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Relationship between the Economy, Construction Sector and Imports in

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Article  in  International Journal of Construction Management · December 2020

DOI: 10.1080/15623599.2020.1863173

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 Relationship between the Economy, Construction Sector and Imports in Nigeria

Abstract
Increase in construction output through infrastructure development increases economic
development. However, construction sectors in developing countries are import-dependent,
and current knowledge has suggested that the dependence needs to be reduced to enhance the
sector’s contribution to economic development. To demonstrate that this knowledge is
applicable in the Nigerian construction sector, this study was aimed at establishing a
relationship between economic development, construction sector output and imports using time
series data covering a forty-seven-year period (1970-2016). The study used econometric
methodology involving tests for stationarity, cointegration, causality and exogeneity. From the
findings, the evaluation of the relationship between the economy and construction sector output
produced a linear relationship when construction sector import was excluded from the analysis,
and when it was included, the construction sector output Granger cause construction sector
imports. The study concluded that relationship between the economy and construction sector
output has an impact on construction sector import in Nigeria. The implication was that
economic and construction production policies could be employed to influence construction
sector imports in Nigeria, and other developing countries whose construction sectors are
import-dependent.
Keywords: Construction Sector, Econometrics, GDP, Imports

INTRODUCTION
The construction sector (CNS) encompasses all practices and methodologies that are employed
for producing building and engineering facilities in the built and urban environment. This
sector makes significant contributions to other sectors in an economy through backward and
forward linkages to power, retail, manufacturing and aviation sectors (Giang et al., 2011;
Polenske et al., 1990; Saka et al., 2010). Through backward linkage, the construction sector
requires non-construction sector inputs such as steel building materials for the production of
built facilities (Ali et al., 2019). Also, a forward linkage is created when built facilities are used
as inputs in non-construction sectors. A typical example is an office building for workers in a
refinery project in the power sector. Due to the backward and forward linkages, the
construction sector is inextricably linked to economic development. Economically, the sector
contributes on the average about 10 per cent to employment, 50 per cent to the Domestic Fixed
Capital (DFC) formation and 10 per cent to the gross domestic product (GDP) in developing
countries (Ofori, 2007, 2012). The construction sector is also notable for its negative impacts.
For instance, construction activities such as building maintenance (Steger et al., 2011) consume
about 40 per cent of materials produced globally (Krausmann et al., 2009).

The background to this study is the economy, construction sector and imports in Nigeria. The
state of physical infrastructure (e.g. buildings, roads, airports, seaports, railways and utility
systems) in Nigeria is generally poor, inadequate, unreliable and unevenly distributed. As a
result, the majority of Nigerians have little access to essential utilities (Akinwale, 2010). Only
30 per cent of Nigerians have access to electricity and safe water (Blimpo et al., 2019; Egbinola,
2017). The transport infrastructure, comprised of road, rail, air and water transport systems, is
in a deplorable condition (Emovon et al., 2018). In terms of housing, the nation has about a 17
million housing deficit, and the rate of homelessness continues to grow along with population
growth (Ewurum et al., 2020). According to estimates, the Nigerian infrastructure deficit is
more than US$200billion (Bello-Schünemann et al., 2017), which is more than the annual
budgetary provision in the country. In the next three decades, the infrastructure deficit will rise
to $3 trillion (Amucheazi et al., 2020).

As an oil-producing nation, Nigerian earnings during the oil boom in the 1970s was very high,
but unfortunately, did not result in commensurate investment in public infrastructure. At the
same time, the real exchange value increased by over 100 per cent between 1973 and 1978
(Aliyu, 2001; Babatunde et al., 2019; Shehu Usman Rano, 2007). This limited the international
competitiveness of the country due to increased import demand; by a value greater than oil
earnings. To compensate for the imports, the Nigerian government borrowed about $570
million annually during the period (Amaeteng et al., 2002). Consequently, from 1976,
expenditures outpaced revenue, and the economy fell into recession in 1982 following the
collapse of the international commodity market (Iyoha, 2007). Owing to the deterioration of
the economy, pressure from the International Monetary fund (IMF) and the World Bank, the
Nigerian government adopted the Structural Adjustment Programme (SAP) in 1986. The
programme proposed and implemented measures such as deregulation of the exchange rate,
trade liberalisation, and deregulation of the financial sector (Ismaila, 2016). Other proposals
were rationalisation and privatisation of state-owned enterprises (SOEs) and the adoption of
appropriate domestic pricing policies for petroleum products (Ismaila, 2016). Despite the SAP,
the structure of Nigeria’s foreign trade has remained unchanged. The importation of capital
and intermediate goods, raw materials and consumer items has continued to rise. The
proportion of import in the GDP has varied between 5.2 per cent and 39.2 per cent between
1970 and 2016 (Ismaila, 2016; Mosley, 1992). Hence, Nigeria has remained an import-
dependent economy to date.

