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The 2-Gap Model and the Nigerian Economy

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The 2-Gap Model and the Nigerian Economy

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THE TWO GAP MODEL AND THE NIGERIAN ECONOMY.
- BRIDGING THE GAPs WITH FOREIGN DIRECT INVESTMENT.

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By Bakare Aremu, Tunde Abubakar
Department of Economics , university of lagos, akoka, yaba ,lagos And

Bashorun, oladipo titilayo
Department of Finance , university of lagos, akoka, yaba ,lagos

ABSTRACT Holis Chenery (2005) proposed existence of 2-gaps in LDCs in his TWO GAP MODEL. This research work sought to unveil the existence of the gaps in the Nigeria economy. We realized that domestic savings was insufficient to fund required investment in Nigeria (i.e. S ≠ I).This implies existence of savings gap, also we found that disequilibrium exist in external balance (i.e. X ≠ M), which imply that exchange rate gap equally exist. We sought the impact of these two gaps on economic performance in Nigeria and if FDI could be a bridge, through error correction mechanism, the results revealed that, the two gaps retard economic performance, and that FDI is a bridge but not sufficient in the short run and not reliable in the long as it promote importation in both periods, which could widen the existing exchange rate gap. We discovered from disaggregation of balance of payments that exchange rate gap oil (EXRGAPO i.e. balance of trade oil) should have been a source of exchange rate appreciation but the price is always quoted in U. S dollars (X0 - M0). In addition we found that FDI in Nigeria support export promotion and not import substitution and that exchange rate gap still persist in the long run but saving gap eroded. We therefore recommended that Government should attract more FDI by providing enabling environment through political and social stability and development of adequate infrastructures, provision of employment opportunity which would increase output, income, and savings and through multiplier effect generate further employments. Key Words: 2-Gap Model, Foreign Direct Investment, Import, Export, Savings, Investment, Gross Domestic Product.

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