the economy is doing, it may make sense to look at the economy using a variety of indicators. this may take the primary component of several measures of economic activity; however, past taylor rule research has usually used the output gap or real marginal business expenses. gross domestic product (gdp) measures economic activity. according to the research, the interest rate (i) and the amount of money in circulation (m3) are examples of monetary policy, while public debt (pd) is an example of fiscal policy. to study how fiscal policy and monetary policy function together, we model fiscal policy in a more general fashion that allows for data that is sometimes different and only sometimes from the same source. this method can examine debt sustainability and monetary policy. time series analysis necessitates 20 observations, according to mccleary, hay, meidinger, and mcdowall (1980). time-series models should be fitted with 50 observations for robust results. a time series should be long enough to capture the phenomenon of interest, but more data is preferable. the study encompasses annual data from 1960 to 2022. this is enough data observations for var model results. morocco is the country we are investigating for this study, and the variables specified for the study are the following: • gross domestic product per capita (gdp/gdp). • public debt (pd). • monetary aggregate (m3). • consumer price index (infl). • interest rate (it). table 1. variables used. components infl gdp/pc pd m3 it mean 3.641 1949.948 73.713 76.790 5.486 median 2.205 1477.644 68.736 74.222 4.956 maximum 12.492 3795.380 117.714 128.869 8.500 minimum 0.303 666.715 45.442 35.026 2.568 std. dev. 3.378 975.671 19.086 31.769 2.072 skewness 1.214 0.416 0.688 0.089 0.295 kurtosis 3.452 1.662 2.496 1.395 1.521 jarque-bera 10.687 4.340 3.761 4.561 4.434 probability 0.004 0.114 0.152 0.102 0.108 sum 152.951 81897.83 3095.964 3225.212 230.420 sum sq. dev. 467.980 39029320 14936.82 41381.09 176.102 observations 42 42 42 42 42 the descriptive statistics of the data bring together all the data (mean, median, minimum value, maximum value, and standard deviation) and give us an idea of the level and the evolution of the data over time. thus, the coefficients skewness, kurtosis, and the jarque-bera test statistic allow us to test the normality of the series studied. the table above is a representation of the descriptive statistics of the descriptive statistics of the variables studied. the table above shows that one of the most volatile variables is public debt and that gdp per capita is more volatile regarding standard deviation (std. dev.). we also note that debt, gdp per capita, the monetary aggregate, and the interest rate are normally distributed (prob. jarque-bera > 5%), while the inflation rate is not. in this case, a heteroscedastic model would be preferable in the presence of arch. economy, 2023, 10(1): 29-38 35 © 2023 by the authors; licensee asian online journal publishing group 4.3. descriptive statistics the main variables of the study are annual series and presented in figure 1 and their descriptive statistics in table 1. 40 60 80 100 120 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20 20 21 dp 0 2 4 6 8 10 12 14 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20 20 21 infl(ipc) 20 40 60 80 100 120 140 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20 20 21 m3 0 1,000 2,000 3,000 4,000 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20 20 21 pib/hab 2 3 4 5 6 7 8 9 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20 20 21 ti figure 1. variables of the study. economy, 2023, 10(1): 29-38 36 © 2023 by the authors; licensee asian online journal publishing group table 2. stationarity of variables. variables stationarity adf pp kpss infl i(0) i(0) i(0) gdp/pc i(1) i(1) i(0) dp i(1) i(1) i(0) m3 i(1) i(1) i(0) it i(1) i(1) i(0) reading the results of the stationarity test of the substudy variables in table 2, we can note the following remarks: starting with the augmented dickey-fuller/adf test, the gdp/pc, dp, m3, and it series are integrated into order 1 (stationary after the first difference). at the same time, infl remains stationary at level (without differentiation). similarly, the phillippe-perron/pp test shows that the gdp/pc, dp, m3, and it series are integrated series of order 1 (stationary after the first difference). at the same time, infl remains stationary at level (without differentiation). finally, the third kwiatkowski-phillips-schmidt-shin/kpss test shows that all series are stationary at level (without differentiation). 4.4. results after estimating the var model, we estimated the optimal number of lags, which provides statistically significant results with the minor parameters. the results of the model estimation are presented below in table 3 . in our case, we chose the set of information criteria, namely: the schwarz information criterion (sic), hannanquinn information criterion (hq), akaike information criterion (aic), final prediction error (fpe), and sequential modified lr test statistic (lr), to select the model to be deployed. table 3. results of the optimum number of delays. lag logl lr fpe aic sc hq 0 -733.918 na 1.97e+10 37.893 38.106 37.969 1 -557.860 297.943* 8620236.* 30.146* 31.426* 30.605* 2 -540.209 25.345 13426522 30.523 32.869 31.365 3 -519.518 24.404 20011153 30.744 34.156 31.968 note: * p < 0.1. table 4 shows that the five variables are not cointegrated, i.e., they have no long-term cointegrating relationship. consequently, the null hypothesis of non-cointegration is accepted, as the trace test indicates no cointegrating equations. moreover, we need a cointegrating relationship to adopt engle and granger (1987) errorcorrection model. the next step is to use the var model. table 4. results of the johansen cointegration test. unrestricted cointegration rank test (trace) hypothesized trace 0.05 no. of ce(s) eigenvalue statistic critical value prob.** none 0.511 66.104 69.818 0.095 at most 1 0.354 37.442 47.856 0.326 at most 2 0.280 19.959 29.797 0.425 at most 3 0.136 6.777 15.494 0.603 at most 4 0.022 0.923 3.841 0.336 note: ** p < 0.05. table 5 below shows the estimated coefficients or effects of the var model. indeed, the estimation results show that the effect of the interest rate on the inflation rate is positive and significant. in other words, a 1% increase in the interest rate raises the price level by 7%. similarly, the effect of public debt on the price level is positive but insignificant, i.e., less than proportional: a 1% increase in public debt raises inflation by 0 .677479. in addition, moroccan gdp per capita has a positive (non-significant) effect on the price level in morocco. on the other hand, the monetary aggregate (m3) has significant negative effects. a 1% increase in the monetary aggregate reduces the price by 69%. table 5. results of estimation var. components infl gdp/pc pd m3 it infl(-1) 0.451 (0.150) [ 3.008] 9.014 (9.086) [ 0.992] 0.677 (0.420) [ 1.612] -0.695 (0.298) [-2.326] 0.071 (0.031) [ 2.263] gdp/pc(-1) 0.000 (0.001) [ 0.195] 0.661 (0.067) [ 9.836] 0.006 (0.003) [ 2.152] 0.002 (0.002) [ 0.954] 0.000 (0.000) [ 1.383] pd(-1) 0.021 (0.033) [ 0.645] 6.547 (2.004) [ 3.266] 0.840 (0.092) [ 9.063] -0.109 (0.065) [-1.668] 0.009 (0.007) [ 1.317] m3(-1) -0.070 (0.045) [-1.545] 15.374 (2.772) [ 5.545] -0.345 (0.128) [-2.695] 0.777 (0.091) [ 8.531] -0.0163 (0.009) [-1.680] economy, 2023, 10(1): 29-38 37 © 2023 by the authors; licensee asian online journal publishing group components infl gdp/pc pd m3 it it(-1) -0.668 (0.400) [-1.667] 2.791 (24.24) [ 0.115] -2.056 (1.121) [-1.834] -0.820 (0.797) [-1.028] 0.758 (0.084) [ 8.942] c 8.912 (4.534) [ 1.965] -985.945 (274.326) [-3.594] 34.357 (12.686) [ 2.708] 30.153 (9.021) [ 3.342] 0.948 (0.960) [ 0.988] r-squared 0.657 0.985 0.921 0.985 0.962 adj. r-squared 0.608 0.983 0.909 0.983 0.956 sum sq. resids 148.531 543709.7 1162.729 587.955 6.660 s.e. equation 2.060 124.637 5.763 4.0986 0.436 f-statistic 13.449 485.904 81.727 464.396 177.690 log likelihood -84.564 -252.774 -126.748 -112.769 -20.918 akaike aic 4.417 12.623 6.475513 5.793 1.313 schwarz sc 4.668 12.873 6.726 6.044 1.563 mean dependent 3.501 1970.736 74.053 77.809 5.501 s.d. dependent 3.293 978.330 19.195 31.461 2.095 table 6. causality between sub-study variables. pairwise granger causality tests date: 06/28/23 time: 12:51 sample: 1980 2021 lags: 2 null hypothesis: obs. f-statistic prob. pib_hab does not granger cause infl_ipc_ 40 2.068 0.141 infl_ipc_ does not granger cause pib_hab 1.070 0.353 dp does not granger cause infl_ipc_ 40 4.616 0.016 infl_ipc_ does not granger cause dp 4.331 0.020 m3 does not granger cause infl_ipc_ 40 2.388 0.106 infl_ipc_ does not granger cause m3 1.914 0.162 ti does not granger cause infl_ipc_ 40 0.332 0.719 infl_ipc_ does not granger cause ti 5.055 0.011 dp does not granger cause pib_hab 40 0.176 0.839 pib_hab does not granger cause dp 0.210 0.811 m3 does not granger cause pib_hab 40 11.221 0.000 pib_hab does not granger cause m3 0.328 0.722 ti does not granger cause pib_hab 40 1.082 0.349 pib_hab does not granger cause ti 1.708 0.195 m3 does not granger cause dp 40 4.973 0.012 dp does not granger cause m3 5.950 0.006 ti does not granger cause dp 40 0.050 0.950 dp does not granger cause ti 3.360 0.046 ti does not granger cause m3 40 1.736 0.190 m3 does not granger cause ti 4.801 0.014 table 6 presents the results of the causality test between the substudy variables, which we will discuss in the next step: 5. discussion in this work, we studied the fiscal theory of the price level, first theoretically and then produced empirical evidence of the impact of public debt on the price level through a var model on moroccan data. we have thus highlighted the longand short-term effects of public debt on the price level—the results between our selected variables through johansson cointegration and vector autoregression. we also performed a toda -yamamoto causality analysis because of the non-stationarity of the variables. our study shows two bidirectional causalities between debt and inflation on the one hand and debt and money supply on the other. a unidirectional causality can also be reported: money supply m3 and public debt cause interest; money supply causes gdp per capita; inflation causes money supply. similarly, the estimation results of our work confirm the theoretical contributions of researchers in the field: 1. the effect of public debt on the price level is positive but insignificant, i.e., less than proportional: a 1% increase in public debt increases inflation by 0.677479. 2. moroccan gdp per capita has a positive (insignificant) effect on the price level in morocco. 3. the monetary aggregate (m3) has significant adverse effects. however, the estimation results show that the effect of the interest rate on the inflation rate is positive and significant, i.e., a 1% increase in the interest rate raises the price level by 7%. this contradicts the theoretical results. furthermore, the fact that the variation in inflation is mainly explained by the money supply, suggests that monetary policy is effectively controlling the moroccan economy. however, this control is very weakly influenced by debt policy. as a result, the level of moroccan public debt is a matter of concern for the authorities, given the significant influence it exerts on the economy. thus, while the positive impact should reassure us about the effectiveness of the debt policy, debt dynamics remain a concern insofar as they affect the economy. however, the authorities should pay less attention to the accumulation and speed of debt, given its minor immediate impact on the economy and the fact that it reduces inflation. this would place morocco in a regime of monetary dominance. economy, 2023, 10(1): 29-38 38 © 2023 by the authors; licensee asian online journal publishing group references afonso, a. 