In many developing countries, basic construction material inputs are imported. The reliance on
foreign inputs has a strong tendency to affect the imports and balance of payments (BOP)
(Rashidin et al., 2017; Santos‐Paulino et al., 2004). Like other developing economies in
Africa (Chen et al., 2009), the Nigerian construction sector activities are heavily dependent on
foreign inputs, including expertise, machinery/equipment and materials. Consequently,
infrastructure development has been import-dependent (Okolo et al., 2018; Ukwu et al., 2002)
with potential impacts on the balance of payments and the value of the local currency in Nigeria
(Akinwunmi et al., 2018). In economic terms, the increase in construction outputs through
infrastructure development leads to increase in economic development (Giang et al., 2011).
This is to restate the relationship between construction output and economic development.
Meanwhile, the construction sector in developing countries like Nigeria is import-dependent.
However, the impact of the imports (or import-dependency) in the relationship between
construction output and economic development is not yet understood in developing country
contexts. Therefore, this study established a relationship between economic development,
construction sector output and imports in Nigeria.

In the investigation, three concepts are crucial. The first one is the gross domestic product
(GDP), which is the aggregate monetary value of final goods and services produced in a country
within a given year (Oude, 2013). The second one is the construction sector output. It is the
output of general and special trade contractors primarily engaged in construction contracts,
including buildings, roads, bridges, ports, harbours and other civil engineering works (Ahmad
et al., 1992). The third one is the value of imports. It refers to merchandise, transport,
communication, insurance services, miscellaneous goods and services sourced from foreign
production (Adamu, 1996). This investigation revealed the interrelationship among these
concepts using econometric techniques. The significance of this study is the revelation of the
construction sector strategy for both import control and economic development in Nigeria. The
theoretical significance is establishing imports (or import-dependency) as a variable for
explaining the relationship between construction output and economic development. The paper
is structured into seven sections: introduction, literature review, methodology, empirical
estimation, discussion, conclusions and recommendations.

LITERATURE REVIEW
Construction and imports
The government aims to manage the economy to achieve GDP growth, reduce unemployment,
stabilise price level and to keep the BOP at least in equilibrium. However, managing the
difference in total value between payments in and out of a country over a period can be very
challenging. When there is economic growth, importation increases due to increased incomes
(Akamatsu, 1962; Veeramani, 2009). Also, during economic growth, an increase in
construction and manufacturing necessitates an increase in the importation of inputs
(Kronenberg et al., 2012). In such circumstances, the role of the government is to manage
imports through fiscal and monetary policies to ensure an equitable BOP (Eshag, 1983; Okoro
et al., 2017). The government may try to restrict growth and weaken demand when there is
high importation and imbalanced BOP. Often, this is achieved by reducing government
expenditure, which consequently affects construction investment, and increasing tax on
employment, income and goods (Fasanya et al., 2018; Médici et al., 2015). The government
can also increase tax rates for private enterprises. Increased tax discourages the importation of
construction inputs (Hafez et al., 2020).

Previous studies revealed the dependence between the construction sector output and imports.
Following a multi-regional input-output analysis, Hung et al. (2019) revealed that an increase
in the importation of manufactured goods overseas decreased the influence of the construction
sector in stimulating economic growth from 1.74 output units in 1995 to 1.55 units in 2013 in
Hong Kong. The study estimated that 1.11-1.19 units of output leaked out through imports,
mainly flowing to China – the leading trading partner to the country. The overarching effect on
the economy was evaluated in the study. A decrease of 10.92% in economic growth between
1995 to 2013 was reported, and a declining influence of the construction sector on the economy
of Hong Kong was concluded. Based on the analysis of construction embodied energy
consumption in forty-one countries, using primary energy consumption data from 1995 to
2009, Liu et al. (2018b) reiterated the dependence of the construction sector on international
trade. Particularly in emerging economies like China, Russia and India, the reason for the
import dependence in the construction sectors was their limited production efficiency in energy
application (Liu et al., 2018a, 2018b). While a careful interpretation of these studies is advised,
given the decade-old data used for analysis, similar findings reported in Ayebeng Botchway et
al. (2019) revealed that poor production management was responsible for limited use of the
locally produced pozzolana cement in Ghana. Using more recent data between 2000 to 2018 in
Uzbekistan, Ravshan Nurimbetov et al. (2020) revealed an increase in the importation of
construction inputs in the country. Despite increasing business opportunities for small
enterprises to engage in the importation business, the negative impact was the high cost of
construction due to the high cost of imported construction inputs (Ravshan Nurimbetov et al.,
2020). High costs associated with imported construction inputs is increasingly considered in
relative terms. As demonstrated in Hafez et al. (2020) regarding flying ash importation to meet
Ordinary Portland Cement replacement in the UK, the environmental impacts of construction
inputs need to be considered relative to the costs; costlier input with less environmental impact
is preferred in flying ash importation. With increasing globalisation, energy consumption will
become an important determinant in the construction sector importation (Liu et al., 2018c), and
these new studies will be useful (Hou et al., 2020; Yang et al., 2019).

