ASSESSING THE NEXUS BETWEEN ECONOMIC DIVERSIFICATION AND MACROECONOMIC VARIABLES IN NIGERIA: AN EMPIRICAL EVIDENCE
Abstract
This paper presents empirical evidence on the link between macroeconomic variables and level of economic diversity in Nigeria from 1981 to 2015. Specifically, this paper is consequential because it focuses on macroeconomic variables (GDP per capita, real exchange rate, foreign direct investment, trade liberalization and domestic credit to private sector) in influencing diversification. The model applied Hirschmann-Herfindahl Index (HHI) in determining diversity index of Nigeria. The Vector Autoregressive (VAR) model and the impulse response function model were used to find out how shocks in the macro variables affects diversification index. The direction of causality was determined using the Granger Causality test. From the HHI, the Nigerian economy remains undiversified but the economy recorded tremendous improvement in 2009, 2011 and 2012.The effect of GDP per capita and trade liberalization to diversification index is fluctuating. More than half the time the effects are negative. Domestic credit to private sector and real exchange rate does have a smooth and positive effect on diversification index. The Granger causality test shows a unidirectional causality that flows from GDP per capita, real exchange rate, foreign direct investment to diversification index. A diversification policy that places priority on agriculture, industry and service sectors is recommended. An overvalued exchange rate discourages investors and hinders private sector development. Therefore, government policies should be towards attaining an optimum exchange rate.
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