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IMPACT OF FOREIGN AID ON SAVING IN NIGERIA

BY

OKPANACHI, CHIDUBEM C.
REG. NO: PG/M.Sc/08/49986

DEPARTMENT OF ECONOMICS
UNIVERSITY OF NIGERIA, NSUKKA

SUPERVISOR: MR. O.E. ONYUKWU

JANUARY, 2011.

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TITLE PAGE

IMPACT OF FOREIGN AID ON SANING IN NIGERIA

BY

OKPANACHI CHIDUBEM C.
REG. NO: PG/M.Sc/08/49986

AN M.SC PROJECT SUBMITTED TO DEPARTMENT OF ECONOMICS,

UNIVERSITY OF NIGERIA, NSUKKA, IN PARTIAL FULFILLMENT
OF THE REQUIREMENTS FOR THE AWARD OF MASTER OF
SCIENCE (M.Sc) DEGREE IN ECONOMICS

JANUARY, 2011.

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APPROVAL PAGE

This project has been approved for the award of Degree of Master of Science (M.SC) of
the Department of Economics, University of Nigeria Nsukka.

____________________ ______________________
MR. O.E ONYUKWU PROF C.C AGU
SUPERVISOR Head of Department

____________________ __________________
PROF C.O. T UGWU External Examiner
Dean, Faculty of Social Sciences

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DEDICATION

This project is dedicated to my parents and well wishers for their prayers and
encouragements.

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TABLE OF CONTENTS

Title i

Approval Page ii

Dedication iii

Abstract iv

CHAPTER ONE: Introduction

Background of the Study 1

Statement of Problem 4

Objective of the Study 7

Hypotheses 8

Significance of the Study 8

Scope and Delimitation of Study 9

CHAPTER TWO: Literature Review

Conceptual Framework 10

Theoretical Framework 13

Empirical Literature 18

Limitations of Previous Studies 24

CHAPTER THREE: Methodology

Theoretical Background 27

Model Specifications 29

Justification of the Model 31

Estimation Procedure 31

Data 31

Econometric Software 31

CHAPTER FOUR

Data, Analysis and Result 32

CHAPTER FIVE

Summary, Conclusion and Recommendation 40

References/Appendices

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ABSTRACT
Most developing countries strive to attract foreign aid because of its anticipated efficacy
in fostering economic development in recipient countries. This study examines the impact of
foreign aid on savings in Nigeria, using a two step approach of Engle-Granger procedure in a
co-integration analysis. The study uses time series on a number of macroeconomic variables,
spanning for the period 1970-2009. Secondary data were sourced from Central Bank of Nigeria
(CBN) statistical bulletin (various issues). Results indicate that in the long-run, foreign aid
(ODA), impacts positively on national savings (GNS) and negatively in the short –run. On the
contrary, the long-run effect of foreign direct investment (FDI), on national savings is negative and
positive in the short-run. The variables, gross domestic product (GDP) and interest rate impact positively
on national savings both in the long and short run. The error correction mechanism (ECM), term was
found to be negative and significant, which confirms the existence of a long-run relationship between
foreign aid and savings in Nigeria. Based on the above findings, it is recommended that aid supporting
institutions and policies require much strengthening in order to increase the magnitude of its impact.
Government should also, establish a civil society fund on aid effectiveness, results and accountability to
support the review and independent accountability function of national civil society organizations in aid
effectiveness for results and accountability.

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CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Fundamentally, two opposing views have emerged in development

economics on the topic of macroeconomic effect of foreign aid on savings. On the
one hand, from the early theoretical development, it was learnt that the traditional
pro-aid view, advocated aid on the premise that it complements domestic
resources, eases foreign exchange constraints, transfers modern know-how and
managerial skills, and facilitates easy access to foreign markets, all of which
contribute to economic growth (Chenery and Strout, 1966, Papanek 1972, 1973
etc.). On the other hand, based on the empirical evidence, the radical anti-aid view
criticizes aid on grounds that it supplants domestic savings, worsens income
inequality, funds the transfer of inappropriate technology, finances ineffective
projects, and in general, helps sustain bigger, more corrupt and inefficient
governments in the recipient countries (Griffin and Enos 1970, Weisskoff 1972
etc).

After World War II and until recently, Official Development Assistance

(ODA) from developed countries was the principal source of external finance for
developing countries. The principal aim of foreign aid was to help alleviate
poverty, provide emergency relief, assist with peacekeeping efforts and to increase
infrastructural development. Recent shifts in the global economic and political
environment, notably the collapse of the Soviet Union and surge in private capital
flows to developing countries, have impacted on ODA in a way that has left some

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questioning the viability of foreign aid. In fact, foreign aid to developing countries
declined by one -third in real terms in the 1990s (world bank 1998), perhaps
because donor countries assumed that it no longer achieves its desired objectives.

One of the development challenges facing Nigeria today is how to reduce

the high Poverty level prevailing among her population. At the centre of the
challenge is how the country will sustainably feed her over 140million people.
However, observers’ opinions differ on the efficacy of foreign aid in fast tracking
the process. It is noted that a prominent argument for foreign aid is that it tends to
promote reduction of poverty. The importance of the development challenge of
poverty reduction and hunger is aptly demonstrated as the number one goal of the
eight Millennium Development Goals (MDGs).

Heller and Gupta (2002) express worry about the call by international
community that to enable developing countries achieve the MDGs by 2015, there
should be increase in foreign aid to 0.7 percent of industrialized countries’ GNP
from 0.24 percent of GNP at present. Nevertheless, they argue that a large increase
in aid flows could pose a number of challenges for the poorest countries. For
example, if the industrial world is to be successful in meeting its ODA targets,
financial aid will increase to about $175 billion, slightly more than three times
current levels. To ensure that enhanced ODA is used efficiently in the fight against
global poverty, they argue that donors need to examine closely the different
possible approaches it could take in deciding how to allocate aid, both among
countries and among complementary global poverty reduction programmes.

While there are many reasons for giving foreign aid, a major argument for
such aid is that this assistance will increase the rate of economic growth in
countries, which are recipient of aid. These expectations of aid induced growth

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however have often been unrealistic. The explanation is that aid largely goes to
consumption rather than productive activities which crowd-out domestic savings
and investment.

Recent years have seen a surge in calls for more foreign aid to Nigeria in
order to eliminate the country’s poverty. Developed countries, international
organizations and other Philanthropists have all made renewed pleas for a massive
infusion of development aid to Nigeria. Experts who argued in favour of more aid
are of the view that injecting more foreign aid would materially benefit the people
of the recipient country.

The role of western assistance in alleviating Africa’s extreme poverty depends

on various theories on why Africa is poor of which Nigeria is inclusive.
Economists overtime have insinuated different models of poverty that have
different implications for foreign aid. These include the big push models and
foreign aid, project intervention (education, health and infrastructure), models of
policies and growth as well as aid, institutions and development. Based on these
theories and others, several researchers have examined empirically the impact of
foreign aid inflow on growth as well as savings. Most studies regarding the
connection between foreign aid and growth as well as domestic savings have been
more of panel data analysis or cross country analysis. The main thrust of this study
is to examine this connection in a specific country time series analysis specifically
in Nigeria.

Nigeria is a monoproduct economy, over depending on the oil sector. This

has also been seen to be responsible for deficiency in investment capital in the
country. Amadi (2002) opined, “With oil as the main source of foreign exchange, a
one-product economy must be continuously deficient in investment capital. Oil is

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subject to the vagaries of international capitalism. Therefore, revenue from it must

be subject to serious fluctuations”. The above situation in the country has created
savings and foreign exchange gap. This culminates in a wide gap between the
actual domestic investment fund and the required investment for accelerating
economic growth. So, foreign capital has been regarded as an alternative to
bridging the gap. Consequently, for any country, like Nigeria, with this investment
gap to achieve a desired rate of economic growth, foreign aid has to be given due
consideration. This is because foreign aid provides funds from other parts of the
world to bridge the investment gap.

1.2 STATEMENT OF PROBLEM

A dominant feature of the relationship between industrial and developing

countries since the 1960s is foreign aid. Foreign aid has been a major source of
external finance for the majority of countries in Africa and Asia since they gained
independence.

From a development viewpoint, aid was originally conceived in the post-

world war II environment in the context of a particular “development paradigm”
where poor countries were perceived to be caught in a low-income equilibrium
trap, unable to generate adequate savings to promote capital formation and rapid
growth. At the low €€m of foreign aid. The general belief was that capital from
developed countries was needed to provide the required growth that would make
economic take-off possible. This was the core of the two-gap model of Chenery
and Strout (1966). Although the predominant nature of foreign aid has changed
considerably, from project finance in the 1960s to adjustment support in the 1980s,
its economic importance to recipients has remained considerable.

