Several countries that have achieved rapid economic development since World War II have two common features. First, they invested in education of men, women and in physical capital. Second, they achieved high productivity from this investment by providing efficient capital markets, competitive trade-lending roles, and higher level of economic efficiency driven by technological capabilities, stable polity, appropriate economic policy and economic system (World Bank, 2002). However, as a result of market failure that may likely occur in the process of growth, it may not be ideal to leave the process of economic growth entirely to the market forces especially in the developing economies like Nigeria. One of the cardinal economic objectives of the developing countries, including Nigeria is to achieve high economic growth that will lead to economic development and reduce poverty from whatever theoretical angle that one may look at it, economic growth indicates the ability of an economy to increase production of goods and services with the stock of capital and other factors of accumulation with the right combination of other factors of production will bring about their higher output growth.
Economic growth is a fundamental requisite to economic development. This informs why in Nigeria growth continuous to dominate the main policy thrust of government’s development objectives. Essentially, economic growth is associated with policies aimed at transforming and restructuring the real economic sectors. Nevertheless, the lack of sufficient domestic resources, Savings and investment to support and sustained the sectors is a major impediment to economic development in the country because of the gap between savings and investment.
Saving naturally play an important role in the economic growth and development process. Savings determine the national capacity to invest and thus to produce, which in turn, affect economic growth potential. Low saving rates have been cited as one of the most series constraints to sustainable economic growth. Growth models developed by Romer (1986) and Lucas (1988) predict that higher savings and the related increase in capital accumulation can result in a permanent increase in growth rates.
Savings represents that part of income that is not spent on current consumption, but when applied to capital investment, output increases. This output is increased by introducing new innovations in form of technology, which leads to a faster economic growth and development by creating the possibility of investing in a new plant that increases the productivity of the economy
Savings provides developing countries (including Nigeria) with the much needed capital for investment which improved economic growth. Increase in savings leads to increase in capital formation and production activities that will lead to employment creation and reduce external borrowing of government. Low saving rates may maintain low-growth levels because Harrod Domar model suggested that savings is an important factor for economic growth. Malunond asserts that depending on foreign sources to financed investment makes the country highly sensitive to external shocks
The classical theory indicates that savings has neutral effect on economic growth. The Keynesian economic theory implies that savings has contractionary or expansionary effect on economic growth. The Harrod-Domar model suggests that savings has expansionary effect on economic growth. The result of the investigation on the effect of savings on economic growth in Nigeria by Abu (2010) supports the classical neutrality hypothesis. The result of the investigation on the effect of savings on economic growth in Nigeria by Nwanne (2014) agrees with the Keynesian contractionary hypothesis. The result of the investigation on the effect of savings on economic growth in Nigeria by Stephen and Obah (2017) conforms to Keynesian and Harrod-Domar expansionary hypothesis.
The relationship between savings and economic growth is not only an important but also a controversial issue for both academicians and policy makers. Many internationally reputed economists have analyzed this phenomenon as cause and effect relationship. Modern saving theories indicate that the rate of growth in aggregate real income is an essential determinant of the national saving rates. Rapid growth raises the saving rate. Higher national saving then release resources for the investment needed to sustain high growth.
The savings-growth link in Nigeria is particularly unique because the determinants of savings in Nigeria cut across several diverse factors, ranging from economic and social to religious and fetish reasons. These make the Nigerian case an interesting relationship to look at. According to the prior-savings theory, higher savings lead to higher investment, which in turn leads to higher economic growth. In this way, savings play an important role in the process of economic development. This is particularly critical for a developing country like Nigeria where the demand for loanable funds is assumed to exceed the supply, and where the constraint on investment is the supply rather than the demand for loanable funds.