michela project continuation
TRANSCRIPT
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IMPACT OF FOREIGN DIRECT INVESTMENT ONUNEMPLOYMENT IN NIGERIA (1980-2007)
BY
OBU EWERE MICHAELSSC0503221
DEPARTMENT OF ECONOMICS AND STATISTICS
FACULTY OF SOCIAL SCIENCES
UNIVERSITY OF BENIN
EDO STATE
MARCH, 2010.
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IMPACT OF FOREIGN DIRECT INVESTMENT ONUNEMPLOYMENT IN NIGERIA (1980-2007)
BY
OBU EWERE MICHAELSSC0503221
A RESEARCH WORK PRESENTED TO THEDEPARTMENT OF ECONOMICS AND STATISTICS,FACULTY OF SOCIAL SCIENCES, UNIVERSITY OF
BENIN, EDO STATE; IN PARTIAL FULFILLMENT OF THEREQUIREMENTS FOR THE AWARD OF A BACHELOR OF
SCIENCE DEGREE IN ECONOMICS AND STATISTICS
UNIVERSITY OF BENIN,
MARCH, 2010.
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CERTIFICATION
We the undersigned certify that this research work
was carried out by OBU EWERE MICHAEL of the
Department of Economics and Statistics, University of
Benin, Edo State. And it is adjudged adequate in scope and
quality for the purpose of a partial fulfillment for the award
of a Bachelor of Science (B.Sc) Degree in Economics and
Statistics.
_______________________Dr. Anthony Monye-Emina
Project Supervisor Date:__________________
________________________Dr. Mrs. E. I. OkojieProject Coordinator Date: ____________________
_______________________Dr. O. T. EkanemHead of Department Date:___________________
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DEDICATION
This research work is dedicated to my late mother,
Mrs. Christiana Onyero Obu, in memory of her motherly
love, care and guidance while she was alive.
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ACKNOWLEDGEMENT
I wish to seize this opportunity to thank my
Supervisor Dr. Anthony Monye-Emina for his guidance and
tutelage in the course of writing this project.
Also, I express my warmest gratitude to my father Sir
Michael Arinze Obu, for his prayers, moral and financial
support.
Further, my warmest appreciation goes to my brothers
and sisters viz, Mrs. Vivian Egbudu, Collins, Onyeka and
Mrs. Glory Airiavbere for their love, prayers and financial
support.
To be continually remembered are my friends
Celestine Asumuga, Cornelius Chinedu, Kanabe Imhoesi,
Kenneth, Frank, Shola, Kingsley, Fred, Tina, Abdu and all
others too numerous to mention.
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My profound appreciation also goes to my lecturers
Prof. Obadan, Okoh and Okojie (Mrs.) as well as Drs. Edo,
Hassan, Oriakhi, Mrs. Mogbolu and others for their
tutelage.
For their prayers, I am indebted to Rev. Father Mario-
Debie, Rev. Dr. Oke Akokotu and others.
Not left out are my Uncles Rev. Mr. Fidelis Nwadiani,
Rev. Prof. Mon. Nwadiani, Egnr. Rapheal Obu and Mr.
Ogbemudia as well as Engrs. Peter Egbudu and Atole
Airiavbere, and Mr. & Mrs. Chris Idoye for their support
and encouragement.
Above all else, I thank God Almighty for his awesome
goodness in granting me the strength, courage and
determination not only in the course of writing this project
but also, for leading me through out the period of my study.
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TABLE OF CONTENT
Title i
Certification ii
Dedication iii
Acknowledgement iv
Abstract viii
Chapters
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study 11.2 Statement of the Problem 41.3 Significance of the Study 51.4 Objectives of the Study 71.5 Hypotheses of the Study 71.6 Scope and Methodology 81.7 Limitation of the Study 9
CHAPTER TWO: LITERATURE REVIEW
2.1 Foreign Direct Investments: Conceptual Issues 10
2.2 Determinants of Foreign Direct Investments Flows 13
2.3 Trend in Foreign Direct Investment Flows in Nigeria 19
2.4 Unemployments Conceptual Issues 22
2.5 Determinants of Unemployment 26
2.6 Trend in Unemployment in Nigeria 32
2.7 Foreign Direct Investment and Unemployment:
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Theory and Evidence. 34
CHAPTER THREE: THEORETICAL FRAMEWORK
3.1 Sources of Data and Method of Analyses 37
3.2 Model Specification 37
CHAPTER FOUR: EMPIRICAL ANALYSES
4.1 Presentation of Empirical Results 41
4.2 Discussion of Empirical Results 42
CHAPTER FIVE: SUMMARY, RECOMMEDATION AND
CONCLUSION5.1 Summary of Findings 46
5.2 Recommendations 47
5.3 Conclusions 49
Bibliography 51
Appendix
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ABSTRACT
This study investigated the Impact of foreign direct
investment on unemployment in Nigeria from the period 1980
to 2007.