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The critical role of foreign aid to Sub-Saharan Africa (SSA) was put
succinctly by United Nations Conference on Trade and Development (UNCTAD),
thus: “an increase in official flows of $20 billion could trigger a virtuous circle of
rising national savings and investment and faster growth in SSA. Doubling the
current amount of aid to give a big push to African economies today could end
their dependence within a decade”. This resulted in the commitment by donors and
aid users at the World Summit for Social Development (WSSD) in Copenhagen to
reduce the world population living in extreme absolute poverty by 2015. The
World Bank showed that African economy must grow at an annual rate of 7% if
the preceding is to be achieved. A productive investment of an amount equivalent
to 30% of African GDP each year is required. Given the regions low savings rates
and limited immediate prospects of attracting private capital, this would imply
about 20% increase in African aid budget, assuming the additional resources were
fully invested. Developed countries were to make efforts to raise their level of aid
flows to 0.7% of GNP as soon as possible (World Bank, 2000). Recent discussions
on the effectiveness of foreign aid have focused on Africa because it has received
the greatest amount of aid on a per capita basis of any world region. Nigeria has
received less foreign aid on a per capita basis than other developing countries in
Sub-Saharan Africa (SSA). While average net real Official Development
Assistance (ODA) for African countries in 1990-96 was $52 per person, Nigeria
received just $2.20 per person (Holmgren and Torgney, 1998). As a percentage of
Gross National Product (GNP), net ODA for SSA averaged 14%, while for
Nigeria; it was less than 1%. Nevertheless, aid is still significant to Nigeria, in
particular the agricultural sector, a major recipient of aid. Out of a total net ODA of
$350 million in 1990, about 25% of this went to the agricultural sector. (Herbst et
al., 2001)

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Despite the Copenhagen commitment, aid flows to Nigeria and indeed other
developing countries have been on the decline. In the view of Lensink et al. (2001),
this is simply a manifestation of the frequently proclaimed aid fatigue.

Meanwhile, in Africa, there is a high degree of indebtedness, high

unemployment and absolute poverty .Though foreign aid has continued to play an
important role in developing countries, especially Sub-Saharan Africa, it is
interesting to note that after half a century of channeling resources to the Third
World, little development has taken place. Poor institutional development,
corruption, inefficiencies and bureaucratic failures in the developing countries are
often cited as reasons for the result (Alesina and Dollar, 1998; Furuoka, 2008).

Besides, a wide gap exists between savings and investment in most LDCs
including Nigeria. Without savings there cannot be investment (Umoh, 2003) and
savings equals investments ex-post according to Keynesian view. Keynes
maintains that, on the aggregate, the excess of income over consumption (that is,
savings) cannot differ from the addition to capital equipment otherwise called
gross domestic investment or capital formation ( CBN, 2004; Uchendu, 1993; and
Uremadu, 2006). Savings is therefore a mere residual; and the decision to consume
and the decision to invest between them determine volume of national income
accumulated (rather called gross national savings) in a period (Uremadu, 2006,
2007).

In Nigeria, a Sub-Saharan African (SSA) country, the problem of mobilizing

savings and deposits has always been the bane of economic growth and
development. Savings and investment are very minimal in Nigeria due to high
inflation and constant devaluation of the local currency and this leads to dearth of
credit to the economy (Uremadu, 2006, 2007). As financial resources are a very

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vital factor in economic development, its mobilization will lead to increased capital
formation. Capital formation or gross domestic investment (GDI) requires the
release of domestic goods and services for real asset investment or the import of
resources from outside or, as it is usually the case, a combination of the two
(Uremadu, 2006, 2007; Agu, 1975, 1979, 1981, 1988; Okafor, 1983; Edmister,
1980 and Kevin, 2001).

The average per capita income in the region has fallen since 1970 despite the
high aid flows. This scenario has prompted aid donor agencies and experts to
revisit the earlier discussions on the effectiveness of foreign aid (Lancaster, 1999).
Therefore, the macroeconomic impact of foreign aid on domestic savings in
developing economies remains inconclusive and is worth being studied further.

Hence, the research questions are:

What is the short and long run impact of foreign aid on domestic savings in
Nigeria?

What is the impact of other macroeconomic variables such as gross domestic

product (GDP), interest rate, and foreign direct investment(FDI) on national
savings in Nigeria?

1.3 OBJECTIVE OF THE STUDY

The broad objective of this study is to find the macroeconomic impact of

foreign aid on domestic savings.

Specifically, the study intends to:-

Find the short run and long run impact of foreign aid on domestic savings in
Nigeria.

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Determine the impact of gross domestic product (GDP), interest rate, and foreign
direct investment (FDI) on domestic savings in Nigeria.

1.4 HYPOTHESES

The following null hypotheses were designed to guide the study:

Foreign aid does not have both short and long run significant impact on domestic
savings in Nigeria.

Gross domestic product (GDP), interest rate and foreign direct investment (FDI) do
not have significant impact on domestic savings in Nigeria.

1.5 SIGNIFICANCE OF THE STUDY

It is often advocated that aid works well in a good policy environment, in

which case, a poor country with good policies should get more aid. A well
designed aid package can support effective institution and governance by
providing more knowledge and transferring technology and skills. It is often
recommended to decentralize aid components in recipient countries as money aid
is necessary but technical or idea aid is more important. Therefore, in the presence
of good policy environment in Nigeria, aid has the potency for mobilizing savings
for investment projects while on the contrary, aid enhances reforms through policy
makers’ training and technology transfer.

The expected result of this study will motivate government and policy
makers to revisit the economic objectives of foreign aid and an implementation
committee set up to ensure effective utilization of aid resources. It will also
motivate government to critically analyze costs and benefits of any aid package to
ensure that donor motives do not paralyze the expected economic motives for
receiving foreign aid.

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The expected result of the study, other things being equal, will encourage
government and policy makers to entrench policies and measures that can increase
both domestic and foreign savings as a fundamental for capital accumulation. It is
also expected that the study will address what measures to adopt to ensure
adequate utilization of accumulated capital in production process, hence, increase
in output level.

1.6 SCOPE AND DELIMITATION OF THE STUDY

This study was limited to investigating the impact of foreign aid on domestic
savings in Nigeria. Therefore, the study was based on Nigeria’s economy and
covered the sample period 1960-2009. The choice of this period was informed by
data availability and the need for a precise time series analysis.

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CHAPTER TWO

LITERATURE REVIEW

2.1 CONCEPTUAL FRAMEWORK

It is noted that all the three levels of government are allowed to receive
foreign aid in Nigeria. One characteristic of foreign aid in Nigeria is that it is not
paid into the Federation Account. In this case, donors determine the areas where
they like to intervene without recognition of the national need. In the process,
maximization of benefits from foreign aid suffers. Three approaches to foreign aid
have been identified. They include conditional or unconditional, matching or non-
matching and open or closed ended (Tresch, 1981).

Conditional aids list specific services on which the receiving government

can spend the aid funds. Other conditions could be included as well. An
unconditional aid on the other hand places no restrictions on the disbursement of
the aid. In fact, a fully unconditional aid could even permit recipients to reduce
taxes, especially if there was no plan to increase spending by the total amount of
the aid. It should be noted that tax is a function of income, assuming progressive
system of taxation, the higher the level of income the higher the tax yields.

Thus, anything that affect tax might ultimately affect income and
consequently welfare of the citizenry. As the name suggests a matching aid is an ad
valorem subsidy in which the grantor agrees to reimburse the receiving
government for spending undertaken at some predetermined rate. However, the
spending initiative remains with the recipient. A non-matching aid refers to
transfer of lump sum of money to the recipient. In the case of a closed-ended aid
there is limit to the total funds that the donor would transfer. On the other hand,
open-ended aid places no limit whatsoever on the size of the transfer. It is noted
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that significant proportion of the foreign aid in Nigeria are conditional and closed-
ended, with either matching or non-matching.

Matching aids are esteemed to be more effective than non-matching aids

given the behavior of the recipient. Thus, it is possible that aid may impair the
domestic production, especially when recipients consider the aid as increase in
their income, stimulating them to go for more leisure instead of increasing labour
supply. If the domestic production weakens, non-oil GDP will fall and
consequently the food supply component of the GDP will fall. However, matching
aid by its nature may increase non-oil GDP and consequently the food supply
component. Nevertheless, total aid may produce bias results necessitating
consideration for some decomposing. Foreign aids are usually sourced from some
government agencies, multilateral and bi-lateral organizations, private consultants
and academic institutions in specific areas. The nature and extent of assistance
obtainable from these institutions vary depending on their professional competence
(Edward, 1988). The aid could be financial, technical or both. The former as the
name suggests refers to whole funding or counterpart funding. The latter refers to
formulation of appropriate development policies, establishment of development
institutions, necessary macro and sector studies, and preparation of investment
programmes.

Savings may simply be defined as that part of income which is not spent. In
other words, savings refer to all or part of income which are not spent immediately
but reserved for future purposes. Money which is saved constitutes a withdrawal
from the circular flow of income. It can only come back to the circular flow of
income through investments. Factors which determine personal savings are as
follows:

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Rate of interest: A higher rate of interest will encourage people to save and vice
versa.

Political stability: People are more likely to save when there is political stability.
But there is little or no savings in times of wars or inter-tribal crises.

Size of income: As the income of a person increases, his ability to save equally
increases. In other words, the higher the income, the higher the tendency to save
while the lower the income, the lower the tendency to save.

Presence of financial institutions: People are more likely to save if financial

institutions like savings banks and other financial institutions are available.

Sense of responsibility: People may decide to save for one or more major reasons
based on their income. A person with a high income who decided to save has a
high sense of responsibility while one who refuses to save has a poor sense of
responsibility.

Government policy: Government can influence people's attitude to saving in

several ways. Personal savings can be encouraged through the rate of interest and
income tax concessions.

