Aviation Industry and Implication For Economic Development in Nigeria
Aviation Industry and Implication For Economic Development in Nigeria
Aviation Industry and Implication For Economic Development in Nigeria
NIGERIA
Abstract
development in Nigerian. Over the years, various governments of Nigeria have put in place a series
of policy instruments for the development of the aviation sector as sinews to bolster the desired
growth. But air transport system continues to mirror inefficiency, mismanagement and airline
mishap. This study developed a series of econometrics models including dynamic ordinary
regression equation, cointegration, error correction model and granger causality techniques to
examine the relationship between air transport and economic growth. The analyses suggests a
positive influence of air transport on economic growth, a long run equilibrium relationship and a
causal unidirectional relations from air transport to economic growth. The diagnostic test for the
normality of the model showed that the model functional form is adequate, stable with no serial
correlation. From the analysis, this study recommends a proactive and dynamic cohesive transport
policy that benefits all the stakeholders. Also, the sector must improve on its managerial expertise
guided by adequate transparency and accountability in order to achieve results and develop the
INTRODUCTION
Aviation has become an integral part of the socioeconomic life of the country. According to
Igbatayo and Igbinedion (2014: 1), the aviation industry can be defined as those activities that
relate directly to transporting people and goods by air from one place to another. The industry
comprises various activities such as airline and transport operations, general aviation aircraft
maintenance, scheduled and chartered flights for passengers and freight, as well as air traffic
control and regulation. It also includes activities directly serving air passengers, such as check-in,
baggage
-handling and on-site retail and catering facilities (OEF, 1999)cited in ( Igbatayo and Igbinedion
2014:3).
It is important to note that the aviation sector is regarded as a strategic industry, not only for its
potential for economic growth but also its crucial role in national development and regional
integration. As put by (OEF 1999), the most important contribution aviation often makes to the
economy is through its impact on the performance of other industries and as a facilitator of their
growth.
The aviation industry is part of transport infrastructure on which many other part of the economy
depends. It contributes to the economic growth, providing better transport link across the economy.
It facilities international trade by providing fast transportation network (Ismail et al 2014: 93).
The aviation industry is a sector in its own right employing aviation workers and providing
livelihood opportunity to service providers in the industry. According to Owopoti (2014: 2), the
industry facilitates productivity growth because of its position as rapidly growing sector that
industries. This was further emphasised by (Perovic 2013: 57) when he argued that the industry has
a significant benefit in the Nigerian economy, supporting Nigeria GDP of about 4% and job
creation of about 159,000 of Nigerian working force, contribution to tourism industry and foreign
investment in the Nigerian economy. He further notes that the aviation industry supports tourism
and international business by providing the world’s only rapid worldwide transportation network.
However, the Nigerian aviation industry is yet to contribute significantly to economic growth.
Despite the potential of the sector to create employment and spur the development of other
industries, such as the tourism and hospitality sector. The lack of adequate infrastructure and some
other challenges have constrained the aviation industry in Nigeria. This contradictory view is
authors in examining the role of aviation industry in the economic development of Nigeria spurred
interest in researching this topic. Many authors have examined the aviation industry in Nigeria;
while some argued that the implications have been positive, some argued that it has been negative
while some argued that the aviation industry has not had any implication on the economic
development of Nigeria. This study intends to fill this gap in the literature by examining the
aviation industry and its implication for Nigerian economic development. Emphasis will be placed
on the nature of the aviation sector in Nigeria since inception and how it has contributed to
economic development.
The main objective of this study is to examine the implication of aviation industry in the economic
development of Nigeria. In order to achieve this objective, the following are the specific
objectives:
2.) Explore how the activities of the aviation industry have influenced the economic development
of Nigeria.
3.) Investigate the relationship between aviation industry and economic development.
Research Questions
3.) What is the role of aviation industry in the economic development of a country?
4.) What are the implications of the aviation industry on the economic development of Nigeria.
This study is very significant as it provides a unique way of exploring into the factors that can
contribute to the economic development of Nigeria. It has been discovered that little emphasis has
been placed on the implications of aviation industry in economic development and hence,
exploring this topic will add significantly to the literature and further provide ways by which the
It will also help student researchers to fully understand the aviation industry and further write on
the topic.
This study covers the aviation industry in Nigeria right from inception, and the contributions and
Research Hypothesis
1.) There is no significant relationship between aviation industry and economic development.
2.) There is significant relationship between aviation industry and economic development.
This study is really limited in terms of gathering materials. The aviation industry is a very strategic
sector of the economy and as such enough materials were not found.
Definition of terms
1.) Aviation industry: this can be defined as those activities that relate directly to transporting
people and goods by air from one location to another (Igbatayo and Igbinedion 2014: 1)
2.) Economy: this refers to a man made organization for the satisfaction of human wants. It is a
3.) Economic development: It can be defined as the development of economic wealth of countries,
regions or communities for the well-being of their inhabitants. From a policy perspective,
economic development can be defined as efforts that seek to improve the economic well-being and
quality of life for a community by creating and/or retaining jobs and supporting or growing
incomes and the tax base (Salmon Valley and Innovation Centre).