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(2001). the taylor rule and optimal monetary policy. american economic review, 91(2), 232-237. asian online journal publishing group is not responsible or answerable for any loss, damage or liability, etc. caused in relation to/arising out of the use of the content. any queries should be directed to the corresponding author of the article. https://doi.org/10.3917/edd.223.0115 https://doi.org/10.1016/j.ejpoleco.2009.04.001 https://doi.org/10.1111/1468-0297.00726 https://doi.org/10.1111/1468-0297.00726 https://doi.org/10.1257/aer.91.5.1221 https://doi.org/10.3386/w6646 https://doi.org/10.3917/redp.116.0909 https://doi.org/10.1086/ma.21.25554956 https://doi.org/10.2307/1913236 https://doi.org/10.1590/s0101-41612005000400003 https://doi.org/10.2307/1923904 https://doi.org/10.1111/geer.12000 https://doi.org/10.1057/imfsp.2008.26 https://doi.org/10.1016/0304-3932(91)90007-b https://doi.org/10.1787/888933934375 https://doi.org/10.23943/princeton/9780691158709.003.0005 https://doi.org/10.1007/bf01215378 https://doi.org/10.1080/17520843.2021.1927128 https://doi.org/10.1007/bf01215377 https://doi.org/10.1016/0304-3932(96)01261-5 60 © 2025 by the authors; licensee asian online journal publishing group economy vol. 12, no. 2, 60-77, 2025 issn(e) 2313-8181/ issn(p) 2518-0118 doi: 10.20448/economy.v12i2.6839 © 2025 by the authors; licensee asian online journal publishing group recession worries and management in america: do’s and don’ts for workers, jobs, leaders, and organizations to go into economic downturns with open eyes bahaudin g. mujtaba1 rochelle parrino2 ( corresponding author) 1,2nova southeastern university, huizenga college of business and entrepreneurship, 3301 college avenue, fort lauderdale, fl, 33314-7796, usa. email: mujtaba@nova.edu email: rparrino@nova.edu abstract recessionary periods are recurring challenges in any economy, particularly during times marked by high inflation, political instability, trade conflicts, global pandemics, rising consumer costs, and stagnating wages. this study aims to explore how organizations, managers, and workers can navigate and adapt to the complex realities of economic downturns. using a qualitative methodology, data were collected through in-depth interviews with eight senior executives and business experts who collectively possess nearly 300 years of professional experience in the united states. their insights offer a nuanced understanding of how recessions affect employment, organizational strategy, and workforce resilience. the findings reveal that, while recessions present significant threats, they also offer strategic opportunities for reinvention and growth. workers and organizations that approach these periods with preparation, adaptability, and empathy are better positioned to endure economic hardship and even emerge stronger. practical recommendations include preparing for economic disruptions with strategic foresight, maintaining transparent communication, supporting employee well-being, and identifying new market opportunities. these insights equip working professionals and organizational leaders to face recessions with clarity and resilience, enabling them to remain agile and thrive amid uncertainty. today’s working adults, managers, and organizations should be prepared to enter a recession with “open eyes” while having contingent plans for the worst, empathizing with employees’ concerns, and taking advantage of upcoming opportunities to keep the organization afloat. keywords: economic downturns, hr management, layoffs, recession, strategic opportunities, terminations, transitioning through a bad.economy. citation | mujtaba, b. g., & parrino, r. (2025). recession worries and management in america: do’s and don’ts for workers, jobs, leaders, and organizations to go into economic downturns with open eyes. economy, 12(2), 60–77. 10.20448/economy.v12i2.6839 history: received: 15 may 2025 revised: 5 june 2025 accepted: 11 june 2025 published: 27 june 2025 licensed: this work is licensed under a creative commons attribution 4.0 license publisher: asian online journal publishing group funding: the study received no specific financial support. institutional review board statement: not applicable transparency: the authors confirm that the manuscript is an honest, accurate, and transparent account of the study; that no vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. this study followed all ethical practices during writing. competing interests: the authors declare that they have no competing interests. authors’ contributions: both authors contributed equally to the conception and design of the study. both authors have read and agreed to the published version of the manuscript. contents 1. introduction ...................................................................................................................................................................................... 61 2. literature review ............................................................................................................................................................................ 63 3. methodology ..................................................................................................................................................................................... 67 4. findings ............................................................................................................................................................................................. 67 5. discussion .......................................................................................................................................................................................... 72 6. recommendations ............................................................................................................................................................................ 73 7. summary ............................................................................................................................................................................................ 76 references .............................................................................................................................................................................................. 76 appendix ................................................................................................................................................................................................ 77 mailto:mujtaba@nova.edu mailto:rparrino@nova.edu https://creativecommons.org/licenses/by/4.0/ https://creativecommons.org/licenses/by/4.0/ https://www.doi.org/10.20448/economy.v12i2.6839 https://orcid.org/0000-0003-1615-3100 https://orcid.org/0009-0004-9943-8949 economy, 2025, 2025, 12(2): 60-77 61 © 2025 by the authors; licensee asian online journal publishing group contribution of this paper to the literature this study uniquely combines the experiences of 8 industry leaders, executives, and entrepreneurs regarding recession worries and workforce management. no other study has been done with such experienced senior officials on how to best transition through this year’s recession worries. unlike most previous academic studies, it offers practical recommendations for managers, human resource professionals, and entrepreneurs to effectively transition through the existing economic worries of 2025. 1. introduction a recession typically implies a significant slowdown in the job market, which means increased unemployment, reduced hiring, freezes on salary increases, and possible layoffs (laponsie, 2025). data shows that “during the great recession, 2.1 million americans were laid off in 2009 alone” (frick, 2019). during a recession, businesses often respond to decreased demand and revenue by implementing cost-cutting measures, such as layoffs, hiring freezes, and reduced working hours (mujtaba & senathip, 2020). this can lead to a surge in unemployment rates, making it more challenging for individuals to find new job opportunities (mujtaba, 2022). yet, layoffs are not always the solution to survival during a downward trending economy since many companies that emerged successfully from such crisis “relied less on layoffs to cut costs and leaned more on operational improvements” (frick, 2019). additionally, recessions often result in a shift towards more cautious hiring practices, with employers becoming more selective and prioritizing candidates with specialized skills and experience (agarwal, 2022; career, 2025). during a downward and an unpredictable economy, organizations may also suffer from decreased production, interrupted supply chains, and a drop in employee morale. recessions are regularly depicted by slow economic activity in a city, state, nation, and even region. when recessions are expected by a majority and looming, many individuals and businesses take precautions regarding expenditures, which can have a significant impact on jobs, workers, and most types of organizations. during the forthcoming recession, most managers, entrepreneurs, and administrations plan to cut back on spending and new hire activity to save on costs and prepare for a rainy day (barbarino & scotti, 2020). as a recession looms, workers typically find it more challenging to secure new work. some workers face salary reductions, reduced working hours, and increased job uncertainty. workers can and often do pursue skill acquisition in growing fields or even venture into entrepreneurship to have some access to additional compensation. during periods of recession or economic uncertainty, some companies freeze salary increases as they seek to cut costs. workers also experience increased workload as firms reduce their staff. this can have an immense traumatic impact on employees’ physical and mental health. a looming recession influences how organizations approach their short-term and long-term planning strategies (leachman & sullivan, 2020) as some focus on cost-cutting, which often leads to increased automation and mechanization. additionally, some firms relocate manufacturing to regions with lower costs or reduced overhead to stay afloat (kn & thomas, 2024). president donald trump’s stern and amorphous approach to tariffs, on friends and foe alike, have upended a booming u.s. economy in the first quarter of 2025 (wiles, 2025; zakaria, 2025). research has shown that “several economic indicators suggest a potential recession, including declining stock prices and weakening consumer sentiment…while real estate and unemployment figures remain relatively stable, concerns exist about rising foreclosures and potential job losses,” since “leading economic indicators has declined for three consecutive months, signaling further economic deterioration” (wiles, 2025). additionally, it is a concern for all stakeholders that the u.s. gross domestic product (gdp) for the first quarter of 2025 showed a 0.3% decline at an annual rate and another poor quarter could indicate a recession. consequently, the greater likelihood of a recession has caused more fear and anxiety among all working professionals in both public and private organizations (harring, 2025). this uncertainty coupled with the fears of some foreign workers being detained by the u.s. immigration and customs enforcement (ice) officers are causing havoc for employers and workers alike, especially those individuals without a college education who are not working in high-demand professions such as healthcare, utility or technology industries. as of the latest available data, about 21% of american adults are considered illiterate, which translates to around 43 million people (national literacy institute, 2025; zauderer, 2025). this percentage is based on the definition of functional literacy as understanding, evaluating, using, and engaging with written text to participate in society, achieve one's goals, and develop one's knowledge and potential. additionally, 54% of adults in the u.s. have a literacy level below the fifth-grade level, and 1 in 5 american adults possess low literacy skills. low literacy rates also equate with these individuals not being able to secure specialized or high-tech jobs. as such, it is natural that millions are anxious and worried about the impact of all these societal changes during the second trump administration. president trump successfully secured a slight majority of the american votes due to many factors, especially because he is friendly and good in being on media outlets regularly, but on top of the list might be things like populism, political ideologies, partly due to alignment of religious views, and for some because of vengeful rhetoric. when citizens of a nation vote due to popularity, political affiliation, and/or religious alignment rather than policy, these motivators may not result in the best strategies to deal with high inflation rates, funding for critical research, and trade which