RATIONALE FOR SAVINGS

People may decide to save in order to raise capital, which can be used to set
up a business outfit. You can save to meet unforeseen and unexpected
contingencies such as accommodation problems, retirement, sickness,
retrenchment, etc. Of course, you can also save to acquire assets and accumulate
wealth. Other reasons for savings are for the provision for further purposes such as

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old age, education of children and the acquisition of social status. In view of this,
knowing the various types of savings is vital and there are three of such, namely:
personal savings, corporate savings and government savings. The personal savings
is such which is kept by individuals for personal reasons while the corporate
savings refer to the type of savings kept by companies and other business
organizations. They embark on savings if profits are high, when taxation is low or
for other critical reasons. The Government savings is the type kept by the
government of a country. Government can save through budget surplus and many
other ways. Savings encompass all categories or levels of people from individuals
to corporate societies/organizations/companies and even to the government. A
healthy habit of saving is essential for the development of a nation's economy.

2.2 THEORETICAL FRAMEWORK

A plethora of approach and theories has been developed within the

disciplinary parameters of International relations to explain the granting of foreign
aid to economically weak countries by advanced economies. This is to arrive at
scientifically valid explanations of, and factors responsible for, granting of foreign
aid to Third World Countries. This study, however, adopts dependency theory to
explain the nature of the relationship between the countries of the world and the
factors that have facilitated dependency of one group of countries on the other.
Countries of the world have been sharply divided along economic prosperity.
Countries that are economically buoyant and politically stable are termed
Developed Countries and, on the other hand, countries that are economically
backward are tagged Developing Countries or commonly referred to as “Third
World Countries”.

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The dependency theory seeks to establish the factors that have propelled or
contributed to the development of the undeveloped countries. This theory is
predicated on the assumption that resources flow from a “periphery” of poor and
underdeveloped states to a “core” of wealthy states, enriching the latter at the
expense of the former. It is a central contention and standpoint of dependency
theory that poor states are impoverished and rich ones enriched by the way poor
states are integrated into the “world system” (Todaro, 2003: 123; Amin, 1976). The
theoretical premise of dependency theory is that:

Poor states provide natural resources, cheap labour, a destination for

obsolete technology and markets to the wealthy nations, without which the latter
could not have the standard of living they enjoy.

Wealthy nations actively perpetuate a state of dependence by various means. This

influence may be multifaceted, involving economics, media control, politics,
banking and finance, education, culture, sport and all spheres of human resource
development.

Wealthy states actively counter the attempts by dependency nations to resist their
influences by means of economic sanctions and/or the use of military force
(Todaro, 2003).

Dependency theory states that the poverty of the countries in the periphery is
not because they are not integrated or fully integrated into the world system as is
often argued by free market economists, but because of how they are integrated
into the system. There are two schools of thought with different standpoints on the
issue. One of these is the bourgeois scholars and the second one is radical scholars
of the neo-Marxian political economy.

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However, to the bourgeois scholars, the underdevelopment and the

consequent dependence of most of TWCs is as a result of their internal
contradictions. To them, this problem can be explained by their lack of close
integration, diffusion of capital, technology and institutions, bad leadership,
corruption, mismanagement, etc. (Momoh and Hundeyin, 1999: 50). This
standpoint views the underdevelopment and dependency of TWCs as internally
inflicted rather than externally inspired. To this school of thought, a way out of the
problem is for TWCs to seek foreign assistance such as aid, loan, investment, etc,
and allow unhindered operations of the Multinational Corporations (MNCS).

It is argued that development can come through the MNCs mechanism for
transferring technology, capital and skills in management, design and marketing
(Thomas, 1976: 82; Ajayi, 2000: 119). Although, the argument of bourgeois
scholars on the causes of underdevelopment and dependency of the TWCs and the
possible ways out appear to be strong as a result of the poor socio-political records
of the TWCs,nonetheless, their analyses are superficial and obscurantist in nature
and meant to promote world capitalist interests.

Radical scholars of the neo- Marxian political economy world-view have

dismissed the bourgeois or modernization theory panacea as simply Eurocentric,
teleological and that it will only inextricably link the TWCs to the chain of
capitalist exploitation of the metropole (Momoh and Hundeyin, 1999: 50). Andre
(1979: 140), one of the leading scholars of the neo-Marxist school of thought
argues that the incorporation of the TWCs within the process of world capitalist
development is the cause of the development of underdevelopment. The general
viewpoint of the Maxian political economy is that the world capitalist expansion is
responsible for the development of the Western metropole. Paul Baran, Samir
Amin, Colin Leys, Cardoso, Walter Rodney and Geoffrey Kay are among the

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leading scholars of this school of thought. According to Andre (1979: 140) “an
enquiry into the process of capital accumulation is the determinant nature and
cause of the wealth and poverty of nations”.

Contrary to the claims of bourgeois scholars who strongly defended

colonialism, that it was meant to bring civilization to the “Dark Continent”, neo-
Marxists have argued that colonialism severally decapitalised the Third World and
introduced all sorts of distortion and dislocation in its economic and social system.
More importantly, “Third World Economies were disarticulated, and they were
forced to specialize in the production of unprocessed raw materials for export to
the metropolis in an international division of labour characterized by an unequal
exchange” (Momoh and Hundeyin, 1999:50). Due to the underdeveloped nature of
most TWCs, they are dependent on the West for virtually everything ranging from
technology, aid, technical assistance, loan, to culture, etc. The dependent position
of most TWCs has made them to be susceptible and vulnerable to the machinations
of the Western metropolitan countries and Breton Woods institutions (Ajayi,
2000:133).

Whether to ascribe the underdevelopment and dependency of the Third

World to the eloquent submission of the bourgeois scholars or to subscribe to the
Europhoric explanations of the neo- Marxian theorists, the fact is that the
dependency theory explains in details the factors responsible for the position of the
Third World Countries and their constant demand for, and continuous reliance on,
aid from the developed countries.

The Two Gap Model

The basis, in economic literature, of a beneficial effect of foreign aid is the

original two gap model, where foreign aid may ease the two constraints on

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economic growth of developing countries, namely the savings constraint and the
foreign exchange constraint. The following two arguments can be advanced to
support the plausibility of a positive effect of foreign aid on domestic savings:

The equation S=I – F, where S, I, and F are domestic savings, gross investment,
and net total foreign inflows respectively, is a behavioral equation of flows of these
variables over time. It is not an accounting identity. An increase in the foreign
inflows does not necessarily cause a reduction in domestic savings even if some of
the inflows are used for consumption. This is because an increase in consumption
demand can be met by an increase in investment and output. Savings may increase
depending on the savings function of the economy. However, domestic supply
constraints may limit the increase in domestic output causing an increase in prices
of non-tradable goods relative to those of tradable goods. The domestic supply
constraints may be eased when the recipient countries pursue active economic
policies that target the barriers to economic growth as was demonstrated by the
newly industrialized countries. The following three views of Eshag (1971),
Burnside and Dollar (1997), and Levy (1988), support this argument. Eshag (1971)
pointed out that even if foreign aid is used for consumption, the increase in
consumption must be accompanied by an increase in output although some of it is
met by an increase in imports.

In Burnside and Dollar (1997), where foreign aid happened to coincide with
good economic policies, it had a strong positive effect on economic growth. Levy
(1988) argued that aid is positively related to the growth rate of both traded and
non-traded goods in sub-Saharan Africa. The increase in consumption demand is
not likely to be all met by an increase in the price level or an increase in imports,

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especially with the prevailing interventionist economic policies in the developing

countries. As a result of growth, savings are likely to increase since per capita
income is the main determinant of savings.

Foreign aid, in some literatures meant in general the total foreign inflows to
a recipient country. Usually it included foreign aid, foreign borrowing and foreign
investment. Foreign aids effect on economic growth and domestic savings can be
distinguished from that of foreign borrowing and foreign investment in that, unlike
the later two types, foreign aid does not cause an outflow of funds to pay back debt
or repatriate profits and capital. A positive effect of foreign aid is more plausible
than that of the general effect of all foreign inflows. Example, Chenery and Strout
(1966) argued that foreign aid is a supplement to domestic savings and hence
raised the growth rate of output to (s+a)/v where a is foreign aid as a percentage of
recipient GNP. This increase in the growth rate would raise income, and then the
savings rate would increase because the marginal saving propensity is greater than
average saving propensity in developing countries and hence the higher growth
rate would become self sustaining without the need for further inflows of foreign
aid. Thus, according to this view, inflows of foreign aid would have the effect of
raising the savings rate in subsequent periods.

2.3 EMPIRICAL LITERATURE

Papenek (1972, 1973) severely criticized the methodology of his

predecessors. He argued that previous researchers were found guilty of combining
aid with other foreign resource inflows. Secondly, they ignored the data problems
that arose from using savings as an independent variable when in most LDC’s is
calculated as a residual.

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Most important of all, they inferred one way causal relationship from aid to
savings levels in LDC’s from an undoubted negative correlation between these two
variables when what was more probably happening in many countries was that
both lower savings ratios and high aid levels stemmed from an extraneous third
factor i.e. political and/or economic situations in the country.

Papenek (1973) was the first researcher who divided foreign capital into
three components: foreign investment, foreign aid and other foreign inflows. He
treated growth rate as a dependent variable with domestic savings, foreign aid,
foreign investment and other foreign inflows being independent variables. He
found that foreign aid had a substantial greater effect on economic growth than the
other variables. He estimated the following equation for eighty five countries.

Y=1.5+ 0.20(S) +0.39(FA) +0.17(FDI) +0.19 (OFI)

(6.0) (5.38) (2.5) (2.1)

(t statistics in paranthesis) R2=0.37

The estimated equation reveals that the aid coefficient is very significant and
higher in absolute terms than any other coefficients. Papenek suggested that aid is
more productive than domestic resources and other capital inflows. Gupta (1975),
Stoneman (1975), Gulati (1978), McGowan and Smith (1978) and Bradshaw
(1985) also found positive relationships between foreign capital and economic
growth.