CHAPTER TWO
LITERATURE REVIEW
Great efficiency and value are obtained when long distances are involved and high value payloads
are moved, although, the time and cost efficiencies obtained decreases as distances traveled is
reduced. Air transport is often worthwhile even for relatively short distances. It also provides a
communication link, which is sometimes vital, between the different groups of people involved
WIE (2011). Hayle (1973) maintained that transport development may not be precondition for
economic development. However, he was quick to acknowledge the fact no industry thrives in the
absence of transport, whether in the key areas of marketing of sourcing raw material, distribution
of products, or movement of members of staff from home to factories. In the same vein Filani
(1986) lend support to Hayle (1973) when he argued that for any economic progress to be achieve
in any country, the aviation industry as an integral part of transport must be developed, this is sine-
qua-non to development. Adefolalu (1977) opined that air transportation has introduced the most
effective method of overcoming the barrier imposed by physical distances and difficult topography
The International Air Transport Association (IATA) commissioned Oxford Economics (2012) to
estimate the economic and social benefits of aviation in over 80 countries worldwide. The analysis
includes the traditional economic footprint of the industry, measured by aviation’s contribution to
gross domestic product (GDP), jobs, and the tax revenues generated by the sector and its supply
chain. However, the economic value created by the industry goes beyond the value captured by
these measures. Therefore, the study also investigates the positive impacts of the connectivity
provided by air transport services. The connections made between cities and markets produce an
important infrastructure asset that facilitates activities that enhance a nation’s productivity. More
specifically, air transport enables foreign direct investment (FDI), business cluster development,
specialization, and other spillover effects. The analysis produced by Oxford Economics is one of
the first attempts to estimate these benefits of connectivity (Perovic, 2013). According to a report
by Air Transport Action Group (ATAG), aviation plays a vital role in facilitating economic
major engine of economic growth, Globally, 51% of international tourists travel by air.
improving business operations and efficiency; and allowing companies to attract high quality
employees.
The air transport sector (Aviation) makes a substantial contribution to Nigerian public finance
account. This is achieved through corporate tax paid by companies, income tax paid by all their
employees, social security payments (employers and employees contributions), and the revenue
generation through aviation sector taxes. All these provide an indication that taxes paid by the
aviation sector’s supply chain and taxes raised through induced spending channels contribute to
total revenue in Nigeria (Oxford Economics, 2012). The impact of the air transport sector was
analyzed by Nwaogbe, Wokili, Omoke and Asiegbu (2013), they reported that the air transport
sector has contributed immensely to the economic development of Nigeria and the entire globe in
two other ways. Firstly, through the taxes levied on Gross Value Added i.e. the sum of profits and
wages. Secondly, through its lump sum investment and its use of higher advanced technology
systems for its operations and maintenance. Stephens, Ikeogu and Ukpere (2014) carried out a
study on the contribution of aviation industry on the Nigerian economy. It showed that the
domestic air transport industry is fast growing when we measure demand for its services.
Adeniji (1993) opine that passengers who travel regularly demand consistency of service.
computerized check in, through check in to final destination, frequent flyer tracking, branded or
business lounges and above all recognition. Adeniyi (1998), explain that transport stimulates and
enhances the productive uses of human and material resources and hence economic development of
any society. Oyede (1995) examined the activities of agencies in the Nigerian air transport sector.
His interest centered on Nigerian Aviation Handling Company (NAHCO). Oyede maintained that
the outstanding activities and responsibilities of NAHCO are the provision of assistance to foreign
Some researchers have examined the connection between high technology employment in a region
and whether the region is served by a hub airport. For instance Button (2006) pointed out that in
United States and Europe; more than 40% of air travels are for business purposes. The remaining
trips are either for leisure or for visiting friends and relatives. Hummels (2006) found that the
elasticity of air shipping costs, with respect to distance declined from 0.43% to 0.045% in 2004.
That is doubling distance shipped cause a 43% increase in air shipping costs in 1974, but 4.5%
increase in air shipping costs in 2004. Furthermore, Aizenman (2004) and Schaur (2006) retain the
position that air shipping is more reliable and fast to handle international demand volatility. This is
because air shipment takes hours rather than weeks. Air transport shipping provides real option of
smooth demand shocks for organizations or firms. An efficient air transport system and shipping
modes helps in quality improvement of the air transport system and also elevate international and
Lima and Verables (2001) observed that a 10% increase in transport costs reduces trade volume by
20%. Furthermore, recent studies have observed that a 10% increase in time reduces bilateral trade
volume between 5% and 8% (Hausman, Lee and Subramanian, 2005; Djankov, Migiel, Qian,
Roland and Zhuravskaya, 2005). Obviously, aviation is fully superior to other shipping modes of
transport especially, in the area of fastness or time saving. However, high cost of transportation is
associated with air transportation. But, Swan (2007) observed that since 1970, both price and
production cost for air travel have been declining at about 1% annually.
Ugboaja (2013) conducted a study on the sustainability assessment of Nigerian transport policy.