thus far has made america one of the most innovative nations in the world. other concerns for some americans are the restriction of visas for bright international students who are exercising their views, removal of industrious inclusionary programs intended to level the playing field for women and minorities in promotional opportunities into higher management ranks, and animosity towards higher education institutions. academic researchers surveyed in april 2025 in the u.s. regarding funding cutbacks by various agencies such as the national institutes of health (nih) or the national endowment for humanities (neh), around 70% said they are willing to move to other countries to continue their research (velie, 2025). such disruptive change is unfortunate for the u.s. since some highly educated and specialized scientists cannot secure jobs and opportunities in science and medical research in this highly developed country. so, nih, which has been an astounding organization for many breakthrough innovations in america, will likely be severely damaged due to political ideologies, public sector mismanagement, and incompetence all in the name of, arguably poorly executed, government efficiency efforts. there is concern that america and the world will irreparably suffer from the economy, 2025, 2025, 12(2): 60-77 62 © 2025 by the authors; licensee asian online journal publishing group disruptive, irresponsible and indiscriminate funding cuts for critical research. yet, the uncertainty and anxiety among researchers, workers, businesspeople, and organizational leaders are some of the immediate consequences, and the long-term effects are likely to last for decades (mujtaba, 2025). during the first weekend of may 2025, the annual berkshire shareholder meeting shed light on the statements made by the legendary warren buffett, as he announced that he will slowly transition into retirement. according to buffett, “we should be looking to trade with the rest of the world; as americans, we should do what we do best, and they should do what they do best”. buffett emphasized that trump’s trade policies have raised the risk of global instability by angering the rest of the world. “it’s a big mistake in my view when you have 7.5 billion people who don’t like you very well, and you have 300 million who are crowing about how they have done” (buffett, 2025). “trade should not be a weapon,” buffett said. he also said that “trade could be an act of war.” all such fears have produced economic uncertainty and fears among the local, national, and international workers and leaders alike. luckily, the trump administration has been flexible in not always following through with maximum tariffs initially announced as they attempt to negotiate the best deals for america. this year, about 80% of chief executives project costs spiking in 2025 and beyond, “which is no surprise given the ongoing negotiations over import taxes” with foreign countries, since around 50% “forecast their percentage increases in expenses to be in the double digits” (harring, 2025). to be financially stable, managers often suspend recruitment, cut departments, or restructure operations during a looming recession. consequently, employee engagement and retention rates often fall during recessions (tang & smith, 2022). studies have confirmed that during the recessions of 1980, 1990, and 2000, about 17% of the 4,700 public companies examined performed very badly, as they either went bankrupt, went private, or were acquired by other entities (frick, 2019). yet, about 9% of the companies studied seem to have flourished during the recession period. many of the firms that stagnated in the previous recessions did not proactively make contingency plans for a bad economy. consequently, they had to switch to survival mode by making hurtful cuts and reacting defensively (frick, 2019). overall, a recession can have a profound impact on the job market, requiring individuals to be adaptable, resilient, and proactive in navigating the changing employment landscape. when an economic depression is on the way, it is often followed by “inverted yield curves, rising interest rates, and a rash of layoff announcements,” convincing economists that the global economy is headed for a recession, which is bad for business, but such downturns are not a destiny (subramaniam, salamzadeh, & mujtaba, 2023). “the worst of times for the economy as a whole can be the best of times for individual companies to improve their fortunes”, since “lagging companies are twice as likely to overtake industry leaders during a recession, relative to non-recessionary periods” (subramaniam et al., 2023). therefore, preparation for a downward tending economy must be a moral imperative to consider and maintain all stakeholders’ interests in a balanced manner. it is clear that “a growing majority of america’s top executives now expects the u.s. economy to enter a recession in the near future” since “of the more than 300 ceos polled in april, 62% said they forecasted a recession or other economic downturn in the next six months” (harring, 2025). the increase is probably due to the growing fears about a forthcoming recession because of the current administration’s “changing and the all-aboard tariff” policy in a volatile financial market. about 75% of the senior executives surveyed said tariffs would hurt their businesses in 2025, and about 66% said they did not support the administration’s proposed “consumer tax” policy (harring, 2025). while tariffs alone may not always be too influential on the economy, there are several other areas to monitor for signs of an incoming recession in the country, which can include the following (wiles, 2025): 1. shifting stock prices. 2. trends in real estate. 3. uncertain unemployment. 4. credit and interest-rate movements. 5. consumer sentiment and expectations. 6. hours worked in manufacturing. 7. new business orders. figure 1 shows the percentage of the executives answering the question of “what is your best forecast for the u.s. economy over the coming six months?” while 48% see a mild slowdown in the american economy, about 14% of them believe we will experience a severe recession (harring, 2025). economy, 2025, 2025, 12(2): 60-77 63 © 2025 by the authors; licensee asian online journal publishing group figure 1. executives’ forecast of u.s. economy as of april 2025. source: designed by the authors, based on chief executive data listed by harring (2025). to help protect jobs in the event of a recession, individuals should focus on honing or developing skills that are in high demand and less likely to be automated by artificial intelligence or outsourced (laponsie, 2025). this can include acquiring skills in areas such as data analysis, digital marketing, cloud computing, or cybersecurity. additionally, employees should prioritize building strong relationships with their colleagues, supervisors, and industry leaders, as these connections can provide valuable support and networking opportunities during times of uncertainty. by staying adaptable, continuously learning, and nurturing professional relationships, individuals can increase their visibility, versatility, and value to their organization. furthermore, employees should also take proactive steps to manage their workload, prioritize tasks, and demonstrate their contributions to the organization. this can involve taking on additional responsibilities, volunteering for high-visibility projects, and communicating effectively with stakeholders. by showcasing their skills, work ethic, and commitment to the organization, individuals can position themselves as essential employees and reduce their risk of being terminated during a recession. it is also essential to stay informed about industry trends, economic forecasts, and company performance to anticipate potential changes and make informed decisions about their career. by being proactive, adaptable, and strategic, individuals can better protect their job and navigate the challenges of a recession. as the philosophy goes, amid chaos, there could be opportunities to be capitalized on. while it may seem counterintuitive, a recession can be a good time to search for a new job or change careers. during economic downturns, companies often undergo restructuring, that can lead to new opportunities emerging in industries that are more resilient or even thrive during recessions, such as grocery, healthcare, technology, or finance. additionally, talented individuals may be more readily available, allowing for a stronger candidate pool. furthermore, companies may be more open to internal promotions or transfers, and some may even use the recession as an opportunity to rebrand or pivot, which can create new roles and opportunities. by being proactive and strategic, job seekers can capitalize on these shifts and position themselves for success, even in a recessionary environment. to glean insights and recommendations, the research question is: what does an economic downturn or recession mean for workers, jobs, managers and organizations? 2. literature review any recession is most likely to impact all industries to some extent. consequently, “during economic downturns, companies typically tighten their belts, and that often means reducing the size of their workforce…non-revenue-generating roles are often the first to go” (laponsie, 2025). however, there are individuals, industries and businesses that can thrive despite economic conditions (agarwal, 2022; career, 2025). a recession often means fewer jobs available and more qualified candidates applying for them. knowing about recession-proof industries can provide professionals and job seekers with some sense of security when it comes to choosing a career path. according to laponsie (2025) while there are no guarantees, there are certain actions people can take to recession-proof their careers, such as the following: • focus on what you can control. • increase your visibility. • make yourself indispensable. • learn new skills. • be a team player. • network and make professional connections. • update your online presence. economy, 2025, 2025, 12(2): 60-77 64 © 2025 by the authors; licensee asian online journal publishing group • job search but don’t look like a flight risk. 2.1. recession-impact on various industries “recession-proof jobs are often in demand as they are the most likely to provide long-term security during economic uncertainty” (career, 2025). according to experts career (2025) recession-proof careers usually meet one or more of the following criteria: 1. they provide essential services and products (such as healthcare professionals like doctors, nurses, emergency medical personnel, pharmacists, et.). these services are skill-driven, such as oncologists, entomologists, dentists, cybersecurity experts, utility workers, etc. 2. they are in adaptable industries which can more easily adjust. 3. they serve a diverse customer base. the fast-moving consumer goods (fmcg), also known as consumer-packaged goods (cpg), tend to do well in recessionary times. fmcg are non-durable products that usually sell at a fast pace, with low cost that are in demand and consumed quickly. fmcg can include packaged foods, beverages, toiletries, cosmetics, cleaning supplies, and most low-cost household items such as milk, gum, fruit and vegetables, soda, etc. there are some industries that are least impacted by a looming recession, such as the following: 1. healthcare: providing essential services, healthcare professionals are always in demand, regardless of the economy. this industry includes hospitals, pharmaceutical companies, and medical device manufacturers. 2. utilities: people still need electricity, water, and gas during a recession, making utility companies stable investments. 3. grocery stores: as people continue to buy food and essentials, grocery stores remain a vital part of the economy. 4. discount retailers: stores offering affordable products, like discount chains which often thrive during recessions. 5. education: education is often a priority which can equip candidates with a differentiating set of in-demand skills; as such, most schools, universities, and online educational platforms continue to operate even during recessionary times. 6. food and beverage: companies producing essential food items, like dairy products, bread, and canned goods, tend to do well. 7. freight and logistics: goods still need to be transported, making logistics and transportation companies essential. 