ABSTRACT
This study examines the disaggregated
effect of government expenditure on economic growth in Nigeria. In the
introductory section, the reason why government expenditure has been on
the increase over the years in Nigeria was analyzed. We started by
stating the objectives of the study which include; role of government
expenditure, trend of government expenditure, component of government
expenditure. In the study, we use Ordinary Least Square (OLS) technique,
since it is basically a time series study. The result obtained,
indicate that the economic growth in Nigeria is affected by government
expenditure on agriculture, education, health and transport. However,
the result indicates only government expenditure on health is not
significant in explaining economic growth in Nigeria. The R- square
suggest that the explanatory variable explain 62 percent of the
variation in economic growth, while the F- statistics shows that all the
put together are statistically significant in explaining increase gross
domestic product. The study however, concludes that the relevance of
the variable imposes a great challenge to policy makers and recommends
that the government of Nigeria should help in the pursuance of an
increase level of economic activities in the country.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The relationship between government
expenditure and economic growth has continued to generate series of
debate among scholars. Government performs two functions-Protection
(and security) and Provision of certain public goods (Abdullah, 2000)
and (AI - Yousif, 2000). Protection function consists of the creation of
rule of law and enforcement of property right. This helps to minimize
risk of criminality, protect life and property, and the nation from
external aggression. Under the provision of public goods are defenses,
roads, education, health and power, to mention few. Some scholars argue
that increase in government expenditure on socio - economic and physical
infrastructure encourages economic growth. For example, government
expenditure on health and education rises to productivity of labor and
increase the growth of national output. Similarly, expenditure on
infrastructure such as roads, communications, power, etc, reduces
production, cost, increase private sector investment and profitability
of firms, thus fostering economic growth. Supporting this view, scholar
such as (Al - Yousif, 2000), (Abdullah HA, 2000), (Ranjan, Sharma,
2008), and (Cooray, 2000) concluded that expansion of government
expenditure contributes positively to economic growth. However, some
scholar did not support the claim that increasing government expenditure
promotes economic growth, instead they are assert that higher
government expenditure may slow down overall performance of the economy.
For instance, in an attempt for finance rising expenditure, government
may increase taxes and/or borrowing. Higher income tax discourages
individual from working for long hours or even searching for jobs. This
in turn reduces income and aggregate demand. In the same vein, higher
profit tax tends to increase production costs and reduce investment
expenditure as well as profitability of firms. Moreover, if government
increases borrowing (especially from the banks) in order to finance its
expenditure, it will compete (crowds - out) away the private sector,
thus reducing private investment.
Furthermore, in a bid to score cheap
popularity and ensure that they continue to remain in power, politicians
and government officials sometime increase expenditure and investment
in unproductive project or in goods that the private sector can produce
more efficiently. Thus, government activity sometimes produces
misallocation of resources and impedes the growth of national output. In
fact, studies by (Laudau, 1986), (Barro, 1991), (Engen, Skinner, 1992),
and (Foister, Henrekson, 2001) suggested that large government
expenditure has negative impact on economic growth.
In Nigeria, government expenditure has
continued to rise due to the huge receipts from production and sales of
crude oil, and the increased demand for public (utilities) goods like
roads, communication, power, education and health. Besides, there is
increasing need to provide both internal and external security for the
people and the nation. Available statistics show that total government
expenditure (capital and recurrent) and its components have continued to
rise in the last three decades. For instance, government total
recurrent expenditure increased from N3,819.20 million in 1977 to N4,
805.20 million in 1980 and further to N36, 219.60 million in 1990.
Recurrent expenditure was N461,600.00 million and N1, 589,270.00 million
in 2000 and 2007, respectively. In the same manner, composition of
government recurrent expenditure shows that expenditure on defense,
internal security, education, health, agriculture, construction and
transport and communication increased during the period under review.
Moreover, government capital expenditure rose from N5, 004.60 million in
1977 to N10, 163.40 million in 1980 and further to N24, 048.60 million
in 1990. The valve of capital expenditure stood at N239, 450.90 million
.and N759, 323.00 million in 2000 and 2007, respectively. Furthermore,
the various components of capital expenditure (that is, defense,
agriculture, transport and communication, education and health) also
show a rising trend between 1977 and 2007.
1.2 STATEMENT OF THE PROBLEM
Unfortunately, rising government
expenditure has not translated to meaningful growth and development, as
Nigeria ranks among the poorest countries in the world (Nurudeen and
Usman, 2010). In addition, many Nigerians have continued to wallow in
abject poverty, while more than 50 percent live on less than US$2 per
day. Couple with this, is dilapidated infrastructure especially roads
and power supply that has led to the collapse of many industries,
including high level of unemployment. Moreover, macroeconomic indicators
like balance of payments, import obligations, inflation rate, exchange
rate and national savings reveal that Nigeria has not fared well in the
last couple of years.
The conflicting views of the impact of
government expenditure on economic growth have led to this research
work. The uncertainty of public spending on economic growth gives rise
to the various problems, which include, but are not limited to the
following: resource misallocation, establishment of businesses with
negative externalities, partial implementation of development plans,
existence of white elephant projects, and prevalence of imperfect
markets (e.g. Monopolistic competition) which leads to continuous
exploitation of the masses. Hence, the discovery of the growth effect of
public expenditure components would curb the occurrence of the
aforementioned problems. Consequently, the achievement of developmental
objectives, such as the Millennium Development Goals (MDGs), seven point
agenda and vision 2020, would not be fully perceived as a mirage.