The paper used a Survey research method. The data analyses revealed that the overall mean score
was 2.22 which is lower than the expected value of 3.00 on a five point Likert scale. Therefore, it
was concluded that the extent to which the Transport Policy enhances Social Sustainability in
Nigeria was below the average. Which is an indication, that the policy had little or no influence in
reducing the negative social impact emanating from Nigeria’s Transport system. Nwaogbe, Wokili,
Omoke and Asiegbu (2013), carried out a descriptive analysis of the impact of air transport on
economic development in Nigeria. The study find that air transport sector supports gross domestic
product and the employment of Nigerians through four different routes: direct route, indirect route,
development of Nigeria. The study utilized a descriptive survey method. The result reveals that,
of the country. The study conclude that, for any proper achievements to be achieve in aviation
sector, government must step up its contribution, regulation and due process must be followed in
awarding of contract and making decision that relates to the development of aviation. Akanbi,
Bamidele and Dunni (2013) employed an OLS regression technique to investigate empirically the
that transport output and investment made on transport infrastructure in Nigeria is positive and
significant on growth. In a similar development, Oyesiku, Adegbemi and Folawewo (2013) using
OLS regression technique, they conducted a research on the impact of public sector investment in
transport on economic growth. The data for the study spanned 1977 to 2009. The outcome of the
estimated result showed that transportation impacted negatively on economic growth in Nigeria.
According to Oluwakoya and Olufemi (2013), the aftermath of the deregulation and liberalization
policy has increased air line services at the air terminals of Nigeria. The study utilizes primary and
secondary data. The regression result revealed that reforms in aviation sector, have improve service
delivery of the air line operators in Nigeria. Ikpechukwu and Urael (2012) investigated the impact
of quality of transport infrastructure on the economy. They apply Pearson correlation coefficient (r)
to test the hypothesis of the study. The study revealed a positive correlation quality of transport and
economic growth in Nigeria. Ladan (2012), opined that Nigeria air transport is bedeviled by a
coherent transport policy, bad management, decaying facilities, loose security, closure of airport,
The air transport sector has contributed immensely to the economic development of Nigeria and
the entire globe in two other ways. Firstly, through the taxes levied on Gross Value Added (recall
that it is equal to the sum of profits and wages). The aviation sector helps to support the
government in terms of revenue generation, and the public services that are needed for movement
of goods and services all over the world. Secondly, through its lumpsum investment and its use of
higher advanced technology systems for its operations and maintenance. The aviation sector
generates more Gross Value Added per employee in the economy as a whole, raising the overall
productivity of the economy. The air transport sector comprises of two different operational
2.1Airlines
The airlines responsibility is to transport passengers and freight from one geographical location to
another, there by rendering efficient interaction of a country with the international world. This also
helps in economic investment through tourism and trade (Oxford Economics, 2012).
2.2Ground-Based Infrastructure
The ground-based infrastructure of the aviation industry includes all airport facilities. The services
provided for the airline and their aircraft starting from the entry-gate of the airport to the out-gate,
the services provided for the passengers on-site at airports [such as baggage handling, ticketing and
retail and catering services], together with essential services provided off-site [such as air
The air transport or aviation sector supports Gross Domestic Product and the employment of
2.2.1Direct Route
This is the operation/production output and employment of the companies that are under the
aviation sector.
2.2.2Indirect Route
This is transformation output and employment supported through the aviation sector‟s Nigerian
2.2.3Induced Route
This is the employment and output supported by the spending of those directly or indirectly
2.2.4Catalytic Route
This includes the spillover benefits that are associated with the aviation sector. Some of these
include the activities supported by the spending of foreign visitors travelling to Nigeria via air, and
the level of trade directly enabled by the transportation of merchandise (Oxford Economics, 2012).
four routes express the contributions in GDP form and employment in billion naira and as well
there percentage of whole economy. Furthermore, the table analyzed the contribution of the various
areas of air transport sector through these routes; Direct, Indirect, Induced and Total % of whole
economy Contribution to GDP (NGN billion). Airlines contributed 29, 17, 11, 58, and 0.2%;
Airports and Ground Services contributed 29, 16, 16, 61, and
0.2%; then total of 58, 34, 27, 119, and 0.4%; Catalytic (tourism) also contributed 40, 24, 15, 78,
and 0.3%. The total including catalytic are 98, 57, 42, 197, and 0.6%. While the contributions to
Airlines 7, 33, 21, 61, and 0.1%; Airports and Ground Services contributed 37, 31, 30, 97, and
for airlines, airports and ground services are 44, 64, 51, 159, and 0.3%; Catalytic (tourism)
37, 29, 130, and 0.2%; for the total including catalytic are 108, 101, 80, 289, and 0.5% (Oxford
Economics,
2012).
These airlines industries operating in Nigeria, directly contributed around NGN 29 billion to the
Nigerian economy (GDP). The sector contributes indirectly another NGN 17 billion through the
output it supports down its supply chain. A further NGN 11 billion comes from the spending of the
employees of the airlines and their supply chains. Overall, these airlines contribute over NGN 58
billion to the economy and support 61,000 jobs in Nigeria. The Aviation‟s ground-based
infrastructure employs 37,000 people and supports through its supply chain a further 31,000 jobs.