8. financial services: financial advisors, accountants, and banks provide critical services, even during economic downturns. 9. cleaning products and sanitation services: companies providing cleaning products and sanitation services for businesses and homes remain in demand. 10. diy – do it yourself and repairs: hardware stores, home repair services, and diy companies tend to do well as people focus on fixing and maintaining their homes and belongings. while a variety of factors influence the impact of bad economies on organizations, there are many industries that are more likely to be negatively impacted by a looming recession, such as those shown in figure 2. economy, 2025, 2025, 12(2): 60-77 65 © 2025 by the authors; licensee asian online journal publishing group figure 2. recession vulnerable industries. 1. construction: new construction projects are often delayed or canceled during economic downturns, affecting construction companies, contractors, and suppliers. 2. automotive: car sales tend to decline during recessions, impacting automakers, dealerships, and related industries like auto parts and repair services. 3. luxury goods: discretionary spending on luxury items like jewelry, high-end clothing, and fine dining tends to decrease during recessions. 4. travel and tourism: people often reduce travel plans and vacations during economic downturns, affecting airlines, hotels, and tourist attractions. 5. real estate: housing markets can be impacted by recessions, affecting real estate agents, developers, and related industries like home furnishings and appliances. 6. technology and electronics: while technology is always evolving, recessions can impact demand for nonessential electronics and gadgets. 7. advertising and marketing: companies often reduce advertising budgets during recessions, affecting advertising agencies and marketing firms. 8. hospitality: restaurants, bars, and entertainment venues may see a decline in business during recessions. 9. fashion and apparel: non-essential clothing and fashion items tend to be less in demand during economic downturns. 10. recreation and leisure: industries like movie theaters, amusement parks, and recreational activities may see a decline in business during recessions. of course, every recession is unique, and the impact on industries can vary. some companies may adapt and thrive during recessions, while others may struggle, with few going into bankruptcy. 2.2. recession period bankruptcies forecasts, patterns, trends, and realistic signs of any incoming recession possibility usually force organizational leaders, managers and entrepreneurs to begin preparing for the unexpected. when the transition into, during, and out of a recession is managed well, an organization can adjust and survive. but when this transition into, during, and out of a recession is not strategically planned and managed, it can mean loss of jobs, layoffs, and a reduction in stock value for shareholders. in some instances of bad management and no planning, organizations can declare bankruptcy. the following are a list of a few large organizations that went bankrupt during recession periods in the united states, along with the main reasons behind their failures: 1. leachman and sullivan (2020). the great recession of 2007–2009. one main reason was excessive exposure to subprime mortgages and risky financial derivatives. when the housing bubble burst, it triggered massive losses and a liquidity crisis. its impact was felt nationally and internationally since it was the largest bankruptcy in u.s. history, with over $600 billion in assets. economy, 2025, 2025, 12(2): 60-77 66 © 2025 by the authors; licensee asian online journal publishing group 2. whitfield (2023). the great recession of 2007–2009, due to heavy investment in subprime mortgages. a bank run and subsequent federal seizure led to its collapse. its banking operations were sold to jpmorgan chase. 3. career (2025). the great recession of 2007–2009. poor management decisions, inability to compete with best buy and online retailers, and declining consumer spending. liquidated its assets and closed all stores. 4. dominick, iordanoglou, prastacos, and reilly (2021). the great recession of 2007–2009. declining sales, rising pension and healthcare costs, and failure to adapt to changing car market preferences (e.g., fuel efficiency). the company filed for chapter 11; it emerged after government bailout and restructuring. 5. career (2025). the great recession of 2007–2009, due to falling sales, lack of innovation, and high labor costs. heavily impacted by the collapse in auto demand. filed for bankruptcy and partnered with fiat to restructure. 6. buffett (2025). post-great recession decline. they failed to adapt to digital streaming, while facing competition from netflix and redbox amid mounting debt. so, they filed for bankruptcy; most stores closed or rebranded. 7. bishop (2012). post-great recession recovery (effects lingered). slow transition to e-books and online sales, increased competition from amazon, and poor real estate strategy. filed for bankruptcy and eventually liquidated. 8. dominick et al. (2021). early 2000s recession (dotcom bust + 9/11). massive accounting fraud, hiding debt through off-balance-sheet entities, and inflated earnings. one of the largest corporate fraud scandals, which triggered reforms like sarbanes-oxley (sox). 9. weiss (2024). early 2000s recession, due to accounting scandal involving $11 billion in fraudulent entries to inflate assets. so, the company filed for bankruptcy and emerged later as part of verizon. 10. adam (2025). early 1990s recession (1990–1991), due to rising fuel prices, poor management, terrorism concerns (lockerbie), and inability to compete with newer airlines. the company ceased operations and sold assets. 2.3. best jobs in a recession during a looping recession, despite widespread federal layoffs, some industries are primed for opportunities to grow and thrive (adam, 2025). as a matter of fact, the prospect does appear promising for skilled-based jobs in healthcare, energy, retail, and cybersecurity. additionally, most professionals in the legal and artificial intelligence fields are likely to remain in demand even during recessions. as the proverb goes, "in any period of chaos, there is also opportunity." amid life's turmoil at any given time, sun tzu reminded us that hidden deep under the surface of any disorder lies potential for opportunities. as emphasized by carolyn hanley hax, writer and columnist for the washington post and author of the daily syndicated advice column, “some people can work amid chaos or conversations, and some can’t – and while there’s no doubt an element of brain wiring to it, there’s also the possibility of acquiring skills that improve your focus.” as such, we should see challenges not as barriers but as avenues, routes, and gateways to improvement, innovation, and growth by adapting, adjusting, and moving along. people who are skilled in various artificial intelligence applications to generate content are likely to thrive during downward economic times as companies become forced to do more with less resources (nafei, ghoneim, mujtaba, & khanfar, 2025). this year, many american workers are feeling uncertain about their jobs and careers (adam, 2025). despite the chaos and changing political policies, not all jobs are at risk. according to the bureau of labor statistics, “certain roles in health care, clean energy and cybersecurity are expected to see double-digit growth over the next decade” (adam, 2025). research clearly identifies the following professions as examples of recession-proof jobs that are likely to remain stable during economic downturns: 1. healthcare tasks that require certification. 2. pharmacists. 3. mental health counselors. 4. technology specialists. 5. energy sector (utility). 6. police officers. 7. accountants. 8. public sector / federal employees. 9. firefighters. 10. emergency workers, soldiers, etc. as demonstrated by the covid-19 pandemic and recession period, essential medical services are always in demand, regardless of economic conditions. people will always need medications, making pharmacists and pharmacy technicians essential workers. consequently, healthcare professionals are less likely to be affected by recessions, thereby making such jobs a stable career choice. while the trump administration is focused on reducing the size of the federal workforce using the department of government efficiency (doge) initiatives, and despite the fact that some high level military jobs were recently cut, public sector jobs are generally more secure during economic downturns. federal employees, including those in law enforcement and the military, can expect stable employment. crime rates may increase during recessions, but law enforcement jobs remain secure due to government funding. additionally, fire departments receive funding from taxes and municipal funds, which makes these jobs less susceptible to economic fluctuations. with the increasing reliance on technology, skilled and certified experts are in high demand, even during recessions. similarly, skilled workers in electrical, sewage, and natural gas distribution are crucial to maintaining daily services. finally, since tax laws and financial regulations don't change during recessions, it ensures a steady demand for accountants and auditors. of course, a recession impacts all working adult men and women, but female). professionals are likely to be impacted more severely due to existing inequities and biases (ürü, vardarlıer, mujtaba, & yozgat, 2024; weiss, 2024; whitfield, 2023). nonetheless, recessions might also provide, males and economy, 2025, 2025, 12(2): 60-77 67 © 2025 by the authors; licensee asian online journal publishing group females of any background, opportunities for new startup businesses. for example, jackson bros ice cream was started by jackson (2025) with a single ice cream truck and now has expanded into a variety of “soul food” options (such as hand churned banana pudding ice cream, red velvet cheesecake ice cream, strawberry corn bread ice cream, etc.) made with quality products free of additives and harmful ingredients (personal communication with jackson (2025) nova southeastern university library this year, due to changing policies on tariffs and high costs associated with rising inflation rates, many people are naturally worried about a possible recession. would a recession impact business entrepreneurs? of course, a recession impacts entrepreneurs. during these uncertain times when a recession might be coming, experts do provide practical advice for those that have been thinking about starting their own business, and whether they should wait for more certainty in the economy. according to one successful business owner, jackson (2025) “never wait to start a business. always start and make it work. my business was opened during the recession of 2007 and 2008 and i did well…. today, i can give back and help the community.” when managers and entrepreneurs do not plan properly, a recession can cause them to lose their business. so, you have got to believe in yourself and your product, according to jackson. if you provide quality products and work hard, your business will survive. do not allow a recession from stopping you to start a business, or even to buy a house, jackson said. try to find different ways of accessing capital to make your business work. managers and entrepreneurs are often at the forefront of any recession as they must reflect on future revenues, jobs, hiring, layoffs, and surviving a bad economy through their social network (seyoum, chinta, & mujtaba, 2021). as such, using a structured interview process, this study gleans insights and views from experienced managers and entrepreneurs regarding the realities of a looming recession and jobs. 3. methodology to conduct a thorough literature review, a systematic methodology was employed in this study. first, a clear research question or objective was defined to guide the search for relevant literature. next, a comprehensive search of academic databases, journals, and books was conducted using relevant keywords and search terms. the search results were filtered based on inclusion and exclusion criteria, such as publication date, practicality, and relevance to the focus of this study. the selected studies were reviewed to glean practical insights for the research question. the results of the literature review were synthesized and summarized to identify patterns, themes, and gaps in the existing literature. to draw relevant conclusions from expert interviews, a semi-structured interview protocol can be used. first, a list of open-ended questions should be developed to guide the conversation and encourage in-depth responses from the experts. the experts should be selected based on their relevance to the research question and their expertise in the field. the interviews should be conducted in a way that allows for free-flowing conversation and probing for more information. the interviews should be recorded, transcribed, and analyzed using thematic analysis or content analysis to identify patterns, themes, and insights. the findings from the expert interviews should be triangulated with the results of the literature review to draw relevant conclusions and identify areas for further research. by combining the results of the literature review and expert interviews, a comprehensive understanding of the research topic can be developed, and meaningful conclusions can be drawn. to get insights from entrepreneurs and organizational executives on “what does an economic downturn or recession mean for workers, jobs, managers, and organizations?”, we asked the following questions (see survey in the appendix 1): 1. what have the recession talks and downward economic trends of 1990, 2000, 2008, or 2020 during the covid-19 pandemic meant for you personally, your organization, and your industry regarding jobs? 2. how do managers and organizations prepare for a recession regarding jobs? 3. during the oncoming of a possible recession, what should employees do to help protect their job in the event of a recession? 