Another attempt was made by Mosley, Hudson and Horrell (1987), for 60
LDC’s in three periods 1960-70, 1970-80, and 1980-83. They considered the
apparent effectiveness of foreign aid in the light of a model which decomposes the
impact of foreign aid into three different component parts. These are “the direct

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effects of the aid disbursement”, “indirect effects on the spending pattern of the
public sector of the recipient country”, and lastly the effect of foreign aid on the
prices of some goods, “raises the prices of some goods, depresses the price of some
others and hence has side effects on the private sector of the recipient economy
through the price system” (Mosley, Hudson and Horrell, 1987, p.616-617). Their
results again showed a poor performance for aid in generating growth and failed to
show that aid has a positive effect on growth.

By contrast, Knack (2000), in a cross-country analysis, indicates that higher

aid levels erode the quality of governance indexes, i.e. bureaucracy, and the rule
of law. He argues that “aid dependence can potentially undermine institutional
quality, encourage rent seeking and corruption, foment conflict over control of aid
funds, siphon off scarce talent from bureaucracy, and alleviate pressures to reform
inefficient policies and institutions”.

Large aid inflows do not necessarily result in general welfare gains and high
expectation of aid may increase rent-seeking and reduce the expected public goods
quality. Moreover, there is no evidence that donors take corruption into account
seriously while providing aid (Svensson, 1998). A permanent rise in foreign aid
reduces long-run labor supply and capital accumulation, increases long-run
consumption and has no impact on long-run foreign borrowing. Using the optimal
growth model with foreign aid, foreign borrowing and endogenous leisure- and –
consumption choices, Gong and Zou (2001)showthat foreign aid depresses
domestic saving, mostly channeled into consumption and has no relationship with
investment and growth in developing countries.

Aid works well in a good policy environment and a poor country with good
policy should get more aid, which is not always the case in reality. A well-

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designed aid plan can support effective institutions and governance by providing
more knowledge and transferring technology and skills. It is recommended to
decentralize the aid flows in recipient countries. Money aid is important but idea
aid is even more important. Aid can be the midwife of good policy in recipient
countries. In poor-policy countries, idea aid is especially more essential than
money aid. This implies that in a good-policy environment, aid increases growth
via the investment channel whereas in a poor-policy environment, it nurtures the
reforms through policy makers training or knowledge and technology transfer.
These non-money effects are believed to be more important and viable than the
money value of aid. Aid works better where the reform is imposed by outsiders.
Therefore, aid is normally more effective when it facilitates efficiently and timely
reforms triggered by the local authority (World Bank, 1998).

In a recent paper, Easterly, Levine and Rodman (2003) conducted a new test
on the previous work of Burnside and Dollar (1997). With a larger sample size
(1970-1997 compared to BD’s (1970-1993), they find that the result is not as
robust as before claim that the question of aid effectiveness is still inconclusive.

The renewed political interests together with increased resource transfer

have resulted in numerous studies on the impact of aid on growth. There is,
however, little evidence of a significant positive effect of aid on the long-term
growth of poor countries. The link between aid and growth goes via investment
and there is no doubt that aid sometimes finances investment. Dalgaard, Jansen and
Tarp (2004) have shown that aid transfers improve steady state productivity in
partner countries through raising the capital stock per person. Rodman, (2004)
finds that the aid-growth link is influenced by factors such as domestic policies,
governance, external conditions and historical circumstances.

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Looking at recent developments in the aid and growth literature, Hansen and
Tarp (2001) divide the studies into three generations. The first generation, being
influenced by the Harrod-Domar model, mainly focused on the aid-savings link.
Saving was assumed to lead to investment and growth. Second generation studies
investigated the aid-investment-growth link more directly without focusing on
savings. Third generation studies entail a number of contributions, such as
improved country coverage, use of regressors representing the policy environment,
acceptance of non-linearity in the aid-growth relationship.

A priori, Savings, in economics, when applied to capital investment, is that

output increases. Institutions in the financial Sector like deposit money banks
(DMBs) mobilize savings in various ways including savings deposits on which
they pay certain interest. To effectively mobilize savings in an economy, the
deposit rate must be relatively high and inflation rate stabilized to ensure a high
positive real interest rate, which motivates investors to save from their disposable
income (Uremadu, 2006, 2007). For any economy that wants to increase its real
capital formation or gross domestic investment, the objective must be to provide a
climate receptive to the resources from abroad and the encouragement of domestic
savings (Uremadu, 2006, 2007; Agu, 1988; Chete and Ndubuisi 2002).

The financial mobilization problem is closely linked with savings problems,

and developing countries are commonly characterized by a low rate of domestic
savings. Nonetheless, gross domestic savings is still relatively reasonable in most
LDCs but the efficiency in translating accumulated savings into productive
investments is lacking (Agu, 1988). Interestingly, this is where import of foreign
private capital, foreign aid or foreign direct investment (FDI) is crucially needed
and helpful.

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Many LDCs (Nigeria inclusive) have relied very much on the inflow of
financial resources from outside in various forms: official/private capital flows and
foreign direct investment (FDI) as a means of speeding up their economic growth
(Olaniyi, 1988; Odozi, 1995; Ekpo, 1997 and Ogamba, 2003). These can come in
form of grants in aid and foreign direct loans and advances. Erroneously these
countries have shown Preference for foreign direct investment as a means of
counteracting the sluggish investment trend in official and private portfolio capital
flows. Capital from outside can be very helpful in speeding up the pace of
economic growth and development and can act as a catalytic agent in making it
possible to harness domestic resources particularly in a developing country. But
foreign capital, no matter how large the inflow, cannot absolve a recipient country
from the task of mobilizing domestic resources. Foreign capital flows can, at best,
be complementary to domestic savings (Uremadu, 2006, 2007; Olaniyi, 1988; Agu,
1979 and Odozi, 1993).

Akonor (2008) examined foreign aid impact on Africa using theoretical and
descriptive quantitative analyses and revealed that aid is not a panacea for Africa’s
development woes. He said, foreign aid has so far created a welfare continent
mentality and has become the hub around which the spokes of most African
economies turn. The study further stated that dependence on foreign aid has
compromised the sovereignty of African countries and that it is very unfortunate
that aid has taken more than 50% of Sub-Saharan African countries’ budgets and
70% of their public investment.

Ahmed and Ahmed (2002) studied the impact of foreign capital inflow on
domestic saving in Pakistan by applying three variants of cointegration techniques
to time series data for the 1972-2000 periods. The study revealed in every case a
valid long run relationship among the variables. The three variants of co-

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integration technique also revealed an inverse relationship between saving rate and
foreign capital inflows and short run relationship between these two variables was
also found to be negative.

Burnside and Dollar (2000) studied the link between aid, policy and growth
for 56 developing countries. The study applied panel data analysis for the period
1970-1973 and 1990-1993 and the study revealed that on the average aid has had
little impact on growth, although, a robust finding was that aid has had a more
positive impact on growth in good policy environments.

Singh (1985) examined the impact of interventionist state policy on economic

growth. The study using cross-sectional OLS method revealed that both the
savings rate and the rate of foreign aid were positive and significant. However,
when an index of state intervention was introduced into the model, foreign aid
became insignificant. With savings as the response variable, foreign aid was
negative and significant when the index of state intervention was introduced into
the model.

It is evident that results of research on the relation between aid and savings
vary depending upon the models, data and countries of analysis. Therefore, the
debate over the impact of aid on savings is on-going and left open to further study.

2.4 LIMITATIONS OF PREVIOUS STUDIES

Most studies on foreign aid and economic growth, for example Gupta (1975)
stoneman (1975), Gulati (1978) and Bradshaw (1985) unlike Papanek (1975) did
not divide foreign capital into its components VIZ: foreign investment, foreign aid

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and other foreign inflows. Their studies therefore, failed to capture the specific
impact of foreign aid on economic growth in developing economies.

Even though, Papanek op cit, decomposed foreign capital into its

components in his study, he employed a wrong methodology. Papanek used
Ordinary Least Squares (OLS) in estimating the relationship between foreign aid
and economic growth. It therefore, becomes questionable; the validity of OLS, if
there is a two-way that foreign aid is related to and is influenced by the income
level of the recipient countries, which implies that both income and foreign aid are
interdependent. This interdependence of the two variables above suggests the use
of a Two Stage Ordinary Least Squares (TSLS) as the appropriate estimation
technique.

Furthermore, most studies on foreign aid, domestic savings and economic

growth used cross-sectional data for, example, mosley (1980), Fayissa and El-
kaissy (1999), Snyder (1993), Moham (2006), Anuro and Amadi (2001), and
Mavrotas and Kelly (2001). The reliance on cross-sectional data has not
satisfactorily provided us with country specific issues such as political,
institutional, administrative, infrastructural and policy environment. This
limitation, undoubtedly, is responsible for the non-uniformity of aid and savings
impact on growth in various countries.