These indirectly supported jobs include, for instance, construction workers building or maintaining
facilities at airports and other ancillary services. A further 30,000 jobs are supported by the
spending of those employed by the aviation industry‟s ground-based infrastructure and its supply
chain. The ground-based infrastructure directly contributes NGN 29 billion to the Nigerian
economy (GDP). It contributes indirectly another NGN 16 billion through the output it supports
down its supply chain. A further NGN 16 billion comes through the spending of those who work in
Murtala Muhammed International Airport is Nigeria‟s principal airport with the highest aviation
operations and largest productivity output. As a hub airport for intercontinental passenger traffic,
Murtala Muhammed International can offer Nigerian residents and businesses a better offer in
terms of access to their various destinations, at a higher frequency and at lower price in terms of
fare charges. With such hub and spoke network, its benefits are to enhance the country‟s various
connectivity in terms of air transport system, which in the other way round contributes to high
global, and nations‟ overall international trade and economic levels of productivity and Gross
The air transport industry‟s most important economic contribution is through its impact on the
performance of other industries and as a facilitator of their growth. It affects the performance of the
world economy, improving the efficiency of other industries across the whole spectrum of
Air transport helps countries participate in the global market by increasing access to main markets
and allowing globalisation of production. Air transport also encourages countries to specialize in
activities in which they have a comparative advantage and to trade with countries producing other
Destinations
Tourism directly supports jobs in airlines and airports, and expense of visitors arriving by air
Improved transport links expand the market in which companies operate. As a result, companies
are better able to exploit economies of scale thereby reducing costs, and to specialize in areas of
For example, many industries use air transport to shorten delivery, as part of their just-in-time
delivery systems, enabling them to deliver products to clients quickly and reliably and to reduce
costs.
2.3.5 Air Transport Is An Enabler Of Investment Both Into And Out Of Countries And
Regions
Viable air transport links is one of the key considerations that influence where international
parts of the globe. A good transport infrastructure can also encourage greater spending on research
and development by companies. For example, increasing the size of potential markets allows the
In terms of the increased availability of travel connections, and for local airport communities must
be taken into account when considering environmental impacts on, for example, air quality, noise
and congestion in the vicinity of airports. There is a clear distinction between these „catalytic‟
impacts and the direct, indirect and induced economic impacts of air transport. In simple terms, the
economic value of the direct, indirect and induced effects is related to the total revenues of the air
transport industry, whereas the catalytic impacts are “spin-off”‟ effects on other industries (ATAG,
2005).
According to Oxford Economics (2012), visiting family and friends to shipping high value
products, 8.3 million passengers and 181,000 tonnes of freight travelled to, from and within
Nigeria. More than 15,200 scheduled international flights depart Nigeria annually, destined for 32
airports in 30 countries. Domestically, more than 66,800 flights make over 7.5 million seats
approximately 4.2 million of the passenger total. For the 8.3 million passenger flights in total,
passengers pay NGN 866 billion (inclusive of tax), with Nigerian residents paying around NGN
438 billion. This expenditure is likely to significantly understate the value passengers actually
attach to the flights they use. Calculations by Oxford Economics suggest the value of the benefit to
travelers from flying, in excess of their expenditure, is worth NGN 785 billion a year (NGN 397
billion for Nigerian residents). Air transport is crucial for the distribution of high value to weight
products. Air freight may only account for 0.5% of the tonnage of global trade with the rest of the
world, but in value terms it makes up around 34.6% of the total freights. Shippers pay airlines
NGN 89 billion annually to carry 181,000 tonnes of freight to, from and within Nigeria. The
benefit to shippers, in excess of this expenditure, is estimated as NGN 37 billion. Based on the
share of exports in total merchandise trade, Nigerian shippers receive nearly 60% of this benefit
(NGN 22 billion).
There are various significant benefits of air transport operation in the world, they are
2.5.1 Air transport improves quality of life by broadening people‟s leisure and cultural
experiences. It provides a wide choice of holiday destinations around the world and an affordable
2.5.2 Air transport helps to improve living standards and alleviate poverty, for instance, through
tourism.
2.5.3 Air transport may provide the only transportation means in remote areas, thus promoting
social inclusion.
2.5.4 Air transport contributes to sustainable development. By facilitating tourism and trade, it
generates economic growth, provides jobs, increases revenues from taxes, and fosters the
2.5.5 The air transport network facilitates the delivery of emergency and humanitarian aid relief
anywhere on earth, and ensures the swift delivery of medical supplies and organs for
Air transport enables companies to service and meet clients, and promotes the efficient
organisation of production.
2.6.1 Servicing And Meeting Customers
Air services allow better contact and more effective communication between buyers and sellers,
which contributes to companies making new sales and to meeting the needs of their existing
customers.