The study was carried out empirically using the Ordinary
Least Squares method of regression analysis; alongside other
statistical tests. Empirical results obtained revealed that
government expenditure is a poor determinant of
unemployment, while foreign direct investment inflow is the
most germane determinant of unemployment in Nigeria.
Hence to reduce the spat of unemployment in Nigeria, policy
emphases should be centered on attracting greater inflows of
foreign direct investment.
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CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDYThe world economy is growing on the strength of
globalization. One of the most salient features of
globalization drive is the conscious encouragement of cross-
border investments, especially by trans-national
corporations and firms. Thus many countries and
continents (especially developing) now see the attraction of
foreign direct investment as an important element in their
strategy for economic development, essentially because it is
seen as an amalgamation of capital, technology, marketing
and management (Sjoholm, 1999).
Foreign direct investment is an investment made to
acquire a lasting management interest in a business
enterprise operating in a country other than that of the
investor, defined according to residency (World Bank, 1996).
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Such investments may take the form of either Greenfield
investment (also called mortarand brick investments) or
merger and acquisition which entails the acquisition of
existing interest rather than new investment.
In corporate governance, ownership of at least 10% of
the ordinary shares or voting stock is the criterion for the
existence of a direct investment relationship, while
ownership of less than 10% is recorded as portfolio
investment. Furthermore, foreign direct investment
comprises not only mergers and acquisitions and new
investments, but also reinvested earnings and loans and
similar capital flows or transfers between parent companies
and their affiliates. It has been posited that a countrys
inward foreign direct investment position is made up of the
hosted foreign direct investment projects, while outward
foreign direct investment comprises those investment
projects owned abroad.
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One of the strongest strengths of foreign direct
investment arises from the positive externalities if generates
from the positive externalities it generates from forward and
backward linkages or through industrial acceleration as
being currently experienced in the South and East Asia. This
is evident because it is less volatile and resilient to
perturbations in the economy.
Africa is in dire need of foreign direct inflows owing to
its acknowledged advantages. Hence one of the pillars on
which the New partnership for Africas Development
(NEPAD) was launched, was to increase the available capital
inflows through a combination of reforms, resource
mobilization and a conducive environment for foreign direct
investment (funke and Nsouli, 2003).
Finally, in Nigeria the level of foreign direct investment
attracted overtime is mediocre (Asiedu, 2003),as compared
with her resource base, potential need; especially in limiting
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unemployment growth rate, , and in relation to the policy
framework initiated in the past.
1.2 STATEMENT OF THE PROBLEMEssentially, since the aftermath of the oil glut in
1982, there has been an enormous need for foreign
direct investment in mitigating the constraints posed
by shortages of foreign exchange earnings, dire need of
necessary capital and intermediate goods with which to
fast-track production, growth in employment and the
attainment of the targeted growth rate.
It has been a constant cause for worry that despite the
myriad of investment incentives offered overtime in Nigeria,
there has been a continual low inflow of foreign direct
investment as well as poor outcomes in generating
employment.
One of the fundamental problems observed overtime is
the high cost of running businesses owning to poor
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forward and backward linkages in enhancing economic
growth as well as reducing unemployment.
The need to curtail the growing pace of unemployment
in Nigeria via foreign direct investment has been paramount,
as articulated in the Structural Adjustment Programme in
1986.
In examining, the trend and outcomes of foreign direct
investment via -a- vis unemployment in Nigeria, this
research work assesses the performance of past policy
frameworks and the impact of foreign direct investment
inflows on unemployment in Nigeria overtime.
Finally, it emphasizes the spread of foreign direct
investment into non-oil sectors, especially the agricultural
sector. Thus it stresses the need to limit infrastructural
barriers and variabilility in policy frameworks, as a means of
revamping the declining inflows of foreign direct investment,
hence generating employment in all sectors of the economy.
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1.4 OBJECTIVES OF THE STUDYThe general objective of this study is to determine the
impact of foreign direct investment on unemployment in
Nigeria.