Interestingly, literatures on savings so far, omitted the role of foreign

resource inflows and as a result, do not consider either the role played by foreign
resource inflows in complementing domestic saving or, the likely beneficial effects
of foreign inflows on domestic savings. This study is very important because
empirical studies that examine the effect of foreign aid on domestic saving in
Nigeria remain scanty. Unfortunately, foreign capital inflow to Nigeria has

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continued to decline, thus increasing the need by government and policy makers to
look inward and promote the mobilization of domestic saving. In addition, is the
desire of the Nigerian economy in attaining higher economic growth rate. Thus, to
examine the complementary role of foreign resource inflows, redress imbalance in
the reviewed literatures, and allow for country specific policy, this study
investigates the macroeconomic impact of foreign aid on domestic savings, in
Nigeria.

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CHAPTER THREE

METHODOLOGY

3.1 THEORETICAL BACKGROUND

According to the Keynesian consumption function, savings are positively

related to the level of disposable income. At low levels of income, total spending
may exceed income causing dis-saving. As income rises, total savings rise. The
gradient of the saving function is given by the marginal propensity to save (MPS).
The saving function is presented either as a mathematical equation, most often as a
simple linear equation or as the graphical saving line. In either form, income is
measured as a disposable income, national income or occasionally, as gross
domestic product (GDP).

The function makes it easy to divide savings into basic types: Autonomous
and induced savings. Autonomous savings is the intercept term ‘c’ in the
Keynesian savings model and measures the amount of savings made if income is
zero. Induced savings is the slope ‘b’ of the savings function and measures the
change in savings resulting from a change in income.

The savings function is generally represented in the form:

S=f(Y) ----------------------------------------------------------------------------- (1)

Where S = savings

Y=income(or disposable income)

F=notation for a general, unspecified functional form.

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Depending on the analysis, the actual functional form of the equation can be linear
with constant slope or curve linear with a changing slope. The most common form
is linear such as the one below:

S=c+bY------------------------------------------------------------------------------ (2)

Where S=savings

c=intercept

b=slope

Y=disposable income

Introducing foreign aid and other relevant variables in the savings function above,
we obtain the below equation:

S=f(Y,INT,FAID,FDI)--------------------------------------------------------------(3)

Where

Y=GDP growth rate

INT= real interest rate

FAID=foreign aid

FDI=foreign direct investment

In equation 3, the GDP growth rate Y was added following Mikesell and
Zinzer (1973) and White (1992) who contended that higher economic growth
raises transitory income more than permanent income, which induces increased
savings. Real interest rate was also added following an argument, that, to
effectively mobilize savings in an economy, the deposit rate must be relatively

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high and inflation rate stabilized to ensure a high positive real interest rate, which
motivates investors to save from their disposable income (Uremadu, 2006, 2007).
Literature linking FDI to economic growth through domestic savings is more
consistent and this variable is expected to have a positive effect on the level of
savings. Meanwhile, based on previous literature, the expected effect of FAID on
the level of domestic savings is undetermined.

3.2 MODEL SPECIFICATIONS

Based on the objectives of the study, the following model was specified.

Model 1

In order to capture the macroeconomic effect of foreign aid on domestic savings in

Nigeria, the model estimated is:

S= α o + α 1 Y + α 2INT + α 3 FAID + α 4 FDI + ∈ ------------- (1)

Where

α i = Parameters estimated
Y =Gross Domestic Product Growth Rate

INT = Real Interest Rate

FAID= Foreign Aid

FDI = Foreign Direct Investment

∈ = Error Term.

To make for numerical accuracy ( Gujararti 2007; 187), model1 transformed into a
semi-log (log – lin) model as below:

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InS = α 0 + α 1Y+ α 2INT+ α 3 FAID + α 4 FDI + ∈ ----------(2)

3.3 UNIT ROOT TEST

In this study, an assumption was made that all variables of study were
stationary at level form. However, it is evident in literature that most
macroeconomic variables were time variant (Dukey and Fuller, 1981; Pindyck and
Rubinfeld, 1998). Consequently, model 2 was subjected to unit root test using
Augmented Dickey – Fuller (ADF) test and it appeared as model 3 as seen below:

∆ lnS = α 0 + α 1( ∆ Yt-i) + α 2( ∆ INTt-i) + α 3( ∆ FAIDt-i) +

α4 (∆ FDIt-i) + ∈ ------------------------------------------------ (3)

Where:

∆ = First Order Difference Operator

α i= Estimated Parameters
t-i = Estimated Lags

∈ = Stochastic Disturbance Term

Model 3 was the model specification for objectives 1 & 2.

In addition, the unit root test showed evidence of co- integration, and model 3
transformed into error correction model (ECM) as seen below:

∆ lnS = α 0 + α 1 ( ∆ Yt-i) + α 2 ( ∆ INTt-i) + α 3( ∆ FAIDt-i) +

α 4( ∆ FDIti) + ECMt-i + ∈ -------------------------------------------(4)
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Where ECM, is the error correction mechanism that shows the feedback or
adjustment effect.

3.4 JUSTIFICATION OF THE MODELS

The choice of the model for this study was informed by the objectives of the
study. The characteristics of a good econometric model were represented in the
model specifications. Interestingly, given no endogeneity problem, associated with
the variables of interest in the study, the ordinary least square (OLS) estimation
method was used. This technique makes for the unbiasedness of parameter
estimates.

3.5 ESTIMATION PROCEDURE

Given the need to achieve the stated objectives of the study, annual time
series data of the variables were tested for stationarity using the Augmented
Dickey Fuller (ADF) test. In order to obtain an equilibrium relationship between
variables of interest, a co- integration regression was carried out and which was
obtainable from a co- integrating vector. After all, the diagnostic checks of the
properties of the model were carried out.

3.6 DATA

The annual time series data for the study were generated from the Central
Bank of Nigeria (CBN) statistical bulletin (various issues), National Bureau of
Statistics (NBS) and the CBN annual reports for various years.

3.7 ECONOMETRIC SOFTWARE

The study used STATA econometric software for estimation and analyses.

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CHAPTER FOUR

DATA ANALYSIS/RESULT

UNIT ROOT TEST

To test for stationarity or the absence of unit roots, this test is done using the
Augmented Dickey Fuller test and Philips Peron (PP) test procedures. Under the
stationarity test, we take the following decision rule: if the absolute value of the
Augmented Dickey Fuller (ADF) test is greater than the critical value either at 1%
, 5% or 10% level of significance at the order zero , one , or two , it shows that
variable under consideration is stationary otherwise it is not.

In order to assess the time series properties of the data, unit root tests were
completed. The results of the ADF and PP tests are as follows: The tests indicate
that all the variables are integrated of order one I (1) process at 5% level of
significance

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Table 1: The unit root test

VARIABLE FIRST FIRST

DIFFRENCE DIFFREN
CE

ADF TEST PROBA PP TEST PROBABILI

BILITY TY

D(LOG(SAV( -4.945354 0.0000 -6.069414 0.0000

-1)))

D(LOG(FDI(- -5.328191 0.0000 -13.40413 0.0000

1)))

D(LOG(GDP( -4.206050 0.0001 -5.360102 0.0000

-1)))

D(LOG(ODA( -5.960751 0.0000 -5.523471 0.0000

-1)))

D(INTEREST -4.376889 0.0001 -7.142370 0.0000

(-1))

The results reported in Table１ above, confirm the acceptance of the

null hypothesis of unit root at all level of significance for each variable,

based on the two tests （ADF and PP test). From the table, it could be seen

that first differencing of all variables yields rejection of the null hypothesis
on unit root at 5 percent level of significance for each variable. Based on

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these test results, it is, therefore, concluded that all the variables (LOG
(SAV), LOG (FDI) LOG (GDP) LOG (ODA) and INTEREST) are first
difference stationary, that is, I(1) integrated of order one. This implies that
the combination of one or more of these series may exhibit a long run
relationship. We, therefore, proceed with cointegration test.

COINTEGRATION AND ERROR CORRECTION MODEL

The earlier work of Granger and New bold(1974)highlighted the danger of

generating a spurious regression by regressing one non-stationary time series on
another. However later, Granger(1981)introduced the concept of cointegration that
was further extended by Engle and Granger(1987). This concept is based on the
idea that, although economic time series exhibit non-stationary behaviour, an
appropriate linear combination between trending variables could remove the
common trend component. The resulting linear combination of the time series
variables will thus be stationary, which means the relevant time series variables are
cointegrated. From an economist’s perspective cointegration is of interest because
of the possible existence of a long run or steady state equilibrium relationship.

Since it is shown that all variables in equation（1）are integrated of order one, we

compute what is known as the first step of Engle-Granger procedure: below are the
long and short run estimates of the parameters:

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Table2 Regression Results of Impact of ODA on Savings in Nigeria

(1) (2) (3)

long_run1 ecm1 ecm2

log_oda 0.0477

(0.49)

log_fdi -0.344

(-1.84)

log_gdp 1.118***

(25.25)

INTEREST 0.0330*

(2.42)

D.log_oda -0.0211 -0.0279

(-0.56) (-0.75)

D.log_fdi 0.0268 0.0332

(0.70) (0.77)

D.log_gdp 0.179 0.192

(1.54) (1.68)

D.INTEREST 0.00164 0.00437

(0.13) (0.34)

L.Residuals -0.142* -0.127*

(-2.55) (-2.52)

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Constant 2.936 0.208*** 0.204***

(0.87) (6.36) (6.76)

Observations 47 45 45

R2 0.985 0.199 0.186

Adjusted R2 0.984 0.096 0.082

AIC 54.28 -48.50 -47.69

BIC 63.54 -37.66 -36.85

t statistics in parentheses

* p < 0.05, ** p < 0.01, *** p < 0.001

Impact Of Foreign Aid On Domestic Savings In Nigeria

The result in table2 shows the short and long run effects of the impact of
foreign aid on national saving in Nigeria. From the estimated long run result,
foreign aid impacts positively on the national saving. The result implies that a unit
increase in foreign aid would increase the total national saving to the tune of o.48%
in the long run.