Like other developing and emerging economies, the Nigerian construction sector is strongly
dependent on the importation of inputs such as machinery and materials. Stanley et al. (2014)
revealed that up to 65% of construction materials were imported in Nigeria. A study by Olatunji
et al. (2018) revealed that the dependence is often experienced in the cost of imported
construction materials such as cement and steel products. For instance, changes in pump prices
of fuel products exacerbated by fall in foreign exchange rates and fuel availability issues in
Nigeria affect the cost of these materials, and subsequently, the cost of projects. The study has
only been able to reveal preliminary issues pertaining to construction sector imports in Nigeria.
Research demonstrating greater economic implications of the dependence between
construction sector outputs and imports in Nigeria is still lacking. For instance, accumulation
of physical assets (e.g. buildings) and working capital is deemed necessary for economic
development (Schatz, 1968). Also known as capital accumulation, it has become an acceptable
means of accelerating economic development in developing countries through investments in
physical infrastructure. Consequently, many studies have explored the links between
construction output and economic development in developing countries and more broadly (see
next section). In the attempt at enhancing economic development through investment in
physical infrastructure (capital accumulation), the importation of construction inputs creates an
economic situation that is yet to be understood in the Nigerian context. To date, what we know
is a mix of negative and positive results that is only relevant to other developing or emerging
countries like Hong Kong, Malaysia and Singapore (Tan, 2000; Veerasanai et al., 2020; Yiu et
al., 2004), and not Nigeria. On the negative side, a capital accumulation that relies on
importation of inputs and expertise lowers the construction sector contribution to economic
growth. On the positive side, capital accumulation involving the influx of foreign expertise can
increase the expertise and competitiveness of local professionals and firms through
collaborative working arrangements and local content policies of the government. Meanwhile,
there is a lack of specific government policies supporting construction sector growth in Nigeria
(Dosumu et al., 2020). To make appropriate construction policies that enhance economic
development, a study evaluating the dependence between the construction sector output and
imports, and the economic implication of the dependence, is necessary in Nigeria.

Construction and economic development

For several decades, the link between construction and economic development has been
established in many studies (Ahmad et al., 2019; Giang et al., 2011; Tan, 2002). In the United
Nations International Development Organization (1969)’s study, the construction sector
accounted for 3-5 per cent of the GDP in developing countries, and 5-9 per cent in developed
countries. However, due to increased infrastructure investments, particularly in China and
India, it appeared the tide had turned, as recent research showed that the construction sector
accounted for 8 per cent of GDP in developing countries, while it remained at 5 per cent
contribution to the GDP in developed countries (Deloitte, 2018; Mito, 2019). The 1969’s study
further revealed that the construction sector represents 45-60 per cent in most economies
(irrespective of whether it is a developed or developing economy). Future projections estimated
the construction sector contribution to GDP to be 13 per cent in 2014 and this will rise to 14.7
per cent by 2030 (Andrés Mella et al., 2018). Furthermore, the 1969’s study revealed that the
construction sector accounted for 6-10 per cent of total employment in developed countries and
accounted for only 2-6 per cent in developing countries. These estimates have increased over
time. For instance, recent evidence revealed that the construction sector contribution to total
employment is around 7 per cent worldwide (Mito, 2019), around 8.2 per cent in Europe (Baker
et al., 2017) and around 11.2 per cent in low-income countries (LIC) (Andrés Mella et al.,
2018).

Many studies did document the relationship between construction output and economic
development. A particular one with strong implications in the developing country context is
Turin (1973). Using cross-sectional data in 87 low-income countries (LIC) and middle-income
countries (MIC) over a period between 1955-1965, the study found that a positive and
significant linear correlation between GDP and construction sector valued-added and
construction sector gross output. The first reason is that as economics transition from LIC to
MIC, the construction sector grows faster, leading to “middle-income bulge” (Jiang, 2013;
Strassmann, 1970). The analysis of Jiang (2013) revealed that the construction share of GDP
in developing countries like China with low GDP per capita tends to grow faster than richer
economies like the UK, due to lower diminishing returns. The second reason is that developing
countries have the luxury of replicating best production practices, methodologies and
technologies in developed countries, for their own development (Jiang, 2013; Oliete Josa et al.,
2018). For instance, the Nigerian government is currently relying on German technology to
revamp and upgrade the power sector infrastructure in the country through Siemens AG
multinational conglomerate company (Zyl, 2020). The third reason references the action of the
Chinese government. As a developing economy, Jiang (2013) revealed that the Chinese
government channelled greater efforts at implementing industrial policies such as the Chinese
Economic Stimulus Plan in 2008 to stimulate infrastructure development in the economy. A
similar one in Nigeria is the Economic Recovery and Growth Plan (EGRP), whereby massive
infrastructure development was one of the key areas proposed for stimulating economic
development since April 2017 (Olanipekun et al., 2019; Ugwueze, 2018).

