TABLE OF CONTENT
TITLE PAGE- – – – – – – – – — – – – –
– – – – — – – – – – – – – – – – -i
APPROVAL PAGE – – – – – – – – — – – –
– – – – – — – – – —– – – -ii
DEDICATION- – – – – – – – – — – – – –
– – – – — – – – – – —- – – iii
ACKNOWLEDGEMENT- – – – – – – — – – –
– – – – – — – —– – iv
TABLE OF CONTENT- – – – – – – – — – –
– – – – – – ———- – v
ABSTRACT- – – – – – –
– – —- — — – — – – – – – – – – – —- – ix
CHAPTER ONE:
1.0
INTRODUCTION——————————————————1
1.1 BACKGROUND OF THE STUDY- – – – – –
— – – – – — —- — – -1
1.2 STATEMENT OF PROBLEM – – – – – –
— – – – – – – – – — – – — – 4
1.3 OBJECTIVE OF THE STUDY- – – – – –
— – – – – – – – – — – ——7
1.4 RESEARCH QUESTION——————————————–8
1.5RESEARCH HYPOTHESIS- – – – — – – –
– – – – — – ——– – – – 8
1.6 SIGNIFICANCE OF THE STUDY – – – —
– – – – – – – – — – – – —9
1.7 SCOPE AND LIMITATIONS OF THE STUDY
– – – – – – — – — 9
CHAPTER
TWO
2.0 CONCEPTUAL LITERATURE
– – — – – – – – – – – – — – – – – – 10
2.1 CONCEPT OF
GOVERNMENT EXPENDITURE————–10
2.2 CLASSIFICATION OF
GOVERNMENT EXPENDITURE—–10
2.2.1 FUNCTIONALCLASSIFICATION—————————–10
2.2.2 RECURRENT AND
CAPITAL EXPENDITURE————–10
2.3 CONCEPT OF
ECONOMIC GROWTH————————–11
2.4 THEORETICAL
REVIEW—————————————–12
2.5 EMPIRICAL
LITERATURE REVIEW- – – – – – – – – — – – — —13
2.6 SUMMARY OF
RELATED LITERATURES———————-16
2.7 LIMITATIONS OF
PREVIOUS STUDIES————————16
CHAPTER THREE
3.0 METHODOLOGY – – –
– – – – — – – – – – – – – — – – – — ——-17
3.1 THEORETICAL
FRAMEWORK————————-———17
3.2 MODEL
SPECIFICATION – — – – – – – – – – — – – – – – ———18
3.3METHOD OF
EVALUATION———————————– — 19
3.3.1 PRELIMINARY
TEST——————————————–19
3.3.1.1 STATIONARITY
TEST————————————– –19
3.3.1.2
CO-INTEGRATION TEST———————————— 19
3.3.1.3 ERROR
CORRECTION MECHANISM———————–20
3.3.2 ECONOMIC TEST
OF SIGNIFICANCE————————21
3.3.3 STATISTICAL
TEST OF SIGNIFICANCE———————-21
3.3.3.1 TEST FOR
GOODNESS OF FIT—————————–22
3.3.3.2 t-TEST OF
SIGNIFICANCE———————————-22
3.3.3.3 f-TEST OF
SIGNIFICANCE———————————-22
3.3.4 ECONOMETRIC
TEST OF SIGNIFICANCE——————23
3.3.4.1
AUTOCORRELATION—————————————–23
3.3.4.2 NORMALITY
TEST—————————– ————–23
3.3.4.3 GRANGER CASUALITY
TEST——————————-24
3.4 NATURE AND SOURCE
OF DATA——————————25
CHAPTER FOUR
4.0 PRESENTATION AND
ANALYSIS OF RESULTS – — – ——-26
4.1 EMPIRICAL
RESULTS——————————————–26
4.1.1 UNIT ROOT TEST
RESULTS———————————-27
4.1.2 COINTEGRATION
TEST REULTS—————————–28
4.1.3 ERROR
CORRECTION MECHANISM RESULT AND
INTERPRETATION—————————————————–29
4.2 EVALUATION OF
REGRESSION RESULTS——————-31
4.2.1 EVALUATION
BASED ON ECONOMIC CRITERION——-31
4.2.2 EVALUATION
BASED ON STATISTICAL CRITERION—–32
4.2.2.1 R2
RESULT AND INTERPRETATION———————–32
4.2.2.2 t-TEST RESULT
AND INTERPRETATION—————–32
4.2.2.2 RESULT AND
INTERPRETATION OF F-TEST————33
4.2.3.1 RESULT AND
INTERPRETATION OF AUTOCORRELATION
TEST———————————————————————33
4.2.3.2 NORMALITY
TEST RESULT AND INTERPRETATION—34
4.3 EVALUATION OF
RESEARCH HYPOTHESES—————-36
4.4 IMPLICATION OF
THE RESULTS——————————-36
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION————————————————-
38
5.1 SUMMARY OF FINDINGS————————————–
-38
5.2
CONCLUSION—————————————————–39
5.3
RECOMMENDATION———————————————39
REFERENCES–
– – – – – – – — – – – – – – – – — – – – – – – – – — —–40
APPENDIX————————————————————–46
ABSTRACT
This study examines the impact of
public expenditure on economic growth in Nigeria using time series data over
the period 0f 1981-2016. The study is primarily aimed at ascertaining the
relationship between federal government expenditure and economic growth in
Nigeria.To achieved this objective,the study adopted the econometric technique
of Ordinary Least Squares (OLS) and Error Correction Mechanism (ECM). The
Augmented Dickey Fuller test was used in the study to check for unit root. The
ADF result showed that all the variables were stationary at first difference
and the co-integration test indicated a long run relationship among the
variables.The findings reveal that federal government capital
expenditure, federal government recurrent expenditure and gross fixed capital
formationare statistically significant while inflation rate is statistically
insignificant.On the bases of the foregoing, the study recommends relevant
authorities should monitor each project issued out to avoid diverting the fund
meant for public good. Government expenditure should be promoted in as much as
it is geared to productive investment that will facilitate growth and
development in the country.