However, the short run analysis shows that foreign aid variable ODA is
negative. The negative effect of foreign aid on the nations saving growth in the
short run, can be justified persistently on grounds of poor macroeconomic
fundamentals which result in accumulation of public debt stock in the economy.
Over the decades the share of grants as percentage of total foreign assistance has
also declined, and the loans procured by the Nigeria’s government has translated
into harsh economic conditions

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Impact Of Other Variables In The Model On Domestic Savings In

Nigeria

The negative co efficient of FDI indicates that foreign direct investment

impacts on the gross national saving negatively. From the result therefore, a unit
increase in FDI reduces national saving to the tune of -0.3%.

Ironically, the short run result of the Foreign Direct Investment ( FDI
variable), indicates positive sign; giving a positive impact of FDI on saving in the
short run, but negative in the long run. The negative coefficient of Log(FDI) in the
long run and the positive coefficient in the short run indicate a conflicting result.
This also goes in line with the theoretical debate on the impact of FDI on economic
growth. There are two main approaches regarding the opposite views with respect
to the impact of FDI on the level of economic growth. It has been empirically
proved that FDI has a tendency to promote and increase efficiency while
enhancing the level of economic growth (Shahbaz, et, al., 2007). Therefore, it can
be considered a positive impact of FDI inflow which it exerts on the economic
development. Whereas there is also a belief that FDI inflow poses negative impact
on economic growth in developing countries by replacing savings (Chung, 1995).
There is an urgent need to improve domestic resource mobilization, ensuring
macroeconomic stability and reducing reliance on foreign loans.

The estimated result shows that Log (GDP) has a positive and significant
impact on the national saving in the long run. The positive GDP variable implies
that savings growth is positively dependent on GDP growth both in the short and
long run, and this finding goes in line with the conventional perception which
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states that savings contribute to higher investment and hence higher GDP growth
in the short run (Bacha, 1990; DeGregorio, 1992; Jappelli and Pagano, 1994). The
traditional development theory posits that increasing savings would accelerate
growth. It also conforms to findings of Kaldor (1956) and Samuelson and
Modigliani (1966) studies on how different savings behaviours induced growth. On
the other hand, many recent studies have concluded that economic growth
contributes to savings.

The variable INTEREST indicates a positive sign which is also statistically

significant, implying that during the period under review, a unit increase in the
interest rate increases the total national saving to the tune of 03% in the long run.
The interest rate coefficient is positive in both cointegrating equations. This
conforms with the financial liberalization school which predicts that the nominal
interest rate, will have a positive impact on private savings .This is consistent with
a Keynesian type precautionary motive of savings rather than a monetarist type
portfolio shift from savings to assets that are inflation hedges.

In the estimated long run result, the R² value indicates that ODA, FDI, GDP
and INTEREST account for 98% of the total variations in the gross national
saving. The result of the short run model shows that the overall goodness of fit of
the model is plausible. This is evident in the R2 value of 0. 199, indicating that
approximately 20 % of the total variation in the behaviour of the dependent
variable (SAVINGS) can be adequately explained by all the explanatory variables.

The Error Correction Mechanism tells us the degree to which the

equilibrium behaviour drives the short-run dynamics. Thus the ECM term is of
importance in cointegration analysis. The coefficient of the ECM term which
signifies the speed of adjustment of the model to equilibrium in the event of shocks

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shows that 14 per cent of disequilibrium errors are corrected. The ECM term is
also found to be negative and significant, further confirming the existence of a
long-run relationship between foreign aid and savings in Nigeria.

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CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATION

The early theoretical development on the impact of foreign aid on aggregate

domestic saving has been inconclusive. The traditional pro-aid view, advocated aid
on the premise that it complements domestic resources, eases foreign exchange
constraints, transfers modern know-how and managerial skills, and facilitates easy
access to foreign markets, all of which contribute to economic growth. The radical
anti-aid view criticizes aid on grounds that it supplants domestic savings, worsens
income inequality, funds the transfer of inappropriate technology, finances
ineffective projects, and in general, helps sustain bigger, more corrupt and
inefficient governments in the recipient countries. The principal aim of foreign aid
was to help alleviate poverty, provide emergency relief, assist with peacekeeping
efforts and to increase infrastructural development. Recent shifts in the global
economic and political environment, notably the collapse of the Soviet Union and
surge in private capital flows to developing countries, have impacted on ODA in a
way that has left some questioning the viability of foreign aid. Foreign aid remains
an important source of public expenditure in most developing countries, including
Nigeria. Its impact on development and saving growth in particular has been
debated following the empirical literature.

The analysis of the aid-saving relationship in Nigeria has shown that using
various approaches and specifications, foreign aid is observed to significantly
promote domestic saving growth in Nigeria within the period 1960-2010. The
study identified and analyzed some factors contributing to the fluctuations in
Nigeria’s domestic saving. The study analyzed both short and long run impact of
foreign aid on the domestic saving in Nigeria. Both the estimates of short and long

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run Engle -Granger approaches to co integration and error correction models are in
agreement that foreign aid is a positive determinant of domestic saving. Changes
on the aid-saving specification in both approaches also confirm that foreign aid
significantly impacts on domestic saving in Nigeria. The agreement of this finding
across approaches and specifications only provides support for reliability and
validity of the findings and conclusions reached on the impact of foreign aid on
aggregate domestic saving.

The study revealed that foreign aid had contributing impact on the growth of
aggregate domestic saving in Nigeria in the long run. The result equally shows that
foreign direct investment negatively impact on the domestic saving in the long run
but the short run result indicate a positive impact. The GDP variable impacted on
the aggregate domestic saving positively both in the short and long run. It implies
that saving growth is positively dependent on GDP growth. The interest rate
variable equally indicates positive sign both in the short and long run, implying
that interest rate impacts positively on aggregate domestic saving in Nigeria.

The evidence in the case of Nigeria has provided support only for the
supplemental theories that foreign aid is vital in the promotion of a country’s
economic development. Donor intervention in Nigeria does not seem to have been
in vain, but has proved to be largely useful instead. It implies that Nigeria’s
persistent poverty characterization amidst notable donor presence and participation
in the country’s economy has little to do with the fact that foreign aid has been
ineffective in promoting economic development, but rather that the magnitude of
the effect has not been sufficiently strong to eradicate poverty completely. It is also
evident that the promotion of private investment is almost as important as the
disbursement of foreign aid with respect to promoting growth.

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The following recommendations are therefore made:

(1)Aid supporting institutions and policies require much strengthening in order to

increase the magnitude of its impact. It is noteworthy that Nigeria has always been
represented in all the past high level fora beginning from Rome 2003 through Paris
2005 to Accra 2008. There is, therefore, the urgent need for the adoption of the
2005 Paris Declaration on Aid effectiveness. The five focus areas of the Paris
declaration were in the areas of Aid ownership, alignment, harmonization,
managing for results and mutual accountability. The level of public engagement
with ODA has not been encouraging in Nigeria. As a matter of fact, there is no
functioning multi-stakeholder body involving Civil Society Organizations (CSOs),
legislators and private sector representatives that prepares and monitors the
national development policies, plans and strategy. The various government
agencies should work in synergy with relevant organizations for effective
implementation and utilization of aid.

(2) Government should establish a Civil Society Fund on Aid Effectiveness,

Results and Accountability to support the review and independent accountability
function of national civil society organizations in aid effectiveness for results and
accountability.

(3) There is a need for strengthening of the country’s institutions in order to ensure
transparency and accountability. Ministries, Department and Agencies (MDAs) are
to present the investments by development partners working in their sectors as a
part of the budgetary process. This will ensure that review processes by the
appropriate committees of parliament reflect the contribution of ODA, and
appropriation processes ensure alignment and inclusiveness. This requires all ODA
to be demonstrably on plan, and even when exceptionally off budget, to be

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reported to parliamentary oversight processes and aligned to national plans,

planning, budget cycles and allocations.
(4)Parliament needs to be more proactive and engage in its oversight role on aid
flows, management and effectiveness. Mechanisms and strategies for these needs
to be explored and this should include, establishing by an Act of Parliament, a
National Assembly Budget and Research Office to provide independent
information and support to Parliament on ODA, its alignment to budgets, and aid
effectiveness.
(5) It is also recommended that government should deepen dialogue with a broad
range of stakeholders in aid implementation and monitoring, including civil society
organizations, provide timely access to budgeting and appropriation information by
expanding participation in its Inclusive National Budgeting Initiative.
(6) If aid’s impact on the country’s saving growth is to be maintained or its
magnitude even to be improved, it is recommended that efforts towards a
politically stable state and the promotion of democratization be pursued. It needs to
be reiterated that one of the five key principles of Paris Declaration on Aid
Effectiveness to shape aid delivery is, democratic ownership, which suggests
participation including transparency and mutual accountability

(7) The Nigerian government should implement policies that will reduce aid
dependency and as well ensure proper use of aid to productive public expenditure.