4. do managers and organizations hire new employees during recessionary times? why or why not? 5. what mistakes do employees make when they see a recession looming? 6. what else should managers and employees know to better prepare for a recession? 4. findings recession experience can shape people’s attitudes towards wealth redistribution. a columbia business school study found that experiencing a recession in young adulthood leads to lasting support for wealth redistribution, but primarily for one's own group (meier, cotofan, & dur, 2022). this suggests that personal experiences during economic downturn can shape individual attitudes towards economic policies and social welfare. it is always important to analyze each recession and decision with longer terms or periods. research suggests that studying the impact of recessions would benefit from analyzing longer timeframes (benach et al., 2022). this implies that organizations and employees should take a long-term view when preparing for recessions, rather than focusing solely on short-term solutions. multilevel modeling can be an effective methodology for this type of analysis. in this study, we interviewed executives with 20-40 years of experience that have witnessed, observed and dealt with three or more recessions. table 1 shows some of the general demographic variables of the entrepreneurs, managers, executives, and/or employees that took part in this study regarding the impact of a looming recession on workers, jobs, management, and organizational decisions. economy, 2025, 2025, 12(2): 60-77 68 © 2025 by the authors; licensee asian online journal publishing group table 1. interviewee demographics. interviewees gender industry position years of experience respondent a (r-a) male retail retail manager & hr executive 30 r-b female healthcare, retail assistant vice president, director, consultant 47 r-c female tv production executive producer/president 37 r-d male social services and education president / ceo 40 r-e male medical / waste president 30+ r-f male cpa/accounting partner 25 r-g male technology, non-profit & real estate vice president, finance & operations 28 r-h male real estate entrepreneur / owner 60 *recessions observed: 1990, 2000, 2008, and/or 2020 4.1. impact of recession the following are actual statements from respondents regarding the impact of various periods of american economy’s recession on their workers, jobs, organization, and industry: • in the retail environment, managers might put a hold on hiring non-essential staff during a downturn in the economy. during the recessions of the past three decades, we did not resort to any structured layoffs since consumers need food, drinks, medications, etc. (r-a). • the impact is highly dependent upon the industry. as an example, healthcare and the ancillary businesses related to this industry are generally resilient to economic downturn except for elective procedures i.e. cosmetic, bariatric, knee replacements and certain eye surgeries which are sensitive to the patient’s pocketbook because these procedures are likely not covered by insurance. however, during recessions, the financial impact can still be felt in unpaid patient co-payments or self-pay balances that increase bad debt and/or charity care write-offs. healthcare systems located in well insured communities face less volatility than those based in areas with higher rates of uninsurance. generally, jobs were not significantly affected as under-utilized patient care workers could be shifted to meet staffing needs in other clinical areas. to reduce costs, administrative positions may be left open and unfilled until a more advantageous time allows for full staffing. it should be noted that healthcare has undergone a transition over the years to more efficient operations and smaller hospitals have been acquired and merged into larger healthcare systems. as a personal example when the hospital system merger between mount sinai medical center and miami heart institute in miami beach took place in 2000, a significant number of administrative positions/personnel were eliminated through a layoff. in one day, i reduced two thirds of my staff. primarily, it was the combined operations that accelerated the need to eliminate redundancy rather than the fears generated by the economic downturn. however, the timing presented an opportunity to immediately reduce overhead administrative costs, thus very quickly offering some protective relief from this expense. healthcare systems are highly dependent upon the insurers for payments and those that rely on government payers such as medicare generally have less financial risk. however, close monitoring of changes in payment methodologies and negotiations with managed care payers is critical to minimizing the impact of any economic weakening. the “soft goods” clothing industry experiences a different set of challenges with reductions in orders placed, retail outlets filing bankruptcy and a higher percentage of merchandise returns and “chargebacks”. typically, during difficult economic conditions, it was important to minimize risk and negotiate accounts receivable for insurance coverage or factoring, as determined by a careful review of the risk associated with the individual retail customers. again – generally administrative and/or non-critical positions were held open longer to reduce overhead costs (r-b). • during covid, i put almost everything on hold. since most of my projects don’t involve hard deadlines, i don’t have employees on payroll. i had the luxury of putting safety first. in earlier recessions, at least some of what i was doing was providing content to public television, producing pledge shows, so i was able to work steadily through those times. since many people in my industry depend on free-lance work, the recessions have been harder for them. they depend not only on the companies that hire them, but they’re also affected by state funding (or lack of it) that incentivizes productions to come to florida (r-c). • the recession of 2008 was perhaps the most difficult on a personal level. the price of real estate decreased significantly, while costs remain unchanged. tenants had trouble meeting their rent obligation so difficult decisions had to be made to remain financially solvent while being sensitive to the needs of families/renters. in my early care and education industry, the covid-19 pandemic resulted in significant learning loss for children while they attended school virtually. virtual school was a necessary measure, but it became exponentially difficult for children in preschool settings. although childcare was exempt from closure and most programs were only closed for a short time, many parents were uncertain about the safety of early learning settings. they had choices to make. stay home with the child/ren and not earn a living or go to work and take health risks with their child. funding for my industry and organization was plentiful. the federal government allocated billions in emergency funding to ensure early learning programs remained open so parents could go to work. first responders and health care workers received free early learning/childcare for their children so they could go to work to support community needs. early education business owners received bonuses to maintain a level of revenue. teachers also received retention bonuses to ensure they remained in what is recognized as a low wage, low growth early care and education industry where high-quality teachers make all the difference. this was all an effort to retain some level of normalcy for communities across the nation, recognizing the adverse impact of children not attending school, job loss, economy, 2025, 2025, 12(2): 60-77 69 © 2025 by the authors; licensee asian online journal publishing group financial challenges for families, challenges faced by employers due to employee absenteeism, and recruitment and retention of staff (r-d). • i have always been in “recission proof” business such as medical and waste. hat said, it brings out the “greediness” in people and business (r-e). • recessions for the cpa industry tend to be a mix of opportunities and challenges. there generally is an increase in pressure and workload due to increased client demand for financial/tax planning and business continuity advice. firms shift their focus from expansion to risk management and client retention. while some layoffs occur, especially in advisory and consulting services, core services like audit, tax and compliance tend to remain essential and, in some instances, grow due to increased scrutiny and demand for transparency (r-f). • from the real estate industry's perspective, each recession has brought its own set of challenges and learning curves. the 2008 financial crisis had a particularly devastating impact on real estate. it was not just a downturn. it was a full-scale collapse of the housing market that led to widespread job losses, firm closures, and a long and slow path to recovery. it reshaped how we view risk, leverage, and long-term planning in the industry. in contrast, the 2020 recession brought on by the covid-19 pandemic was far more sudden but also more short-lived. it followed a v-shaped trajectory, rebounding quickly in many sectors, including ours. at the time, our company made the decision to reduce salaries across the board by 20 percent instead of laying off team members. this helped preserve jobs, maintain morale, and ensure we could bounce back quickly when the market recovered, which it ultimately did. looking ahead, if another recession emerges, we may take a different approach. rather than simply absorbing the shock, we might view the moment as an opportunity to realign expectations and thoughtfully drive productivity. any measures we take would be aimed at preserving long-term value and ensuring the firm emerges stronger and more efficient (r-g). • those periods were undoubtedly challenging. each recession brought its own difficulties, but they also shared common patterns. i’ve learned to assess the situation quickly, draw on lessons from previous downturns, and adapt accordingly. while it’s never easy, resilience and flexibility have been critical—for me personally, for my organization, and for navigating the broader industry impacts on jobs (r-h). 