CHAPTER ONE
INTRODUCTION
The management of the economy is
now in circle of functions of governments throughout the world. The abandonment
of laissez fair doctrine of the classical school brought about the government
intervention in the working of the economy. Governments all over the world now
feel compelled to ensure that their economies are managed to achieve major
desirable objectives of full employment, price stability, economic growth and
external balance (Ohale and Onyema 2002). John Maynard Keynes, an English
Economist, popularized public expenditure as a stabilization tool through his
philosophy of active government intervention in an economy that pulled many
economies out of the Great Depression of 1930s. Government now play serious role
for most economics of the world by intervening in the economy to achieve
macro-economic goals, price stability, creation of employment, achieve
industrialization and maintain a reasonable level of economic growth.
Many
developing countries are currently undergoing substantial macroeconomic
adjustment. It is
not clear how
such programmes are
affecting government
expenditures and hence longer-term economic growth and poverty reduction. Thus,
it is important to monitor trends in
the levels and composition of
government expenditures, and to assess the causes of change over time. It is
even more important to analyze the relative contribution of various
expenditures to production growth and poverty reduction, as this will provide
important information for more efficient targeting of these limited and often
declining financial resources in the future.
The
link between public expenditure and economic growth has attracted considerable
interests on the part of economic researchers both at the theoretical as well
as empirical level. Roughly speaking, one may distinguish between two opposing
views: On the one hand, there is the Keynesian approach according to which
government spending is an important policy tool to be used to ensure a
reasonable level of economic activity; correct short-term cyclical fluctuations
in aggregate expenditure (Singh and Sani, 1984); and secure an increase in
productive investment, thus providing a socially optimal direction for growth
and development (Ram, 1986). The opposite
view is that excessive
state intervention in economic
life affects growth performance
in a negative way for two reasons: first, because government operations
are often conducted
less efficiently, they
reduce the overall
productivity of the economic
system, second, because
excessive government expenditure
(usually accompanied by high taxation levels) distorts economic
incentives and results in suboptimal economic decisions (Barrow 1990; King and
Rebel 1990).
Those
who support larger size of the government give credence to the provision of
certain goods and services that would otherwise not be provided by the private
sector. They assert that government comes into economic activities due to
failure of the market and externalities to establish a predetermined growth
path. Government exists so as to provide social and physical infrastructure, by
undertaking some investment and expenditures. By these ways, the government can
directly or indirectly improve the productivity of the private sector by
efficient and effective allocation of resources. The existence of government is
correctly justified when one looks at the legal functions of the government, in
terms of property rights (Atkinson and Stiglitz 1980:5), provision of security,
maintenance of law and order, etc. In this sense, government expenditures have
become expedient and necessary to overcome the obstacles of economic
development.
However,
when the size of the public sector becomes very large it can impinge on
economic growth and development (Peden and Bradley (1989: 239), Vedder and
Gallaway (1998), Folster and Henrekson (2001), etc). The larger the size of the
public sector, the more difficult it becomes to coordinate the activities of
the key players in the system. Larger
governments tend to crowd out private
investment, which invariably impinges on domestic output (Ahmed and Miller,
1999). Larger sizes of government can also create output volatility (Acemoglu
and Ziliboti, 1997; and Koskela and Viren, 2003).
Maintaining
law and order, in particular, securing property rights is probably the most
acceptable rationale for government intervention. Theoretically, it is argued
that enforcement of property rights being a public good, its provision can only
be materialized through collective
action (Gradstein, 2004). The rationale
for the existence of government anywhere, including Nigeria, can be viewed from
the perspective of the institutions of property rights, rule of law,
governance, security, enforcement of the rule of law, etc. Nigeria is a Federal
state with three tiers, with multiple and diverse ethnic and other socio-political
differences, which most often determine the volume and rate of spending. The
nature of public spending (in Nigeria) depends majorly on the revenue – of
which oil controls a greater percentage – and which is also determined by the
vagaries of world market interactions.
