Institutions, Natural Resources and Economic Growth: An Application of Cointegration with Structural Break to Nigerian Dataset

Abstract

This study examines the long-run influence of institutions and natural resources on economic growth in Nigeria over the period 1960 – 2014. It is apparent that Nigerian economy depends largely on natural resources such as petroleum products for its sustenance, until recently. Therefore, an economy with good institutions is more likely to use natural resources optimally and hence that should translate into persistent economic growth. In view of this, good institutions are required to restore confidence in the economy and ensure adequate management of the natural resources and distribution of the proceeds realised from them. To achieve the objectives of this study, Gregory & Hansen’s (1996a) cointegration approach and vector error correction model have been applied. The results reveal that institutions have a significant positive long-run influence on economic growth in Nigeria. Similarly, natural resources have a significant positive long-run relationship with economic growth in Nigeria. The results thus imply that improving the quality of institutions has the tendency of increasing long-run economic growth in Nigeria. Furthermore, they imply that enhancing the exploitation and maximum utilisation of natural resources will also help promote long-run economic growth in Nigeria. In addition, the findings of this study indicate that accounting for structural break in VECM improves the significance and thus reliability of the model applied. Therefore, this study recommends the enforcement of rule of law which will ensure equality before the law and promote contract enforcement and property rights, which are proxies for institutions. Furthermore, it recommends that government should further enhance the exploitation and maximum utilisation of natural resources as well as diversify the economy so as to reap the benefits from the production of natural resources.