Consequently, because of the reasons above, as the GDP increases, construction sector output
and construction value-added constitute an increasing proportion of GDP (Oshodi et al., 2020;
Wells, 1984). But when the economy matures, the GDP growth tapers off, and the need for
infrastructure becomes less severe or eliminated (Maddison, 1987; Ozkan et al., 2012; Yiu et
al., 2004). Studies from other countries confirm the relationship between construction activities
and economic development. Ofori (1988) found that construction sector activities increased
economic development in Singapore. Green (1997) revealed that the residential part of the
construction sector Granger caused GDP. Also, using data from 1985-1995, Tse et al. (1997)
found that GDP growth translated to increased construction sector activities in Hong Kong.
Based on construction investment demand function, a recent study revealed that the GDP had
a significant impact on the construction sector in both short and long run in Nigeria
(Olanipekun et al., 2019). Conventional (Bon, 1988, 1992, 2000, 2001) and contemporary
studies (Jiang, 2013; Osei et al., 2017) reveal that the interdependence between construction
and economic development is not static or non-linear. The studies conclude that the
construction sector is consistent with the inverted U-shaped relationship economic system
whereby an economy initially develops from LIC to MIC and eventually to the high-income
economy (HIC). This includes the construction sector share in the total GDP and total
construction sector volume. The impact of the GDP in the relationship between construction
sector activities and imports in Nigeria will also be evaluated empirically in this study.

CONCEPTUAL FRAMEWORK
The literature review confirmed the economic postulation that an increase in construction
output through infrastructure development leads to increase in economic development. The
review also revealed that the construction sector in developing countries like Nigeria is import-
dependent. Current knowledge suggested that the construction-sector dependence on imports
needs to be reduced (or eliminated) to enhance the sector’s contribution to economic
development (See (Hung et al., 2019)). However, there is no empirical evidence to show that
the current knowledge is applicable in the construction sector in Nigeria, despite being an
import-dependent country. To provide empirical evidence, this study conceptualised that the
importation of inputs and expertise in the construction sector has an impact on the relationship
between construction output and economic development in Nigeria. The conceptual framework
is illustrated in Figure 1 and was tested using the longitudinal data and econometric
methodology. The gross domestic output (GDP), construction sector output (CNS) and value
of imports (IMP) are the three concepts that were tested and are illustrated in the framework.
The concepts were previously defined in the introduction section.

Imports (IMP)

Importation of
construction inputs
& expertise
Import-based (IMP)
Construction output (CNS) and economic CNS & GDP relationship
development (GDP) are related
?
Figure 1: Illustration of the conceptual framework

METHODOLOGY
This study used an econometric methodology to evaluate the relationship between the
economy, construction sector and imports in Nigeria. This study adopted Sims (1980)’s Vector
Autoregression (VAR) to evaluate the relationship. The VAR is based on the multivariate time
series analysis (MTSA). The VAR model is very useful for describing the dynamic behaviour
of economic and financial time series data through forecasting and structural inferences
(Patterson, 2000). In addition, by performing the Granger representation theorem, VAR can
easily be transformed into the Vector Error Correction Model (VECM). When I(1) variables
cointegrate, formulating the VAR model in first difference is inappropriate. The correct model
is a cointegrated VAR in levels or a VECM i.e. a VAR in first differences together with the
vector of cointegrating residuals (Robertson et al., 1997). The VAR/VECM techniques involve
several sequential econometric tests and procedures, which include unit root, cointegration,
causality and exogeneity tests.
Time Series Data
Time series data on construction sector (CNS), gross domestic product (GDP) and imports
(IMP) in Nigeria were extracted from the United Nations Statistical Department (UNSD)
database. The data covered a forty-seven (47) year period (1970-2016), and it was based on a
constant 2010 US dollar price. In Nigeria, the current government was democratically elected
in 2015. It had its first budget with a significant infrastructure investment promise in 2016.
Before this time, the government had not prioritised infrastructure investment with the proceeds
from oil earnings due to corruption that dates back to the 1970s. Results of the analysis of data
obtained will therefore be useful to the new government in their attempt to prioritise
infrastructure investment in Nigeria.

Test for Stationarity (Unit Root Analysis)

The study tested the stationarity of all the time series data. This is because the VAR model is
suitable when the time series data are stationary. If the series is not stationary, the vector error
correction (VEC) model is used instead. Cointegration analysis requires that the variables under
consideration be integrated in the same order. Hence it is necessary to undertake unit root tests
before the cointegration test (Ghirmay, 2004). Time series models are based on the notion that
the series to be forecasted has been generated by a stochastic (or random) process with a
structure that can be characterised and described. If so, it is assumed that each value in the
series is drawn randomly from a probability distribution. If the underlying stochastic process
that generates the series can be assumed to be invariant with respect to time, the process or
series is non-stationary. If the stochastic process is fixed in time, the process or series is
stationary. Stationary series can be modelled via an equation with fixed coefficients that can
be estimated from past data (Pindyck et al., 1981). The formal method to test the stationarity
of a series is the unit root test. The study employed the Augmented Dickey-Fuller (ADF) test
(Cheung et al., 1995; Dickey et al., 1979) and Philips-Perron (PP) tests (Cheung et al., 1997;
Phillips et al., 1988) to test for the unit root of the time series data.

