CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The widely held belief that investment through capital inflows will result in positive and important development outcomes based initiatives aimed at attracting foreign capital into developing nations. This plausible statement is reflected in the current policy trend in emerging nations. Empirical research has argued that these capital flows are advantageous to emerging nations because of their potential to improve economic performance (Adams, 2009; Goldberg, 2004). Despite the fact that a few studies have questioned and dismissed the economic and development benefits associated with such flows (UNCTAD, 2005; Rodrik and Subramaniam, 2008; Bhinda and Martin, 2009), the majority view has remained the productivity-enhancing influence. On the one hand, the optimistic side sees foreign capital inflows as a way to boost total factor productivity and, more broadly, the effective use of resources in the recipient economy (OECD, 2002; Chor et al., 2008). Furthermore, according to the literature, economic development is fueled by increased access to financial instruments (financial inclusion), which encourages savings, productive investment, and the transfer of capital (funds) from abroad, resulting in lower poverty, lower inequality, and increased private investment (Beck, et al., 2007; Demirgüç-Kunt et al., 2011). As a result, capital inflows and financial deepening increase the tools needed to promote structural economic transformation and an effective industrial structure for broad-based development and poverty reduction. In light of the previous key findings, developing nations, particularly Nigeria, appear to be sustaining and revitalizing global development programs aimed at attracting foreign capital inflows and improving access to financial services in order to alleviate poverty. The current statistical data indicates an increase in the amount of foreign investment in Nigeria, which began in the 1980s with the implementation of structural adjustment programmes (SAPs) to promote domestic investment and strengthen financial sector growth. FDI Inward Flows (million USD) to Nigeria were 3.06 and 4.45 in 2015 and 2016, respectively, according to the UNCTAD 2018 World Investment Report. In terms of governmental initiatives to improve access to financial credit, a steady growth in microfinance credit has followed the formation of microfinance banks, primarily at the municipal level, since 2001, despite the fact that only 36% of the population has an online bank account (World Bank, 2017). Despite these multifaceted approaches and policy intervention methods (such as the creation of a consortium of poverty reduction programmes), Nigeria's poverty rate remains worrying, since the country seems to be "the world's poverty capital" based on current global poverty figures (Brookings Institution, 2018). Given Nigeria's ongoing mass severe poverty, evaluating the Millennium Declaration's core aim (i.e., eradicating extreme hunger and poverty) remains critical. With 87 million people living in extreme poverty, Nigeria has the greatest rate of extreme poverty in the world, with six people dying every minute compared to India's 73 million (Brookings Institution, 2018). In economic and social aspects, the country may be considered one of the world's most backward developing countries. As a result, achieving the first Sustainable Development Goal (SDG) of the United Nations, which is to eradicate extreme poverty, looks to be a challenge. Nigeria's situation has sparked widespread outrage and debate. Due to a variety of factors, the impact of capital inflows and financial deepening on poverty reduction in emerging nations may be less significant and more beneficial than predicted. For example, these economies rely excessively on highly volatile private capital inflows (unpredictable investment sources), and it has been suggested that impoverished families may be more vulnerable to such a high level of susceptibility than non-poor households through different routes (Calvo et al., 1994; Son and Kakwani, 2006). Another argument, based on a collection of earlier empirical studies compiled by Hulme and Mosley (1996), is that poor households do not benefit from financial credit expansion; instead, non-poor people with income above the poverty line (i.e. non-poor borrowers) who can do better with financial credit (mostly micro-loans) would benefit greatly. Although little research on Nigeria supports the claim that foreign capital inflows have no substantial impact on welfare (Akinmulegun, 2012; Ogunniyi and Igberi, 2014), several studies on developing nations, including country-specific studies, contradict this claim. According to Magombeyi and Odhiambo (2017), Soumare (2015), Fowowe and Shuaibu (2014), and Gohou and Soumare (2012), there is a substantial and positive link between net FDI inflows and enhanced wellbeing. In addition, while investigating the extent to which microfinance organizations help with poverty reduction, According to Okpara (2010), the consistent growth in microfinance lending has resulted in a significant decrease in the poverty index.However, little research on the impact of capital inflows and financial development on poverty reduction in Nigeria has been done. With Nigeria's alarming poverty rate and a growing lack of consensus among academics, a few key issues that appear to remain unanswered are: a) What is the fundamental reason for Nigeria's mounting poverty level? b) What is the substantial welfare gain resulting from increased financial access and foreign capital inflows in Nigeria? b) How can capital inflows and financial development work together to reduce poverty? Given the disparity in the research, it is critical to improve our knowledge of the link between capital inflows, financial development, and poverty reduction. And, because the interaction impact of capital inflows and financial deepening on poverty reduction is relatively under-researched, the report is the first empirical study to examine this entirely in Nigeria, to the best of the authors' knowledge. As a result, the study's primary goal is to look at the short-term, long-term, and causal relationships between the interaction terms – capital inflows and financial development – and poverty reduction in Nigeria. Another major novelty that the current study provides on the capital inflows – financial development – poverty argument in Nigeria is the application of the ARDL bound test and Granger causality test based on the Vector Error Correction Model (VECM). While no research has yet been conducted using this strategy in relation to the topical issues in Nigeria, it is believed that the technique will help in the removal of the difficulty that is frequently associated with short time series data. Because economic policy is so important in supporting positive development outcomes and poverty reduction, the study's goal is to provide policymakers with recommendations on how to promote optimum investment policies and better financial access in order to reduce poverty.