Some 50% of businesses rely on air services for production efficiency. Passenger services enable
managers to visit overseas sites and other sub-sections of their business in other countries, enable a
choice of the best suppliers from a range of competitors, facilitate the spread of new production
techniques and make it easier for companies to attract high quality employees. The global supply
chain is becoming increasingly dependent on the rapid and reliable movement of high-value low-
The development of e-business helps companies identify low-cost suppliers and air transport helps
Enabling, for example, companies to transport online shopping orders quickly and reliably between
countries, allowing products to be stored in large warehouses reducing retail and distribution costs.
Reducing companies‟ storage costs, losses due to stock outages and disruption caused by failure of
Which provides guaranteed, rapid, door-to-door delivery services and increasingly offers logistics
The air transport sector (Aviation) makes a substantial contribution to Nigerian public finance
account. When you estimate the corporation tax paid by companies under the aviation sector, the
income tax paid by all their employees, social security payments (both employer and employee
contributions), and the revenue generation through aviation sector taxes, these estimates reflect the
direct tax payments of the aviation sector. All these provide an indication that taxes paid by the
aviation sector‟s supply chain and taxes raised through induced spending channels. They do not
include increases in the overall Nigerian tax base driven by aviation‟s contribution to investment
The table above show that the aviation sector contributed over NGN 8.5 billion in taxes through
corporation tax and the income and social security contributions (both employee and employer
contributions). Air passengers paid a further NGN 17.0 billion in VAT on domestic and
international flights originating in Nigeria, bringing the total tax contribution to NGN 25.5 billion.
This contribution is likely to increase further, if there is more aviation infrastructural development,
and if the sector recovers a good number of difficult years that many firms operating in it suffered
losses. Very indicatively, it is estimated that a further NGN 16.0 billion of government revenue is
raised via taxation through the indirect (NGN 8.9 billion) and induced (NGN 7.1 billion) route
(Oxford Economics, 2012).
Apart from the transformative effects of aviation sector on the wider economy, air transport services
– the airlines, airports and ancillary services, such as air traffic control – form a capital intensive
sector that invests heavily in aircraft systems and other advanced technology (Oxford
Economics,2012).
The TABLE 3.3 explains the investment intensity of the aviation sector, as measured by its
investment as a proportion of GVA. Investment in air transport services is equal to 58.4%, which is
Productivity as the conventional approach to analyzing the sources of economic growth has been to
focus on increases in the quality and the quality of the inputs used to produce outputs. Gross
Domestic Product is the most commonly used measure for the productivity. GDP is the sum of all
goods and services produced within Nigeria borders, measured as the number of workers times the
output, or production, per worker. Growth in GDP will come from three sources; Changes in
Table 3.4 provides an indication of the productivity of the aviation sector versus the rest of the
economy. Measured as GVA per employee, the productivity of air transport services (the airlines
and the ground-based infrastructure excluding retail and catering services at airports) is estimated at
NGN 3.5 million. This is nearly 7 times higher than the average productivity for the economy as a
whole (NGN 527,000). This high level of productivity implies that, where the resources currently
employed in the aviation sector is redeployed elsewhere in the economy, and then this would be
accompanied by a fall in overall output and income. For example, if productivity in the aviation
sector was the same as the average productivity for the economy as a whole, then the level of
Nigerian GDP would be around 0.11% lower than it is (about NGN 36 billion in current prices)
(Oxford Economics,2012).
CHAPTER THREE
RESEARCH METHODOLOGY
This study depends completely on time series data for the analysis. The source of the historical data
is the Central bank of Nigeria statistical bulletin volume 23 (2012). The generating process of the
time series data was examined. In other words, the test for the order of integration was performed by
using standard tests for unit root such as the Augmented Dickey-Fuller (ADF) and Phillips-Perron
(PP) tests, but Harris and Sollis (2003) have argued that these tests are not generally reliable in
small samples, and this is because of their poor size and power properties. Put differently, they tend
when it is false. Because of this, this study also applied Elliott Rosenberg, Stock optimal point
(ERS) (1996) unit root test to address these problems and also the problem of sensitivity of unit root
testing to choice of lag. They propose a new information criterion, the modified information criteria
(MIC). The distinction between the MIC and the standard information criteria such as the Akaike
and the Schwartz Bayesian criteria is that the former takes into account the fact that the bias in the
sum of the autoregressive coefficients is highly dependent on the number of lags. In addition the
Kwiatkowski, Phillips, Schmidt and Shin (KPSS) (1992) unit root test was utilized to test for the
null hypothesis of the ADF and PP unit root tests. This was to ascertain the stationary level of the
null hypothesis. The ADF model for the unit root test is expressed as:
This was to ascertain the stationary level of the null hypothesis. The ADF model for the unit root test is expressed
as:
∆Yt = 0 + 1Yt-1 +
∆Yt = 0 + 1Yt-1 +
i1
p
i1
Yi + et...............................................................1
Yi + δt + et.......................................................2
Given the unit root equation, the null hypothesis is that the coefficient statistically equal to zero that
is α = 0. If there is no unit root, the series Yt-1 will be stationary at the level or integrated of order
zero expressed as I(0). The presence of unit root as a result of first differencing of the series will
give stationary level, that is first order of integration denoted as I(1). Where Yt is a process of
autoregressive AR(1), it represent the time series and its linear time trend. Change (∆) is the first
difference operator and α 0 is the constant, p is the optimum number of lags in dependent variable, e
is the white noise. The method of analysis adopted in this study is analytical
The study developed analytical techniques such as dynamic ordinary least square (DOLS)
cointegration, Granger causality and error correction model (ECM). This study covers the period
1980 – 2012. While the DOLS model was used to test the individual impact of each independent
variable on the dependent variable, the cointegration model was adopted to determine the long run
equilibrium relationship of the variables, the ECM technique is to correct any drift in the long run
equilibrium relationship. The causality test attempt to identify the causal direction of the variables in
the model. The functional form of the OLS model of this study is specified as follow:
AT = air transport service GDP at market prices, which is a proxy for aviation sector output
GFCF= gross fixed capital formation representing investment in the host nation.