Cointegration Test
Regressions based on trending time series data may be spurious (Kao, 1999; Noriega et al.,
2007). The problem of spurious regression led to the concept of cointegration (Granger, 2001;
Hylleberg et al., 1990). The earliest cointegration test consists of estimating the cointegrating
regression by ordinary least square (OLS), obtaining the (estimated) residuals ut and applying
unit root tests for ut (Engle et al., 1987). Several extensions of this residual-based test have
been proposed. Two-time series data are said to be cointegrated when both are non-stationary,
but their linear combination is stationary (Engle et al., 1987). The stationary linear combination
is called the cointegrating equation and may be interpreted as a long-run equilibrium
relationship between the time series data. The cointegration test is performed with a VAR
cointegration test, using the methodology developed by (Johansen, 1988, 1991) and Johansen
et al. (1990).

Causality and Exogeneity Test

Causality concerns actual links between series in the system, whereas exogeneity is the
property of being ‘determined outside the system under analysis. Thus, it concerns the analysis
of models conditional on putative exogenous variables without loss of relevant information.
The concepts of weak, strong and super exogeneity relate to contemporaneous explanatory
variables to parameters of interest, to sustain valid conditional inference, forecasting, and
policy analysis respectively (Hendry, 1980).
Granger Causality Test
The Granger causality test is a statistical hypothesis test for determining whether one-time
series is useful in forecasting another. Granger (1969) found that there is an interpretation of a
set of tests that reveals something about causality. Granger causality is a strictly linear
prediction and only useful if one thing happens before another. Testing for Granger causality
is carried out by testing for the significance of past values of the dependent variable in the
marginal equation. The test is designed to handle pairs of variables and may produce
misleading results when the true relationship involves three or more variables. However,
conclusions drawn from this test are affected by the number of lags, the sample period, choice
of variables, and invalid weak exogeneity assumptions (Desai et al., 1997). There are special
problems with testing for Granger causality in cointegrated relations. The empirical findings
of Granger causality, or its absence, need not entail an actual link (or its absence) in the data
generating process once non-stationarity is allowed (Toda et al., 1994).

The weak exogeneity in a cointegrated system is a notion of long-run causality (Hall et al.,
1994). However, Wickens (1996) noted that for the restrictions to be meaningful, the
adjustment coefficients or the loading factor, which simply measures the speed of adjustment
of variables, must be statistically significant and their signs must be negative. Becker et al.
(2004) asserted that a weak exogeneity is simply a variable in a cointegrated system that does
not respond to discrepancy arising from long-run relationship. In other words, a variable is
weakly exogenous if the coefficient of the speed of adjustment is zero i.e. α=0, and this
indicates that there is no feedback response from the system. Thus a test of zero restriction (i.e.
α=0) is a test of weak exogeneity (Johansen, 1992; Johansen & Julius, 1992). Hall et al. (1994)
have shown that the long-run causality is more efficient because it does not require a two-steps
procedure of estimating the cointegration relationship and the test of non- causality in VECM
framework. Luintel et al. (1999) suggested that long-run causality is slightly different from the
normal Granger causality as it does not consider the short-run dynamics. Weak exogeneity
requires the parameters of conditional and marginal models to be variation free, and the former
to provide the parameters of interest (Hendry, 1980). Strong exogeneity is the joint hypothesis
of weak exogeneity and Granger’s non-causality, as it combines weak exogeneity with Granger
non-causality. Strong exogeneity requires weak exogeneity and the absence of Granger
causality (Cerqueira, 2009; Hendry, 2004). The concept of super exogeneity combines weak
exogeneity and the invariance of conditional parameters to interventions, changing marginal
parameters (Hendry, 1980). The various tests of exogeneity are important because weak
exogeneity is needed for estimation purposes and for testing, strong exogeneity for forecasting,
and superexogeneity is required for policy analysis (Caporale et al., 1996).

Model Specification
The Vector Error Correction Model (VECM) for this study is specified as follows:
r r r
LCNSt = 1 +  11 p LCNSt − p +  12 p LIMPt − p +  13LGDPt − p + 11ECTt −1 + 1t
i= p i= p i= p (1)
r r r
LIMPt = 2 +  21 p LIMPt − p +  22 p LCNSt − p +  23LGDPt − p +  21ECTt −1 +  2t
i= p i= p i= p (2)
r r r
LGDPt = 3 +  31 p LGDPt − p +  32 p LCNSt − p +  33LIMPt − p + 31ECTt −1 +  3t
i= p i= p i= p (3)
Where t = 1,…,T denotes the time period; t is assumed to be serially uncorrelated error term; ECT is the lagged
error-correction term derived from the long-run cointegrating relationship.

For these models, a test of α =0 is a test for long-run weak exogeneity test. Thus, if the null
hypothesis α11=0 is rejected, then the construction sector output (CNS) is not weakly exogenous
to the imports (IMP) and the economy (GDP). This means that IMP and GDP may cause the
CNS in the long-run. If, on the other hand, the null hypothesis α21=0 is rejected, then the IMP
are not weakly exogenous to the CNS and the GDP, indicating that the CNS and the GDP may
cause the IMP. And if α31=0 is rejected, then the GDP is not weakly exogenous to the CNS and
the IMP, indicating that the CNS and the IMP may cause the GDP. Similarly, the long run
strong exogeneity test involves the joint test of α=β=0. Thus, if α11=β12=0, then the IMP
significantly causes the CNS in the long run. If α11=β13=0, then the GDP significantly causes
the CNS in the long run. If α21=β22=0 is rejected, then the CNS significantly causes the IMP in
the long run. If α21=β23=0 is rejected, then the GDP significantly causes the IMP in the long
run. If the α31=β32=0 is rejected, then the CNS significantly causes the construction sector in
the long run. And if α31=β33=0 is rejected, then IMP may cause the GDP in the long run.