1.3 OBJECTIVES OF THE STUDY
The basic objective of this study will
be to empirically examine the impact of government expenditure on
economic growth in Nigeria. Other specific objectives include;
(A) To analyze the trend of recurrent and capital expenditure, as proportions of Gross Domestic Product (GDP) in Nigeria.
(B) To examine the relationship
between government expenditure components (transportation and
communication, education, health, agriculture) on economic growth in
Nigeria.
(C) To discuss the role of government expenditure
(D) To examine the structure component-of government expenditure in Nigeria
1.4 RESEARCH QUESTIONS
This study will attempt to provide answers to the following research objectives:
(i) What is the trend of recurrent and capital expenditure, as proportions of Gross Domestic Product (GDP) in Nigeria?
(ii) What is the relationship
between government expenditure components (transportation and
communication, education, health, agriculture) on economic growth in
Nigeria?
(iii) What is the role of government expenditure?
(iv) What are the structures / component of government expenditure in Nigeria?
1.5 HYPOTHESES OF THE STUDY
In order to order out this study, the following hypotheses were tested:
Ho: There is no significant relationship between government expenditure on health and economic growth in Nigeria.
H1: There is significant relationship between government expenditure on health and economic growth in Nigeria.
Ho: That government expenditure on education does not influence economic growth in Nigeria.
H1: That government expenditure on education influence economic growth in Nigeria.
Ho: That government expenditure on agriculture does not have statistic effect on economic growth in Nigeria.
H1: That government expenditure on agriculture has statistic effect on economic growth in Nigeria.
H0: That there is no significant relationship between government expenditure on transportation and economic growth in Nigeria.
H1: That there is significant relationship between government expenditure on transportation and economic growth in Nigeria.
1.6 MODEL SPECIFICATIONS
In order to examine the impact of
government expenditure on economic growth, we disaggregated government
expenditure and examine the sector that contributes most to economic
growth in Nigeria. Some key areas of "government expenditure in Nigeria
include; total government expenditure on health, education, agriculture,
and transportation and communication.
DEFINITION OF VARIABLES
The variables used in the model are defined below:
(1) Dependent Variables
GDP = Real Gross Domestic Product in Nigeria
(2) Independent Variables
TAGR= Total government expenditure on agriculture
THEL= Total government expenditure on health
TEDU= Total government expenditure on education
TRC == Total government expenditure transportation and communication
The function form of the models for the study will be expressed as follows
GDP= F(TAGR, THEL, TEDU, TRC) ………………………………… (l)
In order to examine the relationship
between the dependent and independent variables, we will take linear
approximation of the function form of the models in equation 1 this
yields;
GDP= ?o+ ?1TAGR+ ?2THEL+ ?3TEDU+ ?4TRC …………………………….. (2)
Equation 2 above is specified in an econometric form as follows:
GDP= ?o+ ?1TAGR+ ?2THEL+ ?3TEDU+ ?4TRC + µt ...................................... (3)
µt = Error Term
Equation (3) above is designed to
measure the relationship that exists between the dependent variables
(GDP) and independent variables; government expenditure which comprises
(TAGR, THEL, TEDU, TRC). This is to determine the sector that influences
the growth of the economy most. The- priori assumptions for this
equation are:
The above sign implies a positive
relationship between GOP and the explanatory variables. All the
explanatory variables are expected to be positive related with the level
of economic growth.
1. 7 METHODOLOGY OF THE STUDY
The study employs secondary annual time
series data for the period from 1977 to 2008. The principal data sources
are the publications of national Bureau of Statistics, Publications of
the Central Bank of Nigeria (CBN) which includes the statistical
bulletin, annual report, statement of accounts, financial review of
various years and other related items. Other sources of data used are
journals research papers, text books and other academic works directly
related to this work.
The method of analysis, employed in this
study, to test the disaggregated impact of public expenditure on
economic growth in Nigeria, is the Ordinary Least squares (OLS)
technique. The choice of this econometric method was informed by the
fact that, it yields Best Linear Unbiased Estimates (BLUE). Moreover,
such estimate captures the relative effect of particular variables on
another variable. The criteria for evaluation are the economic criteria
which include testing for the sign and size of the parameter estimates,
the first other test also known as the statistical test this include the
test of the statistical significance of the T,F, and R2 ,
and the econometric test which include the test for serial
autocorrelation, and muIti-collinearity since it is a time series
analysis. Specifically, the multiple regression analysis will be
employed in this study. Regression analysis is concern with the study of
the dependence of one variable, on the other variable or variables
called the explanatory variable with a view to estimating and or
predicating the population mean or average valve of the former in terms
of known or fixed valve of the later.
1.8 SIGNIFICANCE OF THE STUDY
Despite the increase in government
expenditure over the years, the Nigerian economy has not achieved any
meaningful growth. Thus a study of this nature is inevitable. The
significance of this study is to enlighten at all levels (federal, state
and local government), on how their spending activities, if judiciously
allocated and monitored would bring about a desirable level of economic
growth. It also seeks to make the general public aware of the spending
operations of the government; this will ensure effective and efficient
resource utilization by the government; thereby, bringing Nigeria's
short term and long term development goals, to reality. This research
work will be a useful addition to the existing study on the effect of
government on economic growth. However, the study is different from
previous studies in scope (number of year considered is longer) and
unlike other studies that examine the effect of total government
expenditure on economic growth, this study looks at the disaggregated
effect of government expenditure on economic growth. And it is intended
to be of relevance to policy/ decision makers, government, investors,
e.t.c. The study will also serve as a prior to future researchers.