ES = electricity sector GDP at market prices GDP(-1) = Lagged GDP by previous year.
The GFCF which is a proxy for investment in this study is expected to impact positively on
economic growth. In other words the level of Nigeria’s investment is expected to increase
economic growth, e is the error term which capture other variables that can explain GDP but
This study shall proceed further to apply the Johansen cointegration test. The cointegration of two
or more series indicates the presence of long run equilibrium relationship. The systems approach
developed by Johansen and Juselius (1990), Johansen (1991, 1995) can be applied to a set of
variables containing possible mixture of I(0), I(1) and I(2) (Perasan et al 2001). The estimation
procedure assumes a vector autoregressive (VAR) base cointegration test (Johansen 1991) of order
et is a vector of innovations.
With the presence of cointegrating equations, it becomes necessary for equation 1 to be modified
into a dynamic structural model. Because of the obvious reasons that long run information may be
lost or a drift in the long run relationship, it suggests the need to employ the vector error correction
model (VECM). A vector error correction (VEC) model is a restricted VAR designed for use with
nonstationary series that are known to be cointegrated. The VECM has cointegration relations built
into the specification so that it restricts the long-run behavior of the endogenous variables to
converge to their cointegrating relationships while allowing for short- run adjustment dynamics. The
cointegration term is known as the error correction term since the deviation from long-run
equilibrium is corrected gradually through a series of partial short-run adjustments. A Vector Error
Correction Model (VECM) is a restricted Vector Autoregressive (VAR) model designed for use
with nonstationary series that are known to be cointegrated. The purpose of the VECM is to indicate
the speed of adjustment from the short-run equilibrium to the long-run equilibrium state. The greater
the coefficient of the parameter, the higher the speed of adjustment of the model from the short-run
to the long run state will be. The dynamic log linear VECM
The Granger causality test model
The OLS reveals the correlation between variables but does not help in determining the direction of
the relationship Dominnick and Derrick (2001). According to Granger (1969), is said to ‘Granger-
cause” X if and only if X is better predicted by using the past values of Y then by not doing so with
the past values of X being used in either case. In short, if a scalar Y can help to forecast another
scalar X, then we say that Y Granger- causes X. If Y causes X and X does not cause Y, it is said that
causality is framed in terms of predictability. The Pairwise Granger causality equation is of the
form:
Where
H01: AT does not Granger cause GDP H02: GDP does not Granger cause AT
Where M1 and M2 are constants and E1t and E2t is the stochastic term A Wald F-test was used to test
Table 4.1: Results of unit root test using Augmented Dickey Fuller (ADF), Phillip Peron (PP)
and Elliott- Rothenberg – Stock point optimal (ERS) unit root statistics tests.
Table 4.1 Unit Root test
Augmented Dickey Fuller Unit Root Test (A) Phillips –Perron Unit Root Test
(B)
Variables ADF T-Stat Order of PP PP T-stat @5% Order of integration
Critical @5% integration Critical
value value
GDP -4.89 -3.57 I(1) -4.90 -3.56 I(1)
AT -6.42 -3.58 I(2) -15.61 -3.57 I(2)
AR -4.90 -3.57 I(1) -4.90 -3.56 I(1)
ES -6.19 -3.57 I(1) -31.58 -3.56 I(1)
MG -5.76 -3.58 I(2) -6.19 -3.57 I(2)
GFCF -5.28 -3.57 I(1) -5.11 -3.56 I(1)
Elliot Rothenberg Stock Point –Optimal (ERS) Kwiatkowski, Phillips, Schmidt and Shin (KPSS) unit Root
unit Root Test Test
(C) (D)
Variables ERS T-Stat Order of KPSS T- Asymptotic Order of Null
Critical @5% integration Stat Critical integration Hypothesis
value value@5%
GDP 116.49 5.72 I(1) 0.12 0.146 I(1) stationary
AT 8.70 5.72 I(1) 0.17 0.146 I(1) stationary
AR 9.10 5.72 I(1) 0.98 0.146 I(1) stationary
ES 158.74 5.72 I(1) 0.42 0.146 I(1) stationary
MG 8.94 5.72 I(1) 0.19 0.146 I(1) stationary
GFCF 5.02 5.72 I(1) 0.85 0.146 I(1) stationary
* Significant at @ 5 per cent. Author’s Computation
The result of the Augmented Dickey-Fuller (ADF), Phillip Peron (PP), Elliott- Rothenberg –
Stock point optimal (ERS) and Kwiatkowski, Phillips, Schmidt and Shin (KPSS) (1992) unit
(A,B,C and D) respectively above. All variables are non stationery at the level, but after first and
second differencing at 5 per cent level of significance, the variables became stationery in
ADF (table 4.1A) and PP (table 4.1B) unit root tests respectively. Included in the equation is
trend and intercept, a maximum lag length of 1 was adopted and the Schwarz information
criterion (SIC) was employed in the computation of the ADF unit root test. With respect to
the PP unit root test result, the newey west bandwidth, trend and intercept as well as the
estimation method of Bartlett Kernel were utilized. Similarly, the ERS (table 4.1C) unit root
test applied Bartlett Kernel spectral estimation method and the newey –west bandwidth. The
result showed that the computed t- critical values are superior to the t- statistic at 5 per cent
level of significance. This is an indication that the variables are integrated of order one I(1).