EMPIRICAL ESTIMATION
Line Graph
The line graph indicated that the three series moved in a diagonal pattern between 1970 and
2016. The imports graph follows a zigzag pattern.

5E+11

4E+11

3E+11

2E+11

1E+11

0E+00
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

CNS GDP IMP

Descriptive Statistics
Table 1 presented the descriptive statistics of the variables. The mean and standard deviation
of the time series data include construction sector (CNS) (5.82x1009; 4.14x1009), gross
domestic product (GDP) (1.86x1011; 1.21x1011), and imports (IMP) (2.44x1010; 1.59x1010).
The GDP is the largest while the construction sector (CNS) is the smallest.
 Table 1descriptive statistics of CNS, GDP and IMP
CGD CNS GDP IMP
Mean 0.032595 5.82E+09 1.86E+11 2.44E+10
Median 0.027305 4.30E+09 1.35E+11 1.86E+10
Maximum 0.057143 1.78E+10 4.64E+11 6.42E+10
Minimum 0.020580 2.23E+09 6.17E+10 5.70E+09
Std. Dev. 0.010133 4.14E+09 1.21E+11 1.59E+10
Skewness 0.781375 1.732029 1.105754 0.977693
Kurtosis 2.399106 4.920441 2.836575 2.930679
Jarque-Bera 5.489721 30.72192 9.630053 7.497168
Probability 0.064257 0.000000 0.008107 0.023551
Sum 1.531980 2.74E+11 8.76E+12 1.15E+12
Sum Sq. Dev. 0.004723 7.90E+20 6.75E+23 1.16E+22
Observations 47 47 47 47

Estimates of the Unit Root Test

The null hypothesis of no unit root for the time-series data in raw and natural logarithm in level
form, with and without time trend, is rejected at all conventional levels of significance (i.e. 0.1,
0.05 & 0.01%) for the ADF and PP test statistics associated with the numerical coefficients of
CNS, GDP and IMP. Thus, all the time-series data have unit root and are known as random
walk time series (an example of non-stationary time series). The time series data are then
transformed into their first difference and the unit root tests re-run, the ADF and PP tests
statistics then reject the hypothesis of a unit root at 5 percent level of significance, indicating
stationarity after first difference (i.e. I(1) ). Table 2 shows the MacKinnon (2010)’s one-sided
p-values associated with the ADF and PP tests performed with the raw/natural logarithm as
well as level and first difference of the time series data. Thus, the result suggested that the
causality should be carried out in the first differences of the time series data.

Table 2 with ADF and PP at level and first difference

ADF at level ADF at 1st difference PP test at level PP test at 1st difference Conclusion
No trend With trend No trend With trend No trend With trend No trend With trend

CS 0.7484 0.7312 0.0859 0.1312 0.9997 0.9978 0.0705 0.2238 I(1)

GDP 0.9897 0.9005 0.0880 0.0975 1.0000 0.9943 0.1024 0.1178 I(1)

IMP 0.4733 0.1464 0.1198 0.3491 0.4393 0.7225 0.0000 0.0001 I(1)

LCNS 0.8693 0.8287 0.0075 0.0305 0.9554 0.9469 0.0075 0.0305 I(1)

LGDP 0.9860 0.8200 0.0005 0.0023 0.9700 0.8847 0.0006 0.0023 I(1)

LIMP 0.2153 0.4077 0.0000 0.0003 0.5267 0.8039 0.0000 0.0003 I(1)

Estimates of the Cointegration Test

Table 3 shows the estimates of the cointegration tests, according to Johansen (1988, 1991) and
Johansen & Juselius (1990) models. The estimates include the hypothesised number of
cointegrating equations (CE(s)), the eigenvalues, trace and Max-eigenvalues statistics. The
Table also shows the 0.05 critical values and the corresponding p-values for the rejection of
the cointegration relationships. The summary of the result showed that both trace and max-
eigenvalue tests indicate one (1) cointegrating equation at the 0.05 level. Thus, the Johansen
cointegration test rejects the null hypothesis that the CNS, GDP and IMP are not cointegrated.
Since cointegration exists, then it is inferred that there is a long–term equilibrium
contemporaneous relationship between the time-series data and that they have a common trend.
The establishment of cointegration ruled out the possibility of a spurious relationship between
the time series data and suggested that a causal relationship must exist in at least one direction.

