A Comparative Analysis of the Impact of Fluctuating Oil Prices on Nigeria’s Agricultural and Industrial Sectors

ABSTRACT This study was the brain child of the earnest desire to unravel the impact of the incessant fluctuating oil prices on two crucial sectors of the Nigerian economy; the agricultural sector and the industrial sector which used manufacturing sector as proxy. The analysis employed the unrestricted Vector Autoregressive methodology as its empirical technique, with a quarterly time series data spanning from 1987 quarter one through 2014 quarter four which covered 112 observations. The result of the impulse response function showed that a one standard deviation shock in oil price volatility had no significant impact on agricultural and manufacturing sectors. These results were further validated by the variance decomposition analysis which further established that amidst the oil price volatility; there exist a complementary role between the sectors. These findings therefore, necessitated the study’s conclusions. Thus it is supposed that if the country’s excessive dependence on crude oil price benchmarks for fiscal policy strategies is not mitigated, the economy may be headed for a deeper crises and instability orchestrated by the utterly negligence of other crucial sectors of the economy.

TABLE OF CONTENTS

Approval page……………………………………………………………………...ii

Certification………………………………………………………………………..iii

Dedication………………………………………………………………………….iv

Acknowledgements………………………………………………………………...v

Abstract……………………………………………………………………………..x

CHAPTER ONE.................................................................................................... 1

1.1 BACKGROUND TO THE STUDY.............................................................. 1

1.2 STATEMENT OF THE PROBLEM............................................................. 5

1.3 RESEARCH QUESTIONS........................................................................... 9

1.4 OBJECTIVES OF THE STUDY .................................................................. 9

1.5 RESEARCH HYPOTHESES.......................................................................10

1.6 POLICY RELEVANCE OF THE STUDY ..................................................10

1.7 SCOPE AND DELIMITATION OF THE STUDY......................................11

CHAPTER TWO ..................................................................................................12

LITERATURE REVIEW .....................................................................................12

2.1 CONCEPTUAL ISSUES.............................................................................12

2.2. THEORETICAL LITERATURE................................................................15

2.2.1 RAGNER NURKSE’S BALANCED GROWTH THEORY..................15

2.2.2. THE BIG PUSH THEORY...................................................................16

2.2.3. THE RESOURCE CURSE THOERY...................................................17

2.2.4 THE ROMER GROWTH MODEL .......................................................18

2.2 EMPIRICAL LITERATURE.......................................................................19

2.2.1 DEVELOPED ECONOMIES (FOREIGN)............................................19

2.2.2 DEVELOPING AND EMERGING ECONOMIES (FOREIGN)...........20

2.2.3 DEVELOPING ECONOMY (NIGERIA)..............................................22

vii | P a g e

2.3 SUMMARY OF EMPIRICAL LITERATURE REVIEWED ......................25

2.4 LIMITATIONS OF PREVIOUS STUDIES AND POINT OF DEPARTURE

..........................................................................................................................26

CHAPTER THREE ..............................................................................................27

METHODOLOGY ...............................................................................................27

3.1 THEORETICAL FRAMEWORK................................................................27

3.2 MODEL SPECIFICATION .........................................................................28

3.3 MODEL JUSTIFICATION..........................................................................30

3.4 ESTIMATION PROCEDURE.....................................................................30

3.4.1 STRUCTURAL BREAK AND UNIT ROOT TEST..............................31

3.4.2 STATIONARITY/UNIT ROOT TEST..................................................31

3.4.3 COINTEGRATION TEST.................................................................3232

3.5 DIAGNOSTIC TESTS ............................................................................3332

3.5.1 THE AUTOCORRELATION TEST/LANGRANGIAN MULTIPLIER (LM)

TEST ....................................................................................................................33

3.5.2 TEST FOR NORMALITY.....................................................................33

3.5.3 STABILITY TEST ................................................................................34

3.6 MODEL ESTIMATION ..............................................................................34

3.6.1 IMPULSE RESPONSE FUNCTION .....................................................34

3.6.2 VARIANCE DECOMPOSITION..........................................................35

3.6.3 PARAMETRIC ESTIMATION...............................……………………35

3.7 SOURCE OF DATA AND SOFTWARE PACKAGE.................................36

CHAPTER FOUR ................................................................................................37

PRESENTATION AND INTERPRETATION OF EMPIRICAL RESULTS .......37

INTRODUCTION ................................................................................................36

viii | P a g e

4.1. REGRESSION RESULTS AND ANALYSIS OF THE DATA

STRUCTURE....................................................................................................37

4.1.1 RESULTS FROM STRUCTURAL BREAK TESTS.............................37

4.1.2 BAI-PERRON MULTIPLE BREAKPOINT TESTS .............................39

4.1.3 TEST FOR UNIT ROOTS UNDER STRUCTURAL CHANGES WITH

ENDOGENOUS BREAKPOINTS .................................................................40

4.1.4 UNIT ROOT TEST WITHOUT STRUCTURAL CHANGES...............41

4.2 NORMALITY TEST RESULT ...................................................................43

4.3 SERIAL CORRELATION LM TEST AND LAG SELECTION .................44

4.4 STABILITY DIAGNOSTIC TEST..............................................................45

4.5 ESTIMATED VECTOR AUTOREGRESSIVE MODEL RESULTS ..........46

4.5.1 RELATIVE RESPONSE OF AGRICULTURAL OUTPUT (AGROP)

TO A SHOCK IN OIL PRICE VOLATILITY ...............................................46

4.5.2 RELATIVE RESPONSE OF MANUFACTURING OUTPUT (MANOP)

TO A SHOCK IN OIL PRICE VOLATILITY ...............................................48

4.5.3 A COMPARATIVE ANALYSIS OF THE RELATIVE RESPONSES OF

AGRICULTURAL OUTPUT (AGROP) AND MANUFACTURING

OUTPUT (MANOP) TO A SHOCK IN OIL PRICE VOLATILITY..............49

4.6 VARIANCE DECOMPOSITION................................................................50

CHAPTER FIVE ..................................................................................................53

SUMMARY, CONCLUSION AND POLICY RECOMENDATION ...................53

5.1 SUMMARY.................................................................................................53

5.2 CONCLUSIONS AND POLICY IMPLICATIONS.....................................54

5.3 POLICY RECOMMENDATIONS ..............................................................55

REFERENCES .....................................................................................................57

APPENDIX ..........................................................................................................62