The variables are significant at 5 per cent level. The result of KPSS (table 4.1D) reveals that
the null hypothesis is stationary and integrated of order one - I(1) at 5 per cent level, thus the
null hypothesis cannot be rejected, thus the KPSS test result further confirm that the ADF and
PP unit root statistic test results are stationary. Certainly the data are genuine and not
spuriously related.
Table 4.2 above reveals the estimated OLS regression line. The dependent variable is GDP
whereas other variables (AT, ES, MG, AR, and GFCF) are independent variables. The
adjusted coefficient of determination (R2) is 0.86; it represents goodness of fit for the
regression line. It is an indication that 86 per cent of the change in GDP is the joint
responsibility of the independent variables in the regression line, hence only about 14 per cent
of the change or variation in GDP is unaccounted for by other variables (error term) outside
the regression line. Equally, the F-statistics supports a good fit. The Durbin Watson (DW)
statistic test result is a measure of the serial correlation. The DW statistic test result of 2.33
does not support the presence of serial correlation in the model. From the coefficients of the
regression line in table 4.2 above reveals that AT is signed positive (1975.63). This is an
indication that air transport (AT) is directly related to GDP. A one per cent increase in GDP
will increase GDP by 1975.63 per cent. This is an indication that AT impact positively on
GDP. This finding does not support the work of Amba and Danladi (2013) and Ugboaja
(2013) but is in consonance with Shufen and Yanjun (2011). The result also showed that AT is
statistically significant at 5 percent. This is because the calculated t-Statistic value of 2.78 is
greater than the t-table distribution value of 2.04. This outcome was anticipated for this study.
The coefficient of the regression line revealed that gross fixed capital formation (GFCF) is
signed positive (0.63). This is an indication that GFCF has an increasing influence on the
behavior of GDP, but the result is statistically insignificant at 5 per cent level. The regression
result show that the coefficient of electricity supply (ES) although was signed positive
(0.0003) but had a slow positive impact on the growth behavior of GDP. This is an indication
of the critical need to improve on the mega watt of electricity in Nigeria. The result was
statistically significant at 5 per cent level. The contribution of agriculture (AR) to the growth
of GDP as depicted by the estimated dynamic regression line suggests a negative effect. This
simply concludes that AR has a decreasing effect on GDP. However, the result shows that AR
is statistically significant at 5 per cent level. The manufacturing sector contribution to GDP
show a decreasing effect as coefficient is signed negative. Similarly, the result is statistically
insignificant at 5 per cent level. The dynamic regression result show that the gross domestic
product (GDP(-1)) lagged previous year (one year) is signed positive and statistically
Table 4.3 and 4.4 below represents the result of Johansen co-integration test of two
likelihood ratio test statistics: that is the trace statistic and the Maximum Eigen-value which
are commonly used to determine the number of co-integrating vectors. The result suggests
that AT, AR, ES and MG demonstrate a positive relationship with GDP. In other words, the
Johnasen co-integration test reveals that there are at least four co integrating vectors in the
series. This is an indication of the presence of long-run equilibrium relationship. Table 4.3
shows the result of the trace statistics. The trace statistics for null hypothesis of no co-
integration relationship is rejected at 5% level. Table 4.4 represents Maximum Eigen value
statistic test. It is confirmed from the Maximum-Eigen statistic test that the null hypothesis
is rejected at 5% level. This implies that the results of the unrestricted co-integration rank
test confirmed a long run significant relationship between GDP and all its determinants.
