Investigating Dutch Disease: The Case of Nigeria

ABSTRACT: This research study empirically investigates the presence of Dutch disease hypothesis in Nigeria when there is long run equilibrium, focusing on this concept of long run equilibrium between crude oil export and agricultural output covering the period 1970-2009 by using Johansen cointegration test, Vector Error Correction Model type of VAR, Impulse Response Function and Variance Decomposition while investigating this possible long run relationship then the study concentrated on two objectives. First main objective is to detect if there exist a negative relationship between crude oil export and agricultural output when crude oil export and the variables are normalized on agricultural output and the second aspect is to observe how innovations or shocks to the crude oil export explains the variations or changes in Agricultural output. In this study seven variables were used namely LAGR, LGDP, LXQcrudeoil, LREER, SRRATE, LRRATE, INFL to explain the Dutch Disease Hypothesis while transformation of variable to log help sort out the scaling problems with variables expressed in the above stated forms. The results are: (1) Cointegration among the variables using (Trace and maximum Eigen values) Johansen tests found cointegration of order (1) which means the variables move together in the long run and when normalized on LAGR, LXQcrudeoil has the expected sign and significant in explaining the expected relationship. (2) After finding cointegration, we proceed to Vector Error Correction (VEC), when LAGR is normalized on other variables, LXQcrudeoil has the same expected negative sign and it is significant in explaining the relationship. (3) Using Impulse Response Function, innovation in LXQcrudeoil is significant in explaining the negative changes in LAGR as expected. (4) Using Variance Decomposition, LXQcrudeoil explains about 20% variations in LAGR when shocks were applied. The findings show that, Dutch Disease hypothesis exist in Nigeria and cannot be ignored in Nigeria using these economic variables. Keywords: Dutch disease, impulse response function, variance decomposition, cointegration, Nigeria, maximum eigen value, hypothesis. ……………………………………………………………………………………………………………………………………………………………………………………………………………………