4.2. preparing for a recession the following are actual statements regarding how managers and organizations prepare for a recession regarding jobs: • the recessions of 1990 and 2000 caused some retail executives to put a freeze on pay-increases, and employee promotions for six months. of course, breaking a promise of pay increase can be hurtful to deserving employees, but most understand that a bad economy takes away such privileges from managers (r-a). • regardless of the industry, my experience has been that the preparation generally involves posting an open position but not actively recruiting and filling it. or not posting the open position until the economic conditions improve. generally, it is preferred not to set yourself up for a layoff if a staffing reduction can be managed through natural attrition (r-b). • i always hire independent contractors. i’m a writer/producer/researcher, so until i have a concept ready to shoot, i don’t have a staff, but if i see a slowdown, i’ll take on smaller outside projects so i can keep myself and my core free-lance team working (r-c). • regardless of the industry, it is important to pay attention and understand market and economic trends and use forecasting tools to ensure the organization can survive through difficult times. this often involves considerable cost cutting measures, including hiring freezes, identifying and prioritizing mission critical positions, as well as limiting expenditures to only the most critical. fully understanding, predicting and planning for the inevitable fluctuations in revenue and revenue sources is also critically important to retain jobs (r-d). • i think you prepare not for work but the reality. there are plenty of businesses and individuals that grow during a recession (r-e). • firm leaders tend to re-evaluate hiring needs, delay raises/bonuses and shift their attention to high demand areas such as tax advisory and restructuring advisory. attention is also heightened as it relates to client groups, cash flow risks and timely billing (r-f). • preparing for a recession from a management standpoint is a lot like what a family might do when they find out one of the primary earners has been laid off. the first step is to take a clear and honest snapshot of your financial health. you need to understand what resources you have on hand, what your ongoing commitments are, and where you are most vulnerable. from there, it is about identifying what is essential and what you can live without, at least temporarily. for companies, that means scrutinizing every department, every line item, and every role to determine where efficiencies can be found. you look for ways to trim excess, delay noncritical investments, and potentially restructuring workflows. it is also critical to have a plan in place before the downturn deepens so you are not making reactive decisions in a moment of panic. instead, you are executing a well-thought-out strategy to weather the storm. in some cases, this preparation allows a company to preserve jobs altogether. in our case, a recession could provide the perfect window to make difficult but long overdue cuts—decisions that may have been postponed in better times but ultimately position the firm for greater long-term stability and performance (r-g). • managers and organizations typically prepare for a recession by carefully evaluating staffing needs and reducing workforce size if necessary. they also look to cut non-essential expenses and streamline operations to maintain financial stability. the goal is to preserve core functions while weathering the economic downturn as efficiently as possible (r-h). economy, 2025, 2025, 12(2): 60-77 70 © 2025 by the authors; licensee asian online journal publishing group 4.3. protecting one’s job during an oncoming recession, the following are respondents’ comments on what can or should employees do to help protect their jobs: • employees must be able to do more with less. workers must come on time, stay longer when needed, do their jobs with high motivation and productivity, and avoid being absent. many managers in retail stores ask employees to take on new responsibilities and get cross-trained in different departments to fill-in vacancies during hiring freezes (r-a). • employees should remain flexible, highly productive and willing to take on new challenges in case a reassignment or change in job duties becomes necessary. the ability to cross over into other departmental responsibilities, offer superior technical skills, and generally make oneself “indispensable” is the best way to preserve your job during difficult economic times. leadership will sometimes use the excuse of weak business conditions to provide cover for the elimination of poor performers through a “layoff” or staffing reduction to strengthen their operations. you don’t want to be one of them (r-a). • since i don’t have employees, i’ve never had to deal with that (r-c). • become that mission critical employee. do more than is expected. volunteer to assist others (r-d). • if you are just starting to be concerned about your job, it’s too late. if you are a team player, keep helping the team (r-e). • employees should always focus on delivering consistent value, being reliable and expanding their skills. a good example of this was during the pandemic and the need to learn the rules around the payroll protection program (ppp). there were great opportunities for employees and firms during the pandemic to assist clients with ppp (r-f). • this is simple. make yourself indispensable. a recession is not the time to put on a show or make sudden herculean efforts that come off as performative. what matters is consistent, visible contribution. keep your head down, focus on the work, and prove that you are productive, reliable, and capable of taking on more if needed. managers will notice the people who quietly deliver results and help move the business forward. those are the ones who tend to stay when difficult decisions are made (r-g). • it's a difficult situation, especially when downsizing becomes necessary for a business to survive. however, employees can take proactive steps to protect their roles by staying flexible, demonstrating value, expanding their skill sets, and taking initiative. those who adapt quickly, contribute consistently, and show a willingness to support broader organizational needs are more likely to be retained during tough times (r-h). 4.4. hiring status during an oncoming recession, the following are respondents’ comments on whether managers and organizations hire new employees: • during the recession of 1990, we hired some essential employees for service departments like bakery, deli, produce, grocery, etc. since taking care of customers was a priority. however, hiring was limited to essential employees (r-a). • hiring during recessionary times does occur. it is dependent upon the industry, the needs of the organization and the skill set of the potential employees. top level employees are always in demand and will be recruited during difficult economic conditions to assist in “turnaround” strategies, provide new or better ideas and offer higher productivity standards that set the bar for others in the organization to follow. some candidates specialize in “change management” and build careers on assuming positions that were not originally posted but require a unique set of highly desirable skills. and as mentioned above, it may be prudent to hold off refilling vacant positions until more guidance and clarity in direction is available (r-b). • personally, if i see a slowdown in demand, i cut back on my schedule. but since many of the people i use are also experiencing slowdowns, i take advantage of their availability to get whatever project i’m working on ready to go when things pick up. so, it’s a little bit of both for me. (r-c). • yes, but in most cases only mission critical employees. for example, in early care and education settings child/teacher ratios are closely monitored by the state licensing agency. if programs are found in violation they are fined, and their record is permanently blemished. this also poses an imminent danger to children’s health and safety. the same applies to nursing and other professions, thereby creating a critical need to maintain certain positions filled (r-d). • yes. “recession” is a word to describe a particular timeline; so is a “boom”. in any of these times, there are successes and failures (r-e). • yes, but selectively. areas in core services or specialized financial services may see recruiting efforts to help meet the needs of clients during these times (r-f). • i personally do not hire during recessions. the priority during those periods is to streamline operations and protect the strongest contributors on the team. what usually ends up hitting the job market are the subpar performers. these are the individuals whose value was not clear enough to justify keeping them when hard choices had to be made. unless there is a truly critical need or a rare opportunity to bring in exceptional talent, i see recessions as a time to stabilize and focus inward (r-g). • while hiring tends to slow down during recessions, it doesn't stop entirely. every manager approaches it differently. personally, i do my utmost to retain as many employees as possible. i believe in preserving talent and loyalty, even during lean times, because rebuilding a strong team after a recession can be more costly and time-consuming than weathering the storm together (r-h). 4.5. mistakes to avoid in a recession during an oncoming recession, the following are respondents’ comments on mistakes employees make when they see a recession looming: economy, 2025, 2025, 12(2): 60-77 71 © 2025 by the authors; licensee asian online journal publishing group • do not quit your job during a recession, to search for another position. also, avoid taking on new loans. people need to avoid the purchase of any major property like a house or car based on loans with high interests. workers without a huge saving should economize by monitoring their spending habits and cutting back on unnecessary vacations, outings, etc. additionally, young people should make use of their existing vehicles, rather than purchasing a new car on load from the bank (r-a). • employees begin to spend too much time gossiping and rely too much on the rumors circulating on the grapevine. rather, they should focus their energies on building their “personal brand” that places them as a “critical” component to the organization. managers need to openly communicate through “town halls” and regular meetings to reduce the grapevine activity and eliminate any fears through explaining the steps being undertaken by the organization to protect employees from adverse consequences. good employees may choose to leave an organization prematurely if they think their job is at risk (r-b). • my general opinion from my observations is that employees tend to take their guidance from their leadership. if their boss is nervous about a recession, the employee tends to become nervous. if the boss is confident about their business during potential downturns, then that may resonate with the employee. but the mistake is relying too much on those indicators (r-c). • not accepting and planning for the inevitable. not exploring their potential employment options and not preparing to make a change in their employment. not determining whether relocation to a different county or state where opportunities for their industry are more plentiful is feasible. not studying and understanding trends in their industry to be better prepared. for instance, a car salesperson should plan to sell fewer vehicles and earn less during a recession (r-d). • most employees get concerned about things beyond what they can control. do your best (r-e). • a common mistake is going into “survival mode” by disengaging or reducing performance, thinking layoffs are inevitable. others resist change, avoid upskilling, or fail to communicate with managers about how they can support the firm. it is crucial under any circumstances for employees in the cpa profession to stay current with evolving regulations and tax law changes (r-f). • the biggest mistake i see is when employees suddenly try to overperform once they sense their job might be at risk. it often comes off as disingenuous and reactive, rather than the result of genuine commitment or consistency. even worse is when someone tries to make themselves look better by putting others down. that kind of behavior is toxic and transparent, and it tells me more about their character than their capabilities. in fact, those are usually the first people i look at when it comes time to make difficult decisions. recessions do not create that kind of behavior. they reveal it (r-g). • many employees panic when they sense a recession coming, which can lead to fear-driven decisions or a drop in performance. unfortunately, not every job can be saved, but we do our best to retain top performers who remain focused, adaptable, and committed. it's often not about who deserves to stay, but about tough business realities (r-h). 