The specific objectives include to:
i. examine the trend in foreign direct investmentflows to Nigeria.
ii. determine trend in unemployment in Nigeria.iii. estimate the relationship between foreign direct
investment and unemployment in Nigeria and
iv. make recommendations on appropriate policy .1.5 HYPOTHESES OF THE STUDY
The hypotheses that guided this study are:
i. Null hypothesis: HO: Foreign directinvestment is not negatively associated with
unemployment in Nigeria.
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ii. Alternative hypothesis:H1: Foreign directinvestment is negatively associated with
unemployment in Nigeria.
1.6 SCOPE AND METHODOLOGY
This study covers the period 1980 to 2007. Essentially
the earlier part of the period was marked by a resurgence in
the need for foreign direct investment particularly for two
reasons, viz:
The oil glut of the 1980s which had precipitated a drop
in revenue and massive loss of jobs in Nigeria and,
The lifting of restrictive laws inhibiting foreign
participation especially through the institution of Structural
Adjustment Programme in 1986.
In the latter period on the other hand, there had been
an enormous need to spread foreign direct investment inflow
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into non-extractive sectors as a means of limiting the growth
in unemployment.
The sources of data for this study would be secondary
sources, such as the Central Bank of Nigerias publications
like the statistical bulletin.
Finally the Ordinary Least Squares regression
technique was used or adopted in the empirical analysis of
this research work. This criterion was adopted because it
has the best, linear, unbiased estimator property among the
class of linear estimators.
1.7 LIMITATION OF THE STUDY
This study was greatly constrained by the short period
of time required to carry out this research work. This is in
addition to the requirements of other course work required
by the programme.
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CHAPTER TWO
LITERATURE REVIEW
2.1 FOREIGN DIRECT INVESTMENT: CONCEPTUAL ISSUES:
According to the International Monetary Fund (1977),
foreign direct investment refers to investment that is made
to acquire a lasting interest in an enterprise operating in an
economy other than that of the investor. Further, the
Organisation for Economic Corporation and Development
(1983), posits that a direct investment enterprise refers to a
situation in which a single foreign investor controls less
than 10 percent or more of the ordinary shares or voting
power of an incorporated or unincorporated enterprise with
a view of having an effective voice in the management of the
organization.
International capital flows in the form of foreign direct
investment is a major in indicator of financial globalization.
Thus, Obadan (2004), posits that against the background of
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financial and capital account liberalization, the larger the
share of a countrys capital flows in global capital flows, the
more financially globalized it is taken to be. In this light
according to Weitz and Lijane (1998), opening up a country
requires investment for connecting the necessary
infrastructure such as roads, telecommunication, power
plants, financial system. The need to open up became very
prominent in Nigeria at the aftermath of the economic
crisis of the 1980s owing to the substantial drop in oil
revenue. As observed by Akpokodje (1998), Nigerias
domestic investment as a ratio of gross domestic product
declined from an average of 24.4% during the 1973 to 1981
period to 13.57% during 1982 to 1986 period, implying that
its dwindling capital was barely replaced in the country. In
the same vein, foreign direct investment rate depreciated
from 8.6% in 1973 to 1981 period to 4.2 percent in the 1982
to 1996 era. The economic crisis, further manifested in
macroeconomic imbalances, widening saving-investment
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gap, high rates of domestic inflation, chronic balance of
payment problems, massive unemployment and huge
budget deficit (Akpokodje, 1998).
Owing to the above, Obadan [2004], argues that in
view of its clear benefits and advantages in relation to the
other forms of capital inflows, foreign direct investment
should be preferred and accorded priority in consideration
of external finance. For not only does it bring money and
machines but also technical know how; it helps in
industrialization, in building up economic overhead capital
and in creating larger employment opportunities. It is
further heightened or esteemed for its less volatility and
resilience to perturbations (Odusola, 2003).
Overall, it is for these reasons that prominence is being
attached to increasing the magnitude of foreign direct
investment in Nigeria especially since 1982, as a means of
augmenting revenue inflow, counteract the sluggish trend in
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official and private portfolio capital flows and further
enhancement of employment (Uremadu, 2006).
2.2 DETERMINANTS OF FOREIGN DIRECT INVESTMENT FLOWS
Several range of factors could account for the
disproportionality and skewness of foreign direct
investment inflow into a few countries. A highlight of
the determinants are as follows:
i. Macroeconomic Environment:A good macroeconomic environment may be defined as
one which guarantees an efficient allocation of resources
(including foreign exchange) , provides appropriate signals to
producers in the real sectors of the economy, and eliminates
distortions in production, investment and consumption
(Iyoha, 1997). In analyzing the importance of an appropriate
macroeconomic environment, (Serven and Solimano, 1992);
asserted that monetary, fiscal and exchange rate policies
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directed at correcting macroeconomic inbalances would have
a salutary effect on foreign direct capital flows. Below are
the analyses of various components or variants of
macroeconomic policies.