1.2 STATEMENT OF THE PROBLEM

The rising global poverty rate has been a major source of concern for both international organizations and governments. The goal of the concern is to improve human well-being by lowering the world's high poverty rate. One of the Millennium Development Goals (MDG primary) is to cut poverty in half by 2015.The MDG charter was signed by the Nigerian government in its quest to eradicate the country's high rate of poverty. Poverty has continued to rise in Nigeria, and eradicating it has been one of the country's major challenges under successive governments. Despite the various programs and projects implemented, as well as the massive inflow of income over the last three decades, the majority of Nigerians remain impoverished. This is ironic given Nigeria's abundance of resources (both human and natural). The concern is that countries with fewer resources, such as Japan and Israel, have been able to overcome poverty and other developmental issues. Their secret to success was their ability to develop human resources and effectively use them for the long-term development of their countries. The problem in Nigeria is that, despite the large population of human resources available, there is still a scarcity of skilled manpower to guide the country's development goals, particularly those related to poverty alleviation.

1.3 OBJECTIVE OF THE STUDY

The objectives of this study are to:

I.       To evaluate the influence of capital inflow on poverty alleviation in Nigeria,

II.    To know the effect of poverty on Nigeria’s economy,

III. To determine ways to eliminate poverty in Nigeria

1.4 RESEARCH QUESTIONS

I.       What is the influence of capital inflow on poverty alleviation in Nigeria?

II.    What effect does poverty have on Nigeria’s economy?

III. In what way can poverty be eliminated in Nigeria?

1.5 SIGNIFICANCE OF THE STUDY

The goal of this study is to examine the impact of capital inflow on poverty reduction in Nigeria. As a result, this research will be useful for academic purposes, and students will have access to a wider variety of materials. In terms of practical application, the findings of this study will be used as a guideline for poverty alleviation in small and large countries alike.

1.6 SCOPE OF THE STUDY

The study focused on the impact of capital inflows on poverty alleviation/eviation in Nigeria, with the scope being Nigeria's independence.

1.7 LIMITATION OF STUDY

The study was limited given the short duration of the study and the budget.

1.8 DEFINITION OF TERMS

Capital inflow: In economics, capital inflow is the amount of capital coming into a country, for example in the form of foreign investment.

Poverty Alleviation: Poverty alleviation is a set of measures, both economic and humanitarian, that are intended to permanently lift people out of poverty. 

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