4.6. suggestions during an oncoming recession, the following are respondents’ comments and suggestions about what managers and employees should know to better prepare: • retail employees should know that a downward trend in the economy might be a good time to speak with their manager and volunteer for additional responsibility in the department and organization. workers should let their bosses know that they are willing to help in whatever way possible to assist. if their hours are reduced, employees should use this time to learn more about their profession, take a course or two in local colleges, become certified in skills that are needed within the organization or industry, etc. (r-a). • senior level and mid-level managers must keep good communication regularly flowing between all levels of the organization to help build employee support and organizational resiliency. the employees should take the time to reassess themselves within the context of their performance and define the specific knowledge that would differentiate them from the other employees. becoming an avid learner, listener, a positive force and an indispensable key player will go a long way in protecting their job and reduce personal risk during periods of economic uncertainty (r-b). • although my business does not have employees, i would recommend staying informed using credible sources. don’t use social media to obtain factual data. know what your competition is doing and remain proactive. keep employees in the loop and stay positive. talk to them about looking for ways to turn “lemons into lemonade” (r-c). • in fairness to employees and their families, managers need to be fully transparent with their employees about the organization’s finances and how changing conditions could affect employees. employees should not fully rely on their employers. they should put themselves and their families first, explore all their options and be ready to make difficult, but necessary decisions (r-d). • act as warren buffet said, “be fearful when people are greedy, and be greedy when people are fearful” (r-e). • managers should always keep an eye on cash flow risks by managing unbilled time, staying on top of accounts receivable and maintaining constant communication with their clients. managers & employees should have a deep understanding of what their firm can offer clients and look for cross-selling opportunities within the firm that can benefit clients (r-f). • uncertainty naturally creates anxiety. the last recession was perhaps the best example of that. people did not know if their jobs were safe, if their income would be stable, or what the future of the company might look like. in those moments, communication and clarity are everything. managers need to be transparent about what they know, what they are watching, and how decisions will be made. employees, in turn, should focus on what they can control. that means showing up, doing the work, and being consistent. everyone should resist the urge to feed rumors or panic. that only adds noise to an already difficult environment. the economy, 2025, 2025, 12(2): 60-77 72 © 2025 by the authors; licensee asian online journal publishing group best way to prepare for a recession is to run a disciplined business all the time. if you are waiting for a downturn to start tightening up or paying attention to performance, you are already behind (r-g). • to better prepare for a recession, managers and employees should focus on both operational efficiency and strategic flexibility. for managers, that might mean adjusting pricing, promoting value-driven offers, and finding creative ways to retain customers. employees should focus on being adaptable, proactive, and ready to take on new responsibilities. clear communication, collaboration, and a shared commitment to weathering the downturn can make a significant difference (r-h). figure 3 shows buffet’s popular statement, echoed by one of the executives interviewed in this study. it means one should act cautiously when others are overly confident or risk-taking, and take bold opportunities when others are fearful or retreating, especially in investing or decision-making. figure 3. warren buffett’s advice for wealth management. 5. discussion as shown by the expert commentary in this qualitative study, the impact of an economic recession on jobs, organizations, and industries varies significantly depending on the sector. in retail, managers may put a hold on hiring non-essential staff during a downturn, but essential services like food and healthcare tend to remain relatively stable. in the healthcare industry, in the past, jobs were not significantly affected, as underutilized patient care workers could be shifted to meet staffing needs in other clinical areas. however, administrative positions may be left open and unfilled to reduce costs. different industries face unique challenges during recessions. for example, the clothing industry experiences reductions in orders, retail bankruptcies, and higher merchandise returns. in contrast, industries like medical and waste management are often considered "recession-proof." the accounting industry tends to see an increase in pressure and workload due to client demand for financial planning and business continuity advice, while real estate is particularly vulnerable to economic downturns. the covid-19 pandemic brought distinct challenges, including significant learning loss for children in early education settings and uncertainty among parents about safety. however, government funding helped support the industry, and some companies, like the real estate firm mentioned, took measures to preserve jobs and maintain morale, such as reducing salaries instead of laying off team members. each recession presents opportunities for growth and learning, and companies can emerge stronger and more resilient by adapting to changing circumstances. managers and organizations must prepare for a recession by taking proactive measures to ensure financial stability and minimize potential losses. this can involve implementing cost-cutting measures such as imposing a hiring freeze, limiting expenditure to only critical areas, and identifying mission-critical positions. some organizations may also delay pay increases and promotions or re-evaluate hiring needs to manage staffing levels through natural attrition. to prepare for a recession, firms often conduct a thorough review of their financial health, identifying areas where efficiencies can be found and trimming excess costs. this may involve scrutinizing every department, line item, and the role to determine what is essential and what can be temporarily eliminated. by having a well-thought-out plan in place, companies can make informed decisions and potentially preserve jobs or even position themselves for long-term stability and performance. some firms may also shift their attention to high-demand areas, such as tax advisory and restructuring advisory, to capitalize on opportunities during a recession. to protect jobs during an oncoming recession, employees should focus on being flexible, highly productive, and willing to take on new challenges before, during, and after work hours, including offsite and virtually. this can involve cross-training in different departments, offering superior technical skills, and making oneself "indispensable" to the organization. employees should also prioritize delivering consistent value, being reliable, and expanding their skills to meet the changing needs of their employer. by being proactive and adaptable, employees can increase their job security and demonstrate their value to their organization. this can involve volunteering to assist others, taking on additional responsibilities, and consistently delivering high-quality work. managers tend to notice and appreciate employees who quietly deliver results and help move the business forward, which can influence leaders to retain these hardworking employees during difficult economic times. ultimately, making oneself indispensable and focusing on consistent, visible contribution can help employees protect their jobs and thrive during a recession. during an oncoming recession, hiring practices vary among organizations and industries. some companies, like those in essential services, may continue to hire critical employees to maintain customer care and meet regulatory requirements. top-level employees with unique skills, such as change management or turnaround strategies, may economy, 2025, 2025, 12(2): 60-77 73 © 2025 by the authors; licensee asian online journal publishing group also be in demand during economic downturns. however, many organizations may limit hiring to only missioncritical positions or delay refilling vacant positions until more clarity is available. the decision to hire during a recession depends on the organization's needs, industry, and the skill set of potential employees. some managers may take advantage of the economic situation to get projects ready for when demand picks up, while others may prioritize streamlining operations and protecting their strongest contributors. ultimately, hiring during a recession is often selective, with a focus on areas that are critical to the organization's success or require specialized skills to meet client needs. during an impending recession, employees often make critical mistakes that can impact their job security and career prospects. some common mistakes can include quitting their job to search for another position, taking on new loans, or making large purchases on high-interest loans. employees also tend to get caught up in gossip and rumors, rather than focusing on building their personal brand and value to the organization. additionally, some employees may become overly nervous or disengaged, reducing their performance or trying to overperform in a way that comes across as insincere. to avoid these mistakes, employees should prioritize building their skills, staying adaptable, and communicating effectively with their managers. they should also be proactive in planning for potential changes, exploring new opportunities, and understanding industry trends. by focusing on what they can control, staying current with industry developments, and maintaining a positive and professional attitude, employees can increase their resilience and job security during economic uncertainty. it's also essential for managers to communicate openly and transparently with their teams, thereby reducing uncertainty and anxiety, and helping employees feel more secure and supported. to navigate economic uncertainty, employees and managers should prioritize proactive strategies. as suggested by the experts interviewed, during a looming recession, employees can volunteer for additional responsibilities, learn new skills, and take courses to enhance their value. senior and mid-level managers should maintain open communication, foster a positive work environment, and encourage employees to develop unique skills. transparency of the organization's finances and potential changes is crucial, and employees should prioritize their own preparedness. managers should focus on cash flow management, cross-selling opportunities, and clear communication. by being adaptable, disciplined, and proactive, businesses can build resilience and navigate economic challenges effectively. 