Firstly, foreign exchange rate management is a
veritable tool for attracting foreign direct investment. Below
are the analyses of various components or variants of
macroeconomic policies. Exchange rate is identified as the
most important determinant of foreign direct investment in
Nigeria and should , therefore, be given due attention in
order to maximize all the benefits that accrue from foreign
direct investment in Nigeria (Uremadu, 2006). Further,
Obadan (1994), traces the need for exchange rate in
emphasizing that a sustained exchange rate misalignment in
terms of over valuation or under-valuation, is a major source
of macroeconomic disequilibrium in developing countries. In
reporting on the relationship between real exchange rate and
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foreign direct investment in Nigeria, (Chete and Akpokedje,
1997), posits that an over-valued exchange rate or highly
distorted foreign exchange rate deters foreign inflows as well
as discourages exports. Finally, Monye-Emina (2001),
postulates that the attendant fluctuation in the rate of
exchange creates the problem of uncertainty which leaves a
negative impact on manufacturing output; hence, in the
light of the demand and supply conditions for foreign
exchange; an appropriate mechanism for determining not
only a realistic but also a stable rate is desirous.
Secondly, inflation in the economy signals the inability
of government to manage the economy (Fisher, 1993). An
accelerating inflation rates impinge adversely on foreign
direct investment flow by raising the risk of longer-term
investment projects, lowering the average maturity of
commercial bank loans and distorting price signals in the
economy (Uremadu, 2005).
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Finally, an appropriate fiscal, monetary and credit
policy to ensure stable prices and interest rate, sound
financial system; as well as a stable commercial and trade
policy will contribute in no small measure to increase the
confidence of foreign investors and raise the inflow of
foreign direct investment (Iyoha, 2001).
In summary, there is an emerging consensus that a
conducive macroeconomic policy environment is, therefore,
desirable for attracting substantial amounts of foreign
direct investment inflow.
ii Infrastructure Development:
Good infrastructure facilitates production, reduces
operating costs and thereby promotes foreign direct
investment (Wheeler and Mody, 1992). In the literature, the
number of telephone per 1,000 population and the index of
energy consumption could be used to measure
infrastructure. In this connection, (Pfeffermann and
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Madarassy, 1992) identify, among other macroeconomic
factors, that, capacity utilization which relies much on
efficiency of industrial or energy production, is a major
determinant of foreign direct investment. They further
discovered that the size of the domestic market and
improved capacity utilization are positively related to foreign
direct investment, while inflation and volatile exchange rates
have negative effects on foreign investment. Finally, an
efficient infrastructural development proxied by the index of
energy consumption will create conducive environment for
high foreign direct investment inflows and increased
domestic investment (Uremadu, 2006).
iii Openness of the host economy to trade:
A good indicator of openness is the relative size of the
export sector, and a range at surveys suggest a widespread
perception that open economies encourage more foreign
direct investment. Iyoha[1999], posits that one of the
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concrete gains from increased openness and integration into
the global economy is increased investment. Moreso ,Singh
and Jun[1995],indicates that exports ,particularly
manufacturing exports, are a significant determinant of
foreign inflows, and further, that there is a strong evidence
that exports precede foreign direct investment flows.
In conclusion, according to World Bank[1996], trade
and investment will accelerate in countries that have opened
up to the global economy.
iv. Size of the market
The size of the market could be proxied by the size of
gross-domestic product. Other tools for measurement are
income levels average, and growth rates. There is a
consensus that the size ofChinas market explains, in large
part, the massive foreign direct investment flows it has
attracted since the early 1980s and provincial gross
national product, reflecting economic development and
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potential demand, has also been indicated as a major
determinant of this concentration (Broadman and sun,
1977). For sub-Saharan Africa as a whole, Bhattacharya et
al (1996), identify gross domestic product growth as a major
factor; and for majority of low-income countries which fail to
attract large foreign direct investment flows, their small
domestic markets are often cited as the main deterrent.
However, Asiedu (2003), observed that the level of foreign
direct investment attracted by Nigeria is medio cre despite
her market size, resource base and potential need.
2.3 TREND IN FOREIGN DIRECT INVESTMENT FLOWS IN NIGERIA:
Despite the myriad of incentives created by the
government overtime, the inflow of foreign direct
investments has been mediocre.