Table 3 Cointegration Test

Max-Eigen 0.05 Prob.**
Hypothesized Trace 0.05Critical Statistic Critical
No. of CE(s) Eigen value Statistic Value Prob.** Value
None * 0.403613 33.61696 29.79707 0.0173 21.70834 21.13162 0.0415
At most 1 0.238569 11.90862 15.49471 0.1614 11.44733 14.26460 0.1332
At most 2 0.010923 0.461293 3.841466 0.4970 0.461293 3.841466 0.4970
Both Trace and Max-eigenvalue tests indicate 1 cointegrating eqn(s) at the 0.05 level

VAR lag Selection

The appropriate lag for the VAR/VEC model was selected through the conventional VAR lag
selection criteria including Loglinear ratio (LR), final prediction error (FPE), Akaike
information criterion (AICs), Schwarz information criterion (SICs), Hannan-Quinn (HQ). The
result indicated that only SIC selected lag 1, LR, FPE and HQ selected lag 2, and only AIC
selected lag 3. Thus, the most appropriate lag for the VAR/VEC model is lag 2.

Table 4 VAR lag order selection criteria for series LIMP, LCNS and LGDP
Lag LogL LR FPE AIC SIC HQ
1 112.1120 NA 1.66e-06 -4.795906 -4.427283* -4.659969
2 126.4729 24.71414* 1.30e-06* -5.045252 -4.308005 -4.773378*
3 133.4904 11.09741 1.44e-06 -4.953041 -3.847171 -4.545231
4 144.8102 16.32163 1.33e-06 -5.060941* -3.586448 -4.517193
* indicates lag order selected by the criterion

Estimates of Causality and Exogeneity Tests

The short-run causality estimates are presented in Table 5. The estimates indicated that the
logarithm of gross domestic product (LGDP) significantly Granger cause the logarithm of the
construction sector (LCS) and logarithm of imports (LIMP) with χ=2.951026; p-
value=0.085823 and χ=2.951026; p-value=0.085823 respectively in the short run. All other
relationships in the system have no significant short-run causality. In other words, there is no
significant short-run Granger causality between LCNS and LIMP (Table 5). The long-run weak
exogeneity estimate provided statistical evidence that both the LGDP and LIMP are exogenous
in the system with χ=1.557669; p value= 0.212007 and χ=0.016419; p-value=0.898041
respectively; while the LCNS is endogenous in the system χ=2.897468; p-value=0.088719.
Thus, the LGDP and LIMP significantly causes the LCNS in the long run in the system (Table
5). The long-run strong exogeneity tests estimate indicated that the all conceivable null
hypotheses cannot be rejected at 0.1 level of significance, except LGDP→LIMP and
LCNS→LIMP. Thus, both the LGDP and the LCNS have a significant effect on the LIMP in
the long run (Table 5).
Table 5 Causality and Exogeneity test
Null hypothesis Chi-square(1) Probability
Granger causality
LGDP→ LCNS B23=0 2.951026 0.085823*
LCNS→ LGDP B32=0 2.489612 0.114600
LIMP →LCNS B21=0 1.300852 0.254058
 LCNS →LIMP B12=0 2.489612 0.114600
LIMP →LGDP B31=0 2.190334 0.138879
LGDP →LIMP B13=0 2.951026 0.085823*
Weak exogeneity test
LIMP α11=0 0.016419 0.898041
LCNS α12=0 2.897468 0.088719*
LGDP α13=0 1.557669 0.212007
Strong exogeneity test
LGDP→ LIMP B13= α11=0 8.819193 0.012160**
LCNS →LIMP B12= α11=0 4.716639 0.094579*
LGDP →LCNS B23= α12=0 2.961193 0.227502
LIMP →LCNS B22= α12=0 3.051404 0.217468
LCNS →LGDP B32= α13=0 2.491577 0.287714
LIMP →LGDP B31= α13=0 2.644020 0.266599

DISCUSSION OF RESULTS
Although the relationship between the economy (i.e. GDP) and the construction sector output
(CNS) is well documented, there is very little known about the relationship between the
construction sector output (CNS) and imports (IMP) in a developing economy context.
Therefore, this study filled the gap in the Nigerian context using econometric methodology.
The impact of the GDP in the relationship between CNS and IMP was also evaluated. The
estimates of the short-run granger causality indicated that the GDP has a significant short-run
causal effect on both the CNS (χ=2.951026; p-value=0.085823) and IMP (χ=2.951026; p-
value=0.085823). Also, the results of the long run weak exogeneity tests implied that the GDP
(GDP: χ=1.557669; p-value=0.212007; IMP: χ=0.016419; p-value=0.898041) significantly
causes the CNS (χ=2.897468; p-value=0.088719) in the system in the long run. The short and
long-run impact of the GDP on CNS revealed in this study agreed with many studies from the
Nigerian context (Olanipekun et al., 2019; Ukwu et al., 2002) and other contexts (Ahmadi et
al., 2017; Ofori, 1988; Tse et al., 1997). Meanwhile, the results pointed to a linear relationship
between the GDP and CNS. It meant that both the GDP and CNS were increasing in the same
proportion for forty-seven years until 2016 in Nigeria. On the accounts of seminal studies Bon
(1988, 1992, 2000), Yiu et al. (2004) and Jiang (2013), the linear relationship meant that the
Nigerian economy was static for the period analysed. For the current 2021 fiscal year, Nigeria
remains an LIC according to World Bank classification (World Bank Group, 2020), an
economic status it has maintained since the 1980s. To introduce context, a non-linear
relationship between GDP and CNS over the period analysed would indicate Nigeria’s
economy had transitioned from LIC to HIC, where diminishing construction sector output is
logical and acceptable (Song et al., 2006). Unfortunately, despite being an oil-producing
country, the broader implication is that the Nigerian economy did not transition to a prosperous
economy, even to date.