6. recommendations from the experiences of experts interviewed and literature, mistakes employees should avoid during a recession include not preparing for a possible “rainy day” scenario, complacency, lack of adaptability, and poor financial planning. failing to adapt to changing circumstances, such as reduced budgets or new priorities, can make an employee more vulnerable to layoffs or negative performance reviews. employees should be proactive in seeking new challenges, developing new skills, and demonstrating their value to the team, department, profession, and organization. poor financial planning and lack of emergency funds can cause unnecessary stress and even bankruptcy. during a recession, job security is often uncertain, and employees may face unexpected layoffs, furloughs, or reductions in hours. failing to have a financial safety net or emergency fund can lead to financial stress and difficulty managing expenses. employees should prioritize saving, budgeting, and building an emergency fund to mitigate the impact of potential job loss or reduced income. retail managers and organizations must avoid the trap of failing to adapt to changing consumer behavior. during a recession, consumers often become more price-sensitive and alter their shopping habits. retail employees and managers should be aware of these changes and adapt their strategies to meet the new demands. this might include offering discounts, promotions, or loyalty programs, as well as improving customer service and building strong relationships with customers. additionally, retail employees and managers must avoid the trap of overstocking or understocking inventory. retailers who overstock inventory may be left with excess products that are difficult to sell, leading to financial losses. on the other hand, understocking can result in missed sales opportunities and disappointed customers. retail employees and managers should carefully manage inventory levels, monitor sales trends, and adjust stock levels accordingly based on evidence and data to minimize waste and maximize sales potential. in all cases, it must be noted that preparation is key to surviving economic downturns. organizations and employees can benefit from having a recession preparation checklist in place, such as the following (financial samurai, 2025): 1) have 6-12 months of living expenses in cash. 2) match your asset allocation with your risk tolerance. 3) write out your investment objectives. 4) build strong work relationships. 5) diversify your income streams. 6) collect as much outstanding debt as possible. 7) touch base with your tenants to see how they're doing. 8) adjust your safe withdrawal rate down. 9) consider retiring during a recession. 10) find a new job before your company sinks or lays you off. of course, all recessions are temporary; so, the key is to transition through it gracefully without any major personal or organizational challenges. things can be so good one year, and then so bad the next year, all outside of a person’s control and sphere of influence. constant change is why we should never try to get too high or low on ourselves. change is an inevitability, so it is best to take calculated chances while helping teams, managers, and employers to effectively transition through a recession. when people see a recession looming, common career mistakes can include panicking and making impulsive decisions, such as suddenly switching careers or industries without a clear plan. some might abandon long-term goals for short-term gains, which can be a mistake. others may become overly cautious, freezing in place and failing to take necessary steps to upskill or reskill, making them less competitive in a changing job market. economy, 2025, 2025, 12(2): 60-77 74 © 2025 by the authors; licensee asian online journal publishing group additionally, some individuals may underestimate the impact of a recession on their industry or profession, failing to prepare for potential changes or disruptions, while others may overestimate their job security, neglecting to take proactive steps to protect their position or build a safety net. these mistakes can ultimately hinder career progress and limit opportunities for growth and advancement. as such, managers and organizational leaders must enact relevant policies and procedures such as being transparent in all communications with employees and shareholders to avoid destructive mistakes during a recession economy (senathip, mujtaba, & cavico, 2017). 6.1. communication and transparency managers and employees should be aware of the importance of communication and transparency during a recession. open and honest communication can help alleviate anxiety and uncertainty, and managers should prioritize keeping employees informed about the company's financial situation, plans for navigating the recession, and expectations for the future. this can include regular updates from leadership, town hall meetings, or departmental briefings. employees should also be encouraged to ask questions and provide feedback, creating a sense of shared understanding and collaboration. by fostering a culture of transparency, organizations can build trust and resilience, helping to mitigate the negative impacts of a recession. in addition to more transparency and effective communication, managers and employees should also focus on building a culture of agility and adaptability. this can involve cross-functional training employees to develop new skills, encouraging innovation and experimentation, and exploring new business opportunities or revenue streams. by embracing a growth mindset and staying attuned to changing market conditions, organizations can identify new opportunities and stay ahead of the competition. employees should be empowered to take calculated risks, experiment with new ideas, and learn from failures, creating a culture of continuous learning and improvement. by prioritizing agility and adaptability, organizations can better navigate the challenges of a recession and emerge stronger and more resilient on the other side. 6.2. take action to prepare since technology plays a critical role, all working adults should know that “professionals who understand how to evaluate, implement or manage automation tools will remain in high demand” (adam, 2025). as such, it is important that workers, managers, and organizational leaders proactively integrate technology into their workplaces to help everyone become more efficient, innovative, and productive (subramaniam et al., 2023; zaidi, khan, khan, & mujtaba, 2023; zareen, razzaq, & mujtaba, 2015). during a looming recession, as shown in figure 4, working adults can take personal, professional, and organizational steps to effectively deal with any challenges. figure 4. action categories for recession preparation. besides individuals and organizations, policy makers must also collaborate with relevant stakeholders to enhance the economic wellbeing of each community by encouraging and supporting innovative and ethical work cultures while adjusting to alternative work arrangements in a responsible manner (bishop, 2012; dominick et al., 2021; mas & pallais, 2017; wang, liu, qian, & parker, 2021). in a study of tourism, according to wen (2025) economy, 2025, 2025, 12(2): 60-77 75 © 2025 by the authors; licensee asian online journal publishing group strengthening infrastructure, enhancing investment channels, and supporting supply-side reforms are fundamental for improvements and growth of the local economy. accordingly, “regional collaboration and innovation should be prioritized to drive long-term industry development”, and policymakers should focus on expanding consumption capacity, improving connectivity, and fostering an innovation-driven economy to enhance regional and national economic benefits (wen, 2025). moreover, while enhancing each local economy, policymakers must provide educational workshops and townhall events to get input from all stakeholders on how to prepare for and mitigate the negative impact of a looming recession (senathip et al., 2017). figure 5 provides suggestions that policymakers, workers, and managers can consider in the personal, professional, and organizational categories when preparing for an upcoming recession period: figure 5. actions to take for a looming recession. 1. upskill and reskill: invest in courses or training programs that enhance your skills and make you more valuable to your employer. 2. diversify your income streams: explore alternative sources of income, such as freelancing or part-time work, to reduce your reliance on a single job. 3. build an emergency fund: save 6-12 months' worth of living expenses in a readily accessible savings account to cushion against potential job loss. 4. network and build relationships: nurture professional relationships and expand your network to increase opportunities for future collaborations or job opportunities. 5. stay adaptable and flexible: be open to changes in your role, department, or industry, and be willing to pivot when necessary. 6. develop transferable skills: focus on acquiring skills that are transferable across industries, such as project management, data analysis, or digital marketing. 7. improve online presence: ensure your linkedin profile and other online presence are up-to-date and showcase your skills and experience. 8. reduce expenses and live below your means: cut back on unnecessary expenses and adopt a more frugal lifestyle to reduce financial stress. 9. stay informed and up to date: continuously educate yourself on industry trends, market developments, and economic forecasts to stay ahead of the curve. 10. consider a side hustle: start a part-time business or freelance in a field you're passionate about to supplement your income and build a safety net. 11. focus on high-impact work: prioritize tasks and projects that have the greatest impact on your organization and demonstrate your value to your employer. 12. develop a personal brand: establish yourself as a thought leader in your industry by creating content, speaking at events, or participating in podcasts. 13. build a professional online portfolio: create a portfolio that showcases your work, skills, and achievements to attract potential employers or clients. economy, 2025, 2025, 12(2): 60-77 76 © 2025 by the authors; licensee asian online journal publishing group 14. stay positive and proactive: maintain a positive attitude and focus on finding solutions rather than getting bogged down by challenges. 15. review and adjust benefits: review your employee benefits, such as health insurance, retirement plans, and other perks, and adjust them as needed to ensure you're maximizing your compensation package. by taking proactive steps for any looming recession, one can better prepare personally, professionally, and organizationally for the challenges and opportunities that may come to be in a better position for long-term success. of course, being proactively prepared with “an umbrella in hand” for a cloudy or “rainy day” can reduce unnecessary anxiety, worries, and mental health challenges at the personal, professional, and organizational categories. 7. summary proactively preparing for an upcoming recession is crucial for individuals, managers, and organizations to mitigate potential risks and ensure long-term success. by taking proactive steps, individuals can protect their careers, build a financial safety net, and stay competitive in a changing job market. this can involve upskilling, networking, and diversifying income streams to reduce reliance on a single source of income. managers can empathize with the anxiety and uncertainty of employees, while also preparing by prioritizing communication, transparency, and agility within their teams, as well as focusing on high-impact work and building a culture of continuous learning and improvement. of course, managers and organizations that prioritize preparation and adaptability can build trust and resilience within their teams, thereby reducing the negative impacts of a recession and emerging stronger on the other side. organizations that prepare for a recession can reduce the risk of financial instability, maintain a strong workforce, and stay ahead of the competition. this can involve diversifying revenue streams, building cash reserves, and investing in innovation and development to drive growth. by being proactive, organizations can also identify new opportunities and pivot to emerging markets, positioning themselves for success in a changing economic landscape. ultimately, preparing for a recession is not just about weathering the storm, but also about positioning oneself for long-term success. by taking proactive steps, individuals, managers, and organizations can build a strong foundation for growth, innovation, and resilience. this can involve embracing a growth mindset, staying attuned to changing market conditions, and prioritizing continuous learning and improvement. by being proactive and adaptable, individuals and organizations cannot only survive a recession but also thrive in the new economic landscape that emerges. references adam, j. 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