Statistics shows that the nominal foreign direct
investment inflows rose from #3,620 in 1980 to
#5,382.8million and #6, 804million in 1982 and 1985
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respectively. Between 1986 and 1990, in which the
Structural Adjustment Programme was initiated, there were
several oscillations in the inflow of foreign direct investment.
In 1986, there was an inflow of #4,313million which rose to
a high of #10,339 million in 1990 and to a low of #5,610.2
million in 1991. Starting from 1992 onwards, net foreign
direct investment shows some degree of resilience, thereby
raising subsequently from #14,463.1 million in 1992 to
#110, 456.2 million in 1997; hence indicating a growth rate
of 556.9% (Odusola, 2003). There was also a drop or
oscillation between 1998 and 1999 which amounted to
#92,795 million in that year and an upward sustained
increase or trend in net foreign direct investment inflows
between 2000 and 2007, in which #115,952.2 million was
recorded in 2000; #249,157.7 million and #573,835.1
million in 2004 and 2006 respectively. The current
sustained upward trend in foreign direct investment inflow
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could be adduced to the privatization, commercialization
and deregulation exercises of the government (Aremu, 2004).
Further, an analysis of the net inflows shows that since
1970 net foreign direct investment flows have been positive
except in 1989 and 1990, in which there were negative
outcomes.
Also, sectoral analysis shows cumulative foreign direct
investment been concentrated in the mining and quarrying,
manufacturing and processing, and trading and business
services sectors. In the period 1992-2006, Obadan (2007),
observed that mining and quarrying sector accounted for an
average of 36.5 percent of foreign direct investment flows
while manufacturing and processing sector accounted for
28.6 percent inflows. Also the finance and business services
sector recorded 6 percent, and 10 and 1 per cent for
transport and communication, and agricultural sectors
respectively.
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Overall, inspite of a large market and government
incentives, agriculture has continued to maintain the least
shares in foreign direct investment, inflow.
2.4 UNEMPLOYMENT: CONCEPTUAL ISSUES:
There seems to be a consensus on the definition of
unemployment. The International Labour Organization,
defines the unemployed as numbers of the economically
active population who are without work but available for
and seeking work, including people who have lost their jobs
and those who have voluntarily left work (World Bank,
1998).
Also, unemployment implies that actual output is less
than potential output (Okun, 1962).The issue of
underemployment is also important. It is a situation where
peoples skills are not used or exploited to their fullest
potentials and thus, represents waste of human resources
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who in some cases happened to have been expensively
trained (Umo, 2007).
Unemployment has been a major socio-economic
problem in Nigeria. Thus unemployment has been
categorized as one of the major impediments to social
progress; hence, apart from representing a colossal waste of
a countrys resources, it generates welfare loss in terms of
lower output thereby leading to lower income and well-being
(Akinboyo, 1987). Also,[Okojie ,2003]; posits that with a
stagnant economy and low economic growth rate, demand
for labour has been declining, thus resulting in high level of
youth unemployment.
The experience of Nigeria since independence in 1960,
has been that of increasing rates of unemployment both in
terms of quality and quantity. In this connection,
Okedara(1984) and Awopegba(1995), attributed the upsurge
in the quantity and quality of educated unemployment to
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discrepancies in the production of high-level manpower and
level of employment. Among the factors attributed to the
above include; inadequate job opportunities for graduates of
tertiary institutions and inadequate practical skills, as well
as high student-teacher ratio. In corroboration, Ojo (1998),
observed that Nigerian unemployment problem emerged in
the 1960s as it was virtually non-existent in the 1950s. he
further posits that the low unemployment rate of 4.3 per
cent in 1976 could be attributed to the oil boom of the
decade; while unemployment rate blossomed in the 1980s
with relatively high aggregates for urban and rural
unemployment, following the impact of the oil glut of 1982.
In view of the Structural Adjustment Programme initiated,
Iyoha (2003), posits that the Nigerian government failed to
solve the unemployment problem at least in the short and
medium term, since it triggered retrenchments both in the
public and private sectors. In this connection, although a
modest growth rate of 5 percent was achieved in real gross
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The National Poverty Alleviation Programme
(NAPEP),etc.
Finally, despite the efforts aimed at abating
unemployment overtime, it remains a major problem in
Nigeria and with the current global economic crisis, the
problem may become dismal.
