CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The rate of growth in Nigeria economy cannot be fully analyzed without a better check out the contribution of capital formation to Nigeria’s economic process. This is within the understanding that capital formation has been recognized as a crucial factor that determines the expansion of Nigerian economy. According to Bakare (2011), Capital formation refers to the proportion of present income saved and invested so as to reinforce future output and income. It usually results from acquisition of latest factory alongside machinery, equipment and every one productive capital goods. Capital formation is analogous to a rise within the physical capital stock of a nation with investment in social and economic infrastructures. Gross fixed capital formation is often classified as gross private domestic investment and gross public domestic investment. The gross public investment includes investment by government and/or public enterprises. Gross domestic investment is like gross fixed capital formation plus net changes within the level of inventories (Jhingan, 2006). Capital formation perhaps results in the assembly of tangible goods (i.e., plants, tools & machines) and intangible goods (i.e., qualitative & high standard of education, health, scientific tradition and research) in a country. Capital formation is like a rise in physical capital stock of a nation with investment in social and economic infrastructure. Continuing on the matter he noted that Gross fixed capital formation is often classified into gross private domestic investment and gross public domestic investment. The gross public investment includes investment by government and public enterprises while gross private domestic investment is investment by private enterprises. Gross domestic investment is like gross fixed capital formation plus net changes within the level of inventories. Economic theories have shown that capital formation plays an important role within the models of economic process (Beddies 1999; Gbura and THadjimichael 1996, Gbura, 1997). This view called capital fundamentalism however was supported by the work of Youopoulos and Nugent (1976) as sited in Bakare (2011). Growth models just like the ones developed by Romer (1986) and Lucas (1988) predict that increased capital accumulation may result during a permanent increase in growth rates. Capital naturally plays a crucial role within the economic process and development process. It has always been seen as potential growth enhancing player. Capital formation determines the national capacity to supply, which successively, affects economic process. Deficiency of capital has been cited because the most serious constraint to sustainable economic process. Meanwhile, an understanding of the impact of capital formation may be a crucial prerequisite in designing a policy intervention towards achieving economic process. The process of capital formation consistent with Jhingan, (2006) involves three inter-related conditions; (a) the existence of real savings and rise in them; (b) the existence of credit and financial institutions to mobilize savings and to direct them to desired channels; and (c) to use these savings for investment in capital goods. The government of Nigeria in 1986 considered the necessity for improvement in capital information and pursued an economic reform that shifted emphasis to non-public sector. The public sector reforms were expected to make sure that interest rates were positive in real terms and to encourage savings, thereby ensuring that investment would be readily available to the real sector.

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