49
 50

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Appendix i

THE DATA

YEAR GDP INTEREST SAV FDI ODA

1970 5205.1 7 341.6 121.6 1.904459

1971 6570.7 7 376.3 319.6 1.85326

1972 7208.3 7 461.2 248.3 1.402777

1973 10990.7 7 586.8 192.6 1.259928

1974 18298.3 7 1137.1 48.3 1.167256

1975 20957.0 6 1347.2 475.4 1.272589

1976 26656.3 6 4796.9 46.3 0.786698

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 60

1977 5205.1 6 7371.4 197.6 0.618228

1978 34540.1 7 8017.5 331.8 0.572444

1979 41947.7 7.5 10257.8 289.9 0.355785

1980 49632.3 7.5 11189.1 467 0.461603

1981 50456.1 7.75 5604.3 137.3 0.512112

1982 51653.4 10.25 4237.1 1624.9 0.44394

1983 56312.9 10 3607.5 536.7 0.578539

1984 62474.2 12.5 2678.7 534.8 0.390543

1985 70633.2 9.25 3944.5 329.7 0.372399

1986 71859.0 10.5 -1494.7 2499.6 0.664522

1987 108183.0 17.5 3573.7 680.8 0.752559

1988 142618.0 16.5 361.1 1345.6 1.279144

1989 220200.0 26.8 48589.9 -439.4 3.628219

1990 271908.0 25.5 61785.2 -464.3 2.620552

1991 316670.0 20.01 56601.6 1808 2.586128

1992 536305.1 29.8 57119.1 8269.2 2.525924

1993 688136.6 36.09 63408.9 32994.4 2.74477

1994 904004.7 21 58987.7 3907.2 1.760369

1995 688136.6 20.18 173984.1 48677 1.909473

1996 904004.7 19.74 114411.4 2731 1.667225

1997 688136.6 13.54 215394.9 5731 1.721585

1998 904004.7 18.29 -168126 24078.9 1.708086

1999 688136.6 27.17 942399.5 1779.1 1.245936

2000 904004.7 21.55 2036352 3347 1.391355

2001 688136.6 21.34 740593.1 3377 1.377211

2002 904004.7 30.19 -71517.7 8206.8 2.27322

2003 688136.6 22.88 736740 5791.9 2.295302

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 61

2004 796070.7 20.82 738666.6 6999.35 4.194088

2005 742103.6 19.49 333574.4 6395.625 45.49123

2006 769087.1 18.7 535157.2 6697.488 79.21015

2007 755595.4 18.36 636911.9 6546.556 13.24232

2008 762341.3 18.79 485243.2 6622.022 8.5296

2009 758968.3 18.575 561077.5 6584.289 4.194088

Source: CBN Statistical Bulletin (various Issues)

Appendix ii

Phillips-Perron Test Equation

PP Test Statistic -6.057933 1% Critical Value* -3.5713

5% Critical Value -2.9228

10% Critical Value -2.5990

*MacKinnon critical values for rejection of hypothesis of a unit root.

Lag truncation for Bartlett kernel: ( Newey-West suggests: 3 )

3

Residual variance with no correction 0.018252

61
 62

Residual variance with correction 0.017692

Phillips-Perron Test Equation

Dependent Variable: D(LOG(SAV),2)

Method: Least Squares

Date: 03/12/12 Time: 14:20

Sample(adjusted): 1962 2009

Included observations: 48 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob.

D(LOG(SAV(-1))) -0.885213 0.145848 -6.069414 0.0000

C 0.215887 0.040099 5.383828 0.0000

R-squared 0.444698 Mean dependent var 0.004661

Adjusted R-squared 0.432626 S.D. dependent var 0.183214

S.E. of regression 0.138005 Akaike info criterion -1.082283

Sum squared resid 0.876085 Schwarz criterion -1.004317

Log likelihood 27.97480 F-statistic 36.83778

Durbin-Watson stat 1.703500 Prob(F-statistic) 0.000000

PP Test Statistic -13.49488 1% Critical Value* -3.5814

5% Critical Value -2.9271

10% Critical Value -2.6013

*MacKinnon critical values for rejection of hypothesis of a unit root.

62
 63

Lag truncation for Bartlett kernel: ( Newey-West suggests: 3 )

3

Residual variance with no correction 0.147419

Residual variance with correction 0.144183

Phillips-Perron Test Equation

Dependent Variable: D(LOG(FDI),2)

Method: Least Squares

Date: 03/12/12 Time: 14:21

Sample(adjusted): 1962 2009

Included observations: 45

Excluded observations: 3 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob.

D(LOG(FDI(-1))) -1.615030 0.120487 -13.40413 0.0000

C 0.077969 0.058738 1.327404 0.1914

R-squared 0.806890 Mean dependent var 0.015425

Adjusted R-squared 0.802399 S.D. dependent var 0.883596

S.E. of regression 0.392779 Akaike info criterion 1.012288

Sum squared resid 6.633847 Schwarz criterion 1.092584

Log likelihood -20.77649 F-statistic 179.6707

Durbin-Watson stat 1.955504 Prob(F-statistic) 0.000000

PP Test Statistic -5.346346 1% Critical Value* -3.5713

5% Critical Value -2.9228

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 64

10% Critical Value -2.5990

*MacKinnon critical values for rejection of hypothesis of a unit root.

Lag truncation for Bartlett kernel: ( Newey-West suggests: 3 )

3

Residual variance with no correction 0.032905

Residual variance with correction 0.032259

Phillips-Perron Test Equation

Dependent Variable: D(LOG(GDP),2)

Method: Least Squares

Date: 03/12/12 Time: 14:24

Sample(adjusted): 1962 2009

Included observations: 48 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob.

D(LOG(GDP(-1))) -0.772580 0.144135 -5.360102 0.0000

C 0.148794 0.038656 3.849125 0.0004

R-squared 0.384456 Mean dependent var -0.000809

Adjusted R-squared 0.371075 S.D. dependent var 0.233655

S.E. of regression 0.185300 Akaike info criterion -0.492911

Sum squared resid 1.579454 Schwarz criterion -0.414945

Log likelihood 13.82987 F-statistic 28.73069

Durbin-Watson stat 1.981432 Prob(F-statistic) 0.000003

64
 65

PP Test Statistic -5.405152 1% Critical Value* -3.5745

5% Critical Value -2.9241

10% Critical Value -2.5997

*MacKinnon critical values for rejection of hypothesis of a unit root.

Lag truncation for Bartlett kernel: ( Newey-West suggests: 3 )

3

Residual variance with no correction 0.289387

Residual variance with correction 0.223716

Phillips-Perron Test Equation

Dependent Variable: D(LOG(ODA),2)

Method: Least Squares

Date: 03/12/12 Time: 14:24

Sample(adjusted): 1962 2008

Included observations: 47 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob.

D(LOG(ODA(-1))) -0.816136 0.147758 -5.523471 0.0000

C 0.043117 0.080712 0.534211 0.5958

R-squared 0.404042 Mean dependent var -0.007376

Adjusted R-squared 0.390799 S.D. dependent var 0.704372

S.E. of regression 0.549772 Akaike info criterion 1.682993

Sum squared resid 13.60119 Schwarz criterion 1.761723

Log likelihood -37.55034 F-statistic 30.50873

65
 66

Durbin-Watson stat 1.879554 Prob(F-statistic) 0.000002

PP Test Statistic -7.175366 1% Critical Value* -3.5745

5% Critical Value -2.9241

10% Critical Value -2.5997

*MacKinnon critical values for rejection of hypothesis of a unit root.

Lag truncation for Bartlett kernel: ( Newey-West suggests: 3 )

3

Residual variance with no correction 2.677278

Residual variance with correction 3.627373

Phillips-Perron Test Equation

Dependent Variable: D(INTEREST,2)

Method: Least Squares

Date: 03/12/12 Time: 14:23

Sample(adjusted): 1963 2009

Included observations: 47 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob.

D(INTEREST(-1)) -1.058806 0.148243 -7.142370 0.0000

C -0.004005 0.243944 -0.016416 0.9870

R-squared 0.531316 Mean dependent var 0.022128

Adjusted R-squared 0.520900 S.D. dependent var 2.415887

66
 67

S.E. of regression 1.672205 Akaike info criterion 3.907784

Sum squared resid 125.8321 Schwarz criterion 3.986514

Log likelihood -89.83293 F-statistic 51.01346

Durbin-Watson stat 1.990520 Prob(F-statistic) 0.000000

Appendix iii

Augmented Dickey Fuller Test Equation

ADF Test Statistic -4.945354 1% Critical Value* -3.5745

5% Critical Value -2.9241

10% Critical Value -2.5997

*MacKinnon critical values for rejection of hypothesis of a unit root.

67
 68

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(LOG(SAV),2)

Method: Least Squares

Date: 03/12/12 Time: 14:16

Sample(adjusted): 1963 2009

Included observations: 47 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob.

D(LOG(SAV(-1))) -0.917651 0.185558 -4.945354 0.0000

D(LOG(SAV(-1)),2) 0.096533 0.138901 0.694976 0.4907

C 0.215128 0.047953 4.486209 0.0001

R-squared 0.459292 Mean dependent var -0.005661

Adjusted R-squared 0.434714 S.D. dependent var 0.170505

S.E. of regression 0.128195 Akaike info criterion -1.208827

Sum squared resid 0.723094 Schwarz criterion -1.090733

Log likelihood 31.40744 F-statistic 18.68738

Durbin-Watson stat 1.875656 Prob(F-statistic) 0.000001

ADF Test Statistic -5.328191 1% Critical Value* -3.5889

5% Critical Value -2.9303

10% Critical Value -2.6030

*MacKinnon critical values for rejection of hypothesis of a unit root.