This outcome has been established by Mehmood, Younas and Shahid (2014).
correction term ensure that the deviation from long-run equilibrium is corrected
gradually through a series of partial short-run adjustments. The table 4.5 above
depicts the result of the VECM. The lag length is ‘2’ which is established on the
basis of SIC and AIC. The cointegration vector confirms the expected positive
relationship between air transport and economic growth. The coefficient of air
transport indicates that an increase of 1 per cent in AT will lead to 4557.89 per
cent increase in GDP. The result is statistically significant at 5 per cent level. The
coefficient of VECM -0.41 is signed negative. This was anticipated. The VECM
value measures the gradual speed of adjustment of the short run dynamic model
back to long run equilibrium position. The VECM gradual speed of adjustment is
41 per cent. This means that a total of 41 per cent of the previous year drift from
long run equilibrium was corrected by the dynamic short run model. The
feedback effect (41 per cent) cannot be said to be very slow, hence the feedback
effect is gradual and moderate, but statistically insignificant at 5 per cent level.
Table 4.6:Granger
Causality test Result
Sample: 1981 2012.
Lags: 7
Null Hypothesis Observations F-Statistics Probability
AT does not Granger cause GDP 24 4.13752 0.2216
GDP does not Granger cause AT 1.19889 0.0918
* Significant at @ 5 per cent. Author’s Computation
Table 4.6 above is the estimated result of Granger causality test. The optimal lag length is 7
based on the SIC and AIC. From the table, it is evident that air transport Granger cause gross
domestic product. But gross domestic product does not granger cause air transport. This is an
indication of a unidirectional causality from air transport to gross domestic product without a
feedback mechanism. Obviously, the outcome of this work show that increase in aviation
activity spur economic growth. The hypothesis that air transport does not granger cause gross
domestic product is rejected at 5 per cent level of significance. This relationship has been
established by Onikosi (2012) and Mukka and Terde (2012). However, the work of Mehmood,
Younas and Shahid (2014) does not support this direction of causality.
Table 4.7 Diagnostic estimated test of the dynamic ordinary regression line
Diagnostic Test
Functional Form Stability Test Autocorrelation
Jacque-Bera AIC Ramsey RESET CUSUM DW Breusch-Godfrey White Heteroscesdasticity
Normality test
1 2.64 31.29 1.33 Stable 2.33 1.14 1.57
(0.29) (0.12) (0.34) (0.22)
Author’s Computation.
estimated result of the diagnostic test. The coefficient of the Jarque – Bera statistics s how that
the study does not have any bases to reject the hypothesis that true error terms in the air
transportation and economic growth are normally distributed. In other words, the residual
normality assumption was adequate and not violated which in essence implies the functional
normality of the regression line for this study. The coefficient of the Breusch-Godfrey LM
was estimated with one (1) lag length. The LM test result is an indication of the absence of
serial correlation in the regression line. In the same direction, ARCH LM or the
Heteroskedasticity statistic was estimated with two (2) lag lengths. The statistic values of
Ramsey RESET test statistic, it was obvious that the functional form of the regression line
was adequately specified and as such robust for policy making and analysis. The recursive
residual test, also known as cumulative sum (CUSUM) was conducted to determine the
stability of the regression line parameters. The CUSUM was plotted against the break points.
The plot of the CUSUM statistics in figure 1 below is within the critical bounds. Whenever
the CUSUM qualify within the range of the critical bounds at 5 per cent significant level, it
suggests that the null hypothesis which states that all coefficients in the regression line
equation are stable cannot be rejected. Since the plot of the CUSUM did not diverge from the
critical region, it implies that the variance is stable and the estimated regression line
10
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88 90 92 94 96 98 00 02 04 06 08 10 12
CHAPTER FIVE
5.1 Conclusion
This study has investigated the influence of air transport sector development on
economic growth in Nigerian between 1981 and 2012. The study examined the
have been done in this regard with divergence of contributions. The absence of
consensus amongst the authors has generated this present article. Over the years, the
governments of Nigeria have put in place a series of policy measures for the
development of the aviation sector in order to kick start the desired level of growth that
will impact on the economy. Despite the improvement, the aviation sector mirrors
cointegration, error correction and granger causality techniques. The analyses showed
that the dynamic regression and error correction tests results supports a positive impact
of air transport on economic growth in Nigeria given the period under review. The
cointegration test revealed a long run equilibrium relationship between gross domestic
product and air transport. The causality test result showed a unidirectional causality
that run from air transport to economic growth. Earlier on, the time series properties of
the data collated from Central Bank of Nigeria statistical bulletin volume 22 are
Rothenberg – Stock point optimal (ERS) and Kwiatkowski, Phillips, Schmidt and Shin
(KPSS). The outcome of the estimated unit root test revealed that the data are
stationary and integrated of I(1) and I(2) given the ADF and PP tests. The ERS showed
that all the variables are integrated of order one I(1). Similarly, the KPSS result
suggests I(1) and the series is stationary as the null hypothesis cannot be rejected. The
diagnostic test for the normality of the model revealed that the model has a functional
form, stable and free of any serious autocorrelation or serial correlation. The
implication of this study is that a more cohesive transport policy that benefits all the
sub units in the transport sector should be pursued vigorously; else development in the
transport sector will plummet given the experience of Malaysia air transport disaster
that nosedive recently. Also, the Federal Government should ensure that air
transportation is well managed in line with best practices and high standard,
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