The other institutional factors which can influence the public
spending and economic growth include
institutional quality (the enforcement of property rights), political
instability (riots, coups, civil
unrests, civil wars,
etc), characteristics of
political regimes (elections,
constitutions, executive powers), social capital (the extent of civic – private
– activity and organizations) and social characteristics (differences in income
and in ethnic, religious, and
historical background) (Aron,
2000:100). All these affect
nations’ investments directly as they create harsh environment and insecurity,
which increases transaction costs and mar the private investment for growth.
According
to North (1990:110), “Third World countries are poor because the institutional
constraints define a set of payoffs to political/economic activities that do
not encourage productive
activity”. Such rules
affect both individuals
and organizations, defined as political organizations (city councils,
regulatory agencies, political parties, tribal councils), economic
organizations (firms, trade unions, family farms, cooperatives, etc),
educational bodies (schools, universities, vocational training centres), and
social organizations (churches, clubs, civic associations) (Aron, 2000). The
inability of the government to enforce the rule of law affects the economies of
developing countries, including Nigeria, and as such, rent-seeking behaviours, corruption, bribery and
protection of individuals and organizations connected with highly placed people
become the common phenomenon. These behavioural attitudes raise the transaction
costs and costs of information in the production process and make the rule of
law unreliable.
Due to the mixed feeling on the above
the debate has been inconclusive on whether or not increasing government
spending induces economic growth or not. Based on the above this paper attempts
to investigate whether increasing government spending induces economic growth performance
in Nigeria.
Nigeria
has consistently had deficit spending over the years without equivalent rate of
economic growth. Data shows that output
of Nigeria has been fluctuating for some years and the sources of these shocks
may not be clear. The growth rate (real
GDP growth) of output was 3.2, 2.4, 2.8, 3.8 and 4.7 respectively, in 1997,
1998, 1999, 2000 and 2001, while the total expenditure growth was 12.1, 15.6,
28.1, 15.6, and 19.3 per cent in 1997, 1998, 1999, 2000, and 2001, respectively
(CBN, 2001). This implies that the growth rate of public expenditure was far
higher than that of economic growth.
The
aggregate expenditure of the Federal Government, in nominal terms, increased by
32.2 per cent in 2008 (CBN, 2008). As a proportion of GDP, total expenditure
increased by 13.5 per cent, from 11.7 per cent in 2007, while the GDP growth
rate was 6.4 percent, almost the same as the 6.5 per cent recorded in 2007 and
the average annual projected growth rate for the period 2004 – 2008. This
implies that the public expenditure is growing faster than the rate at which
the output is growing. As a percentage of GDP, recurrent expenditure increased
from 1.2 percentage points to 8.8 per cent. Most of the components of recurrent
expenditure increased relative to their levels in 2007. As a proportion of Federal Government
revenue, capital expenditure was 30.1 per cent, exceeding the stipulated
minimum target of 20.0 per cent under the West African Monetary Zone (WAMZ)
secondary convergence criteria. The data speaks volume that the economy does
not grow at a fast rate as the growth rate of government expenditures. It is
expected that as the public expenditure expands output is expected to expand
also, because public expenditure should be translated into output growth. Or
does it imply that much of the public expenditure find their ways into some
other paths different from the intended routes?
However, in 2009, the aggregate expenditure of general government fell by 5.1% from its level in 2008, which represented 29.4% as compared with 31.5% in 2008, while GDP growth rate, at 1990 constant prices, was 6.7%, which exceeded the 6.0% recorded in 2008 and annual growth rate of 6.4% forth period of 2005 – 2009 (CBN Annual Report, 2009:74). In 2010, the aggregate expenditure of general government increased by 15.3% from the level in 2009. As a proportion of GDP, it represented 28.4% as compared with 28.8% in 2009, while the growth rate of GDP was 7.9% which exceeded the 7.0% recorded in 2009 and the average annual growth rate of 6.7% but lower than the target growth rate of 10% for the year (CBN, 2010).
From these data, the rate at which the output grows has been lower than that of the growth of public expenditure simply implies that there is need to investigate whether the rises in public expenditure have been accompanied by rise in the output of Nigerian economy. The data on the fluctuations of the GDP and public (government) expenditure are inexhaustible. This makes it expedient to understand the nature of such fluctuations in the macroeconomic variables and how they impact on the output of the economy.
Given the issues raised, the major
objective of the study is to ascertain whether there is a relationship between federal
government expenditure and economic growth in Nigeria. The specific objectives
include:
IMPACT OF PUBLIC EXPENDITURE ON NIGERIA’S ECONOMIC GROWTH (1980-2016)