68
 69

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(LOG(FDI),2)

Method: Least Squares

Date: 03/12/12 Time: 14:17

Sample(adjusted): 1963 2009

Included observations: 43

Excluded observations: 4 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob.

D(LOG(FDI(-1))) -1.514416 0.284227 -5.328191 0.0000

D(LOG(FDI(-1)),2) -0.069643 0.160457 -0.434031 0.6666

C 0.083263 0.063018 1.321257 0.1939

R-squared 0.812481 Mean dependent var 0.014710

Adjusted R-squared 0.803105 S.D. dependent var 0.904354

S.E. of regression 0.401288 Akaike info criterion 1.078940

Sum squared resid 6.441284 Schwarz criterion 1.201814

Log likelihood -20.19720 F-statistic 86.65561

Durbin-Watson stat 2.025736 Prob(F-statistic) 0.000000

ADF Test Statistic -4.206050 1% Critical Value* -3.5745

5% Critical Value -2.9241

10% Critical Value -2.5997

*MacKinnon critical values for rejection of hypothesis of a unit root.

69
 70

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(LOG(GDP),2)

Method: Least Squares

Date: 03/12/12 Time: 14:18

Sample(adjusted): 1963 2009

Included observations: 47 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob.

D(LOG(GDP(-1))) -0.793094 0.188560 -4.206050 0.0001

D(LOG(GDP(-1)),2) 0.019164 0.151070 0.126857 0.8996

C 0.154188 0.046039 3.349094 0.0017

R-squared 0.386040 Mean dependent var -0.001669

Adjusted R-squared 0.358133 S.D. dependent var 0.236104

S.E. of regression 0.189159 Akaike info criterion -0.430758

Sum squared resid 1.574367 Schwarz criterion -0.312663

Log likelihood 13.12280 F-statistic 13.83295

Durbin-Watson stat 1.978627 Prob(F-statistic) 0.000022

ADF Test Statistic -5.960751 1% Critical Value* -3.5778

5% Critical Value -2.9256

10% Critical Value -2.6005

*MacKinnon critical values for rejection of hypothesis of a unit root.

Augmented Dickey-Fuller Test Equation

70
 71

Dependent Variable: D(LOG(ODA),2)

Method: Least Squares

Date: 03/12/12 Time: 14:18

Sample(adjusted): 1963 2008

Included observations: 46 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob.

D(LOG(ODA(-1))) -1.200189 0.201349 -5.960751 0.0000

D(LOG(ODA(-1)),2) 0.434347 0.163559 2.655607 0.0111

C 0.084807 0.078928 1.074489 0.2886

R-squared 0.487824 Mean dependent var -0.009502

Adjusted R-squared 0.464002 S.D. dependent var 0.712003

S.E. of regression 0.521271 Akaike info criterion 1.597898

Sum squared resid 11.68409 Schwarz criterion 1.717158

Log likelihood -33.75166 F-statistic 20.47776

Durbin-Watson stat 1.870191 Prob(F-statistic) 0.000001

ADF Test Statistic -4.376889 1% Critical Value* -3.5778

5% Critical Value -2.9256

10% Critical Value -2.6005

*MacKinnon critical values for rejection of hypothesis of a unit root.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(INTEREST,2)

Method: Least Squares

71
 72

Date: 03/12/12 Time: 14:18

Sample(adjusted): 1964 2009

Included observations: 46 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob.

D(INTEREST(-1)) -0.966665 0.220857 -4.376889 0.0001

D(INTEREST(-1),2) -0.087414 0.151616 -0.576550 0.5672

C -0.001942 0.251255 -0.007728 0.9939

R-squared 0.533224 Mean dependent var 0.000870

Adjusted R-squared 0.511513 S.D. dependent var 2.438134

S.E. of regression 1.704056 Akaike info criterion 3.966893

Sum squared resid 124.8637 Schwarz criterion 4.086153

Log likelihood -88.23855 F-statistic 24.56062

Durbin-Watson stat 2.079914 Prob(F-statistic) 0.000000

72
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Appendix iv

Regression Results of
Impact of ODA on
Savings in Nigeria

(1) (2) (3)

long_run1 ecm1 ecm2

log_oda 0.0477

(0.49)

log_fdi -0.344

(-1.84)

log_gdp 1.118***

(25.25)

INTEREST 0.0330*

(2.42)

D.log_oda -0.0211 -0.0279

(-0.56) (-0.75)

D.log_fdi 0.0268 0.0332

(0.70) (0.77)

D.log_gdp 0.179 0.192

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(1.54) (1.68)

D.INTEREST 0.00164 0.00437

(0.13) (0.34)

L.Residuals -0.142* -0.127*

(-2.55) (-2.52)

Constant 2.936 0.208*** 0.204***

(0.87) (6.36) (6.76)

Observations 47 45 45

R2 0.985 0.199 0.186

Adjusted R2 0.984 0.096 0.082

AIC 54.28 -48.50 -47.69

BIC 63.54 -37.66 -36.85

t statistics in parentheses
* ** ***
p < 0.05, p < 0.01, p < 0.001

Linear regression Number of obs =

> 49

F( 3, 45) = 5

> 5.41

Prob > F = 0.

> 0000

R-squared = 0.

> 7471

Root MSE = 1.

> 4682

74
 75

--------------------------------------------------------------------------

> ----

| Robust

log_saving | Coef. Std. Err. t P>|t| [95% Conf. Inter

> val]

-------------+------------------------------------------------------------

> ----

log_oda | -.7888435 .2880019 -2.74 0.009 -1.368909 -.208

> 7778

log_fdi | 3.236254 .3871551 8.36 0.000 2.456484 4.01

> 6024

interest | .0620675 .0487701 1.27 0.210 -.0361606 .160

> 2956

_cons | -56.60671 7.633329 -7.42 0.000 -71.98102 -41.2

> 3239

--------------------------------------------------------------------------

> ----

. gen log_gdp=log( gdp)

. reg log_saving log_oda log_fdi log_gdp interest, vce(r)

Linear regression Number of obs =

> 49

75
 76

F( 4, 44) = 15

> 7.92

Prob > F = 0.

> 0000

R-squared = 0.

> 9009

Root MSE = .9

> 2926

--------------------------------------------------------------------------

Robust

log_saving | Coef. Std. Err. t P>|t| [95% Conf. Inter

> val]

-------------+------------------------------------------------------------

> ----

log_oda | -.4366001 .1968513 -2.22 0.032 -.8333278 -.039

> 8724

log_fdi | .6092883 .456507 1.33 0.189 -.3107412 1.52

> 9318

log_gdp | .8140643 .1077653 7.55 0.000 .5968776 1.03

> 1251

interest | -.0062083 .0409459 -0.15 0.880 -.0887292 .076

> 3127

76
 77

_cons | -12.44135 8.182816 -1.52 0.136 -28.93273 4.05

> 0033

--------------------------------------------------------------------------

> ----

. estat dwatson

Durbin-Watson d-statistic( 5, 49) = 1.258496

. reg log_saving log_oda log_fdi log_gdp interest, vce(r)

Linear regression Number of obs =

> 49

F( 4, 44) = 15

> 7.92

Prob > F = 0.

> 0000

R-squared = 0.

> 9009

Root MSE = .9

> 2926

--------------------------------------------------------------------------

> ----

| Robust

77
 78

log_saving | Coef. Std. Err. t P>|t| [95% Conf. Inter

> val]

-------------+------------------------------------------------------------

> ----

log_oda | -.4366001 .1968513 -2.22 0.032 -.8333278 -.039

> 8724

log_fdi | .6092883 .456507 1.33 0.189 -.3107412 1.52

> 9318

log_gdp | .8140643 .1077653 7.55 0.000 .5968776 1.03

> 1251

interest | -.0062083 .0409459 -0.15 0.880 -.0887292 .076

> 3127

_cons | -12.44135 8.182816 -1.52 0.136 -28.93273 4.05

> 0033

--------------------------------------------------------------------------

> ----

Durbin-Watson d-statistic( 5, 49) = 1.258496

.Prais-Winsten AR(1) regression -- iterated estimates

Source | SS df MS Number of obs =

> 49

-------------+------------------------------ F( 4, 44) = 4

> 4.15

Model | 131.323391 4 32.8308478 Prob > F = 0.

78
 79

> 0000

Residual | 32.7199041 44 .743634185 R-squared = 0.

> 8005

-------------+------------------------------ Adj R-squared = 0.

> 7824

Total | 164.043295 48 3.41756865 Root MSE = .8

> 6234

--------------------------------------------------------------------------

> ----

log_saving | Coef. Std. Err. t P>|t| [95% Conf. Inter

> val]

-------------+------------------------------------------------------------

> ----

log_oda | -.4607898 .2271784 -2.03 0.049 -.9186378 -.002

> 9417

log_fdi | .7529164 .347658 2.17 0.036 .0522577 1.45

> 3575

log_gdp | .7736455 .1085287 7.13 0.000 .5549202 .992

> 3707

interest | .0064833 .0424405 0.15 0.879 -.07905 .092

> 0165

_cons | -14.97377 6.291393 -2.38 0.022 -27.65324 -2.29

> 4303

-------------+------------------------------------------------------------

79
 80

> ----

rho | .3821561

Durbin-Watson statistic (original) 1.258496

Durbin-Watson statistic (transformed) 1.886717

80