2.5 DETERMINANTS OF UNEMPLOYMENT
Several factors account for the causes of
unemployment and such factors result from various events
that impede the full utilization of human economic skills or
potential (Umo, 2006). The unemployment crisis has been
attributed, inter alia, to four major causes , viz; the labour
force explosion arising from the population explosion, the
massive rural-urban migration in less developed countries;
the failure of industrialization to live to the expectations of
many as an effective means of generating employment in the
manufacturing sectors of less developed countries and over
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production of school leavers and graduates who are ill-
equipped for the labour market (Diefomaoh and Orimalade,
1971) and Iyoha, (1982). More recently, ILO (1995), posits
that the causes of unemployment growth or crises can be
grouped under six headings; the phenomenon of jobless
growth, macroeconomic instability, poorly functioning
labour markets, and lack of international competition
In view of the above, a highlight of the determinants
of unemployment are as follows;
i Population Growth Rate
Growth in population especially in developing
economies impacts negatively on employment. (Diejomaoh
and Oriemalade, 1971), argues that population growth is
the major factor of unemployment since population growth
exceeds labour demand at prevailing wage rates. Also, Iyoha
(2004), states that the rapid population growth rate of the
1980s translates into the rapid labour force growth of the
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late 1990s and early 21st century, hence the weak or
declining employment growth juxtaposed against rapid
labour force growth would spur rising unemployment and
underemployment rates.
ii Gross Domestic product growth rate
This relates to the value of the goods and services
produced in the economy. According to Sancho (1996),
economic growth is the driving force which makes job
creation possible. Further, low output is inevitably
associated with low employment, thus Okun(1961), posits
that for every three percentage points growth in real gross
national product, unemployment rates decline by one
percentage point every year. Hence Iyoha (2004), argues that
employment prospects in Africa in the years ahead depend
on many factors including especially the growth of gross
domestic product, macro and sectoral capacities to create
new jobs and output composition. Therefore, increasing
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output through expansion of national production would
expand or broaden opportunities for employment creation in
the economy.
iii Defective Macroeconomic Policies
The macroeconomic policies of a Nation through its
allocative roles could impact on unemployment either
positively or negatively.
Iyoha (2004), reckons that the best results of fiscal and
monetary policies should be targeted to activities with the
greatest employment creating potential, but however,
observed that acute economic crisis in the 1980s which was
caused by a lost of factors including poor macrocosmic
policy management, led to inflation, rising fiscal deficits,
capital flight, scarcity of foreign exchange and massive
unemployment subsequently.
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Below is a highlight of the components of
macroeconomic policies and their effects towards
unemployment:
Firstly, inflation has deleterious impact on
unemployment. There is indeed a tradeoff between inflation
and unemployment and for this reason it has been observed
that the goals of full employment and stable prices are
largely incompatible. Hence Philips (1958), posits that an
increase in the rate of change of nominal wages or prices
(inflation) leads to decreases in unemployment rate. This is
evident in the inflation-unemployment trade off that is
implied by the Phillips curve.
Secondly, the result of scarcities or volatilities in the
foreign exchange rate and high interest rates impacts
negatively on imported inputs and investment, and
consequently limiting employment generation in the
economy. Evidently, Monye-Emina (2001), argues that
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Fluctuation in exchange rate will cause instability in
purchasing power and hence negatively impact on
investment in import of manufacturing inputs in this
connection, Iyoha (2004) posit that in the aftermath of the
Structural Adjustment Programme of 1986, the result of
scarcity of foreign exchange for imported inputs and high
interest rates led to worker lay-offs in manufacturing firms,
particularly.
Overall, poor macroeconomic policies are constant
drags inhibiting employment creation or opportunities
through their deleterious effects on the economy.
i. Ineffective DemandEffective demand refers to the total expenditure on the
total output that is produced, at an equilibrium level of
employment in the employment. Keynes (1936), stated that
the level of effective demand determines the level of
employment in the economy. Further, the extent of demand
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determines the amount of resources utilized (Bannock et al,
1998).
Therefore, deficiency in effective demand generates
unemployment because it is tantamount to low production
or output in the light of low amount of resources utilized.
2.6 TREND IN UNEMPLOYMENT IN NIGERIA
In recent times, the incidence of unemployment in
Nigeria has been deep and widespread cutting across all age
groups, educational strata and geographical entities, and a
peculiar feature of the unemployment problem in Nigeria is
that it was more endemic in the early 1980s than any other
period (Obadan and Odusola, 2001).
Notably, unemployment rates between 1981 and 1986
were relatively higher than what obtained in the 1960s and
1970s (Ojo, 1998).