The estimates of the long run strong exogeneity tests revealed that the CNS significantly causes
IMP (χ=4.716639; p-value=0.094579) in the period analysed. Of note, the results discussed in
the paragraph above also meant that Nigerian construction output was growing in the period
analysed, only linearly with the GDP growth. Therefore, based on the estimates of the long run
exogeneity test, as the construction output (CNS) was increasing (mainly physical
infrastructure), the importation of construction inputs was also increasing. This finding is
consistent with previous studies carried out in emerging countries like Hong Kong (Hung et
al., 2019), India and China (Liu et al., 2018b) while also extending a related study in Nigeria
(Olatunji et al., 2018). To summarise, the findings reiterate the attempts at enhancing economic
development in these countries (including Nigeria) through infrastructure investment. In the
process, construction inputs for infrastructure development were imported as indicated in the
estimates of the long-run exogeneity. Therefore, over the period analysed, the construction
output growth was import-centric and did not lead to an economic transition from LIC to HIC
in Nigeria. In economics, this kind of construction output growth amounts to capital
accumulation (or diminishing development returns) (Schatz, 1968) only. It does not lead to
greater development, as demonstrated in the studies of Tan (2000) and Yiu et al. (2004). The
problem is that capital accumulation promotes the influx of foreign expertise, materials, tools
and equipment at the expense of local learning, expertise and mechanisation; which are key to
strengthening construction output growth (Ball et al., 1987; Song et al., 2006). This is also
partly due to low mechanisation and manufacturing in construction sectors in developing
countries (Hung et al., 2019; Liu et al., 2018b) including Nigeria. Meanwhile, a recent study in
Malaysia has shown that capital accumulation, which permits the local incorporation of foreign
companies, has a positive influence in construction (Veerasanai et al., 2020) thereby extending
Schatz (1968)’s theory. In the past, the participation of Chinese construction companies in the
African construction market has been partly due to the lack of competitiveness of the local
companies (Chen et al., 2009). Presently, the findings in Malaysia reveal that the participation
of foreign firms in the local construction market has elevated the competitiveness of the local
firms to deliver projects better, while creating more jobs in the economy (Veerasanai et al.,
2020). This provides some positive outlook for capital accumulation through the influx of
foreign construction companies in the construction market in developing countries.
Appropriate strategies, which focus on adapting capital accumulation towards efficiency
improvement, should be put in place (Babatunde, 2018; Yiu et al., 2004).

CONCLUSION AND RECOMMENDATION

This study employed an econometric methodology comprising unit root, cointegration,
causality and exogeneity tests to evaluate the relationship between economy, construction
sector output and imports. The study used longitudinal data over a forty-seven-year period
(1970-2016) in Nigeria. As a result, the study revealed the impact of the relationship between
construction output and economic development on the import-dependent construction sector in
a developing country context. The conclusion of the study is presented as follows.

The relationship between the economy and construction sector output that was evaluated with
the exclusion of construction sector imports in the evaluation produced a linear relationship. It
meant that economy and construction sector output were increasing proportionally, which
amounted to static economic development for a period of forty-seven years in Nigeria.
Furthermore, the relationship between the economy and construction sector import that was
evaluated with the inclusion of construction sector imports in the evaluation revealed that the
construction sector output Granger cause the construction sector imports. With the linear
relationship between the economy and construction sector output, the Granger causal
relationship meant that as construction sector output and the economy were growing in the
same proportion, the construction sector import was also growing. The study concluded that
the relationship between the economy and construction sector output has an impact on
construction sector import in Nigeria.

Based on the conclusion, economic and construction production policies can be put in place to
influence construction sector imports. Such policies should be targeted at domestic capital
accumulation to increase the expertise of local construction practitioners. This will reduce
reliance on foreign experts and companies to execute complex infrastructure projects in
Nigeria. The policies should also provide funding to produce local building materials to reduce
dependency on imported materials. The findings in this study are applicable to developing
countries whose construction sectors are import-dependent. Like Nigeria, these countries need
to put in economic and construction production policies to influence construction sector
imports.

This study has a few limitations. The time-series data was sourced from an open-source
database managed by a reputable global organisation (UNSD). The data analysed covered
forty-seven years until 2016. However, findings published in more recent studies in Hong Kong
(developing country context) (Hung et al., 2019) compare very well with those of this study.
This provides some understanding of recent events relating to import-centric construction
output growth in Nigeria. This limitation was mitigated by not focusing on the effect size
observed in the estimates. Instead, recent literature and current happenings were used, to draw
useful inferences from the study. In future, the econometric methodology specified should be
employed to analyse data on the subject from 2017 till date and draw a comparison with this
study. The benefits of capital accumulation (through the importation of construction inputs and
expertise) should also be tested.

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