DRIVERS OF ECONOMIC DIVERSIFICATION IN NIGERIA: DO FINANCIAL DEVELOPMENT, OIL RENTS, FOREIGN DIRECT INVESTMENT AND EDUCATION MATTER?
Keywords:
Economic Diversification, Oil Rents, Financial Development, Foreign Direct Investment, Education, ARDLAbstract
This study empirically investigates the determinants of economic diversification in Nigeria, examining both domestic production and export structures from 1980 to 2023. Economic diversification is operationalized through two proxies: the proportion of non-oil GDP and the UNCTAD Export Diversification Index. The Autoregressive Distributed Lag (ARDL) modelling technique is employed to estimate both short-run dynamics and long-run equilibrium relationships, accounting for the mixed order of integration of the variables. The analysis explicitly incorporates structural breaks identified by the Bai-Perron test, which correspond to major economic and political events, to ensure robust parameter estimation. The bound test results confirm stable long-run cointegrating relationships for both diversification measures. The findings indicate that oil rents and foreign direct investment (FDI) inflows exhibit a negative long-run impact on economic diversification, corroborating the resource curse hypothesis. In contrast, domestic credit availability is identified as a significant positive determinant of non-oil GDP contribution. Technology adoption demonstrates a dual effect: a short-run negative impact transitions into a positive long-run influence on diversification. Human capital development, proxied by expected years of schooling, is a consistent positive driver, whereas physical capital formation shows a significant negative relationship with diversification. A key divergence is observed between the determinants of domestic economic diversification and export diversification. The results show the structural impediments posed by hydrocarbon dependence and highlight the critical roles of financial sector development, technological advancement, and human capital accumulation in facilitating a structural transformation of the Nigerian economy.
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