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Unemployment rate rose from 4.3 percent in 1976 to
6.4 percent in 1980. It oscillated between 6.4 and 6.1
percent during the 1980-1985 period. Further,
unemployment rate fell significantly from a high of 7.0
percent to a low of 3.1 percent in 1991. And although it rose
marginally to 3.4 percent in 1992, the unemployment rate,
however, consistently declined to 2.7,2.0, and 1.8 percent
points for 1993, 1994 and 1995 respectively; which then
rose to 3.4 percent in 1996 and 45 percent in 1997.The rate
of unemployment has always been highest within the 15-24
age groups. Labour force survey between 1966 and1967
indicated that the group accounted for as high as 72.6
percent of total unemployment even though it represent only
25% of potential labour force while in 1984 it accounted for
almost three quarter of the unemployed, and recent data
show the same pattern as the group represent 71.2 percent
of all unemployed in 1994 (FOS, 1996: P. 220).
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In 1999, there was an increase in unemployment rate
to 4.7 percent, which oscillated subsequently between 3.4
and 3.1 percent points in 2001 and 2004 respectively. The
unemployment rates for the years 2005-06 where stable
with 2.9 percent for both years with an upsurge of 5.8
percent for 2007 and 4.9% for 2008.
Finally, the increase in the duration of unemployment
represents the most serious labour market development;
hence long term unemployment has become a chronic
problem in Nigeria (Okigbo, 1986; Oladeji, 1994)
2.7 FOREIGN DIRECT INVESTMENT ANDUNEMPLOYMENT: THEORY AND EVIDENCE:
The expectant outcome in the relationship between
foreign direct investment and unemployment is negative.
This means that increase in foreign direct investments
reduce unemployment rate.
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The Literature is replete with the employment impact of
foreign investments in terms of empirical investigations.
Aremu (1997), posits an inverse relationship between
increase in foreign direct investment on unemployment in
Nigeria for 1988 to 1990 period after the introduction of the
Structural Adjustment Programme. Further, in an empirical
study of Fiji Pacific Island, Jayaraman and Singh (2007),
posits that the gains from foreign direct investment include
not only creation of employment in those sectors which
attracted overseas investors, but also of additional
employment opportunities in ancillary sectors, which are
supportive to all production oriented activities in the
economy.
Finally, in Nigeria, however, the result seems
inconclusive as the expected inverse relationship between
unemployment and inflow of foreign direct investment could
only be established for the period 1986 to 1990 and 1995 to
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1997; but between 1991 and 1995, positive association
seemed to be established (Odusola, 2003).
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CHAPTER THERE
THEORETICAL FRAMEWORK
3.1 SOURCES OF DATA AND METHOD OF ANALYSES
Data for the study were sourced from secondary
sources such as Annual Abstract of Statistics; of National
Bureau of Statistics and the Central Bank of Nigerias
Statistical Bulletins, for the period 1980 to 2007.
The Ordinary Least Squares method as well as other
statistical tests were used in the analyses of the data.
3.2 MODEL SPECIFICATION
The take-off point for the model used in this study is
provided in Massoud (2008).
The model in its functional form is given below as;
UNR = F(POP, GDP, FDI, GOV)- - -(3.1)
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Transforming the functional model above into an
empirical form yields;
UNR = B0 + B1POP + B2GDP + B3FDI + B4GOV + Ui[3.2]
where;
UNR = Unemployment rate
POP = Population growth rate
GDP = Gross domestic product as proxy for economic growth
FDI = Foreign direct investment inflow
GOV = Government expenditure and
Ui = Random error term
The Bs: B0, B1, B2, B3, and B4 are the parameters to
be estimated.
The a priori expectations are given as;
B1 > 0 : B2, B3, B4 < 0
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The parameter measuring population growth rate is
positively signed because an increase in population leads to
increase in labour force and consequently expanding the
unemployment rate.
The gross domestic product is expected to be negative
since a rise in gross domestic product reduces
unemployment; hence an increase in gross domestic product
rate should reduce unemployment rate.
Foreign direct investment is signed negatively being
that foreign direct investment inflow eases or bridges
domestic saving-investment gap and foreign exchange
constraints for enhancing industrial acceleration and thus
creating employment through forward and backward
leakages of foreign inflows.
Government expenditure that is directed forwards
enhancing domestic production and consumption activities
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has a multiplier effect in enhancing employment generation,
thus government expenditure is expected to be negative.
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CHAPTER FOUR
EMPIRICAL ANALYSES
4.1 PRESENTATION OF EMPIRICAL RESULTS
The results of the empirical work are presented below:
UNE = -5.27+.13POP6.92GDP2.70FDI1.25GOV ..[4.1]
(-1.46) (2.78) (-1.37) (-1.86) (-2.08)
R2 = 0.40 F = 3.72
R2 = 0.30 D.W =1.97
UNE = -3.67 +1.97InPOP -.14InGDP23InFDI+0.001InGOV (4.2)
(-1.43) (2.96) (-.80) (-2.60) (.01)
R2 = 0.53 F = 6.13
R2 = 0.44 D.W =2.01
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4.1 DISCUSSION OF EMPIRICAL RESULTS.
An observation of the Ordinary Least Squares results
above, show that unemployment is associated positively with
population but negatively with government expenditure,
foreign direct investment and gross domestic product.
The estimate of the intercept terms was -5.27,
indicating that the expected level of unemployment when all
the other parameters are zero is -5.27 units. The estimate of
the population parameter was 0.13, meaning that a unit
increase in population leads to an increase in
unemployment by 0.13 units. Government expenditure and
the foreign direct investment estimates were-1.25 and -2.70
respectively, which means that a unit increase in
government expenditure and foreign direct investment will
reduce unemployment by -1.25 and -2.70 units accordingly.
Finally, the coefficient for gross domestic product was -6.92,
units. Further, the R2 and R2 were 0.40 and 0.30 percents
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respectively. Hence, the explanatory variables explained
about 30 percent of the variations in the dependent variable
using the Adjusted Sum of Squares (R2). The F- statistic
though weak at 3.7,however, passed the test of significance,
being above the critical value of 0.03.Lastly, the Durbin-
Waston value of 1.97, clearly shows the absence of auto-
correlation.
The initial result appeared spurious and suggested the
presence of heteroskedasticity. A satisfactory result was
obtained with the Log-Linear method, which showed that
unemployment is associated positively with population and
government expenditure, but negatively on foreign direct
investment and gross domestic product.
The estimate of the intercept term was -3.67 percent,
indicating that the expected level of unemployment when
other explanatory variables are zero is -3.67 percent. The
estimate of the population and government expenditure
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The F-statistic increased to 6.13percent and
statistically significant as well, being above the critical value
of 0.002. Therefore, there exist a linear relationship between
unemployment and the explanatory variables.
Finally, the Durbin-Watson value of 2.001 is indicative
of the absence of autocorrelation.
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CHAPTER FIVE
SUMMARY, RECOMMENDATIONS AND CONCLUSION.
5.1 SUMMARY OF FINDINGS.
The results of the empirical findings showed that all
the explanatory variables initially conformed to the a priori
expectations and were statistically significant, with the
population parameter positively signed, and the foreign
direct investment, gross domestic expenditure, and
government expenditure parameter negatively signed.
However, with the correction for the presence of
heteroskedasticity, the government expenditure parameter
became positively signed and statistically insignificant in
contrast to the a priori expectation.
The study on the whole showed that foreign direct
investment and government expenditure overtime have yet
to meet the expectation of creating broadened employment
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opportunities across all sectors of the economy. Essentially,
this could be adduced to the deleterious effects of continual
population growth and financial management in the
economy.
5.2 RECOMMENDATIONS
Based on the research findings, the following
recommendations are proffered;
(i) Efforts should be geared by government towardsencouraging the adoption of family planning
strategies as a means of stemming the current
growth in population.
(ii) In a bid to attract greater foreign inflows,adequate efforts should be made to mobilize the
desired gross national savings towards raising
capital formation to a level needed for industrial
growth.
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(iii) Greater government expenditure should beploughed into productive economic, consumption
and capital infrastructure in promoting real sector
investments and industrial acceleration in the
economy.
(iv) In order to enhance and maximize the impact ofgross domestic product growth, greater proportion
of our annual national income should be invested
in productive capital goods.
(v) The monetary authorities and government shouldinitiate and sustain policies that are necessary or
needed to fast track growth in foreign inflows,
increase domestic savings and in the overall
macroeconomic management of the economy.
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5.3 CONCLUSION
In order to combat the growing spat or trend of
unemployment in Nigeria, the following remarks are made
from the overall observations above:
(i) That government expenditure is a poordeterminant of unemployment in Nigeria, owing to
corrupt financial practices and mismanagement
(ii) Foreign direct investment inflow is the mostgermane or important determinant of
unemployment in Nigeria.
Overall, therefore greater and consistent
foreign inflows should be sourced on the bases of
the right policy framework and directed or piloted
into industries and sectors that would bring
about optimost growth in the economy and with
high labour absorption capacity ,while also
optimizing on the rightful use of governments
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revenue or expenditure in the provision of
economic infrastructures in enhancing capital
formation and growth in gross domestic product
towards generating employment in Nigeria.
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