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Public Expenditure And Economic Growth In Nigeria

Public Expenditure And Economic Growth In Nigeria

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Published by editoraess
The debate on the use of fiscal policy for economic stabilization and
inducement of economic growth is an old one. Key issue in this debate relates
to the efficacy of public expenditure on stimulating economic growth. The
neo-classical school held on extreme position by refuting the usage of fiscal
policy to regulate the economy even in the time of economic crisis. At the
other extreme are those who emphasize the efficiency of fiscal policy in
stabilizing economic fluctuations and stimulating growth. There is nearly a
consensus on the short-run effects of fiscal policy on the economy. Fiscal
policy can temporarily raise or lower national income or counteract
macroeconomic disturbances that would otherwise influence national output.
This paper contributes to this debate by investigating the effect of federal
government expenditure on economic growth in Nigeria.
An augmented Solow model is specified in Cobb-Douglas form with public
capital as one of the factors. Public expenditure is used as proxy for public
capital which is further decomposed by sectors. This helps us to investigate
the impact of each sector on economic growth. The decomposition is in three
expenditure streams: (i) expenditure on building human capital- public
expenditure on education and health; (ii) expenditure on building
infrastructure- public expenditure on transport and communication, and other
social services; and (iii) expenditure on administration which is necessary for
the functioning of government;
A multivariate time series framework is used. Augmented Dickey- Fuller test
indicated that two of the variables are stationary at first difference while other
variables are stationary at levels. While Phillips Peron tests show that three
are stationary at levels and others at first difference. Results of the regressions
show that in the short run public spending has no impact on growth.
However, Cointegration and VEC results show that there is long run
relationship between public expenditure and growth.
The debate on the use of fiscal policy for economic stabilization and
inducement of economic growth is an old one. Key issue in this debate relates
to the efficacy of public expenditure on stimulating economic growth. The
neo-classical school held on extreme position by refuting the usage of fiscal
policy to regulate the economy even in the time of economic crisis. At the
other extreme are those who emphasize the efficiency of fiscal policy in
stabilizing economic fluctuations and stimulating growth. There is nearly a
consensus on the short-run effects of fiscal policy on the economy. Fiscal
policy can temporarily raise or lower national income or counteract
macroeconomic disturbances that would otherwise influence national output.
This paper contributes to this debate by investigating the effect of federal
government expenditure on economic growth in Nigeria.
An augmented Solow model is specified in Cobb-Douglas form with public
capital as one of the factors. Public expenditure is used as proxy for public
capital which is further decomposed by sectors. This helps us to investigate
the impact of each sector on economic growth. The decomposition is in three
expenditure streams: (i) expenditure on building human capital- public
expenditure on education and health; (ii) expenditure on building
infrastructure- public expenditure on transport and communication, and other
social services; and (iii) expenditure on administration which is necessary for
the functioning of government;
A multivariate time series framework is used. Augmented Dickey- Fuller test
indicated that two of the variables are stationary at first difference while other
variables are stationary at levels. While Phillips Peron tests show that three
are stationary at levels and others at first difference. Results of the regressions
show that in the short run public spending has no impact on growth.
However, Cointegration and VEC results show that there is long run
relationship between public expenditure and growth.

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© AESS Publications, 2011 Page 104
 Asian Economic and Financial Review, 1(3),pp. 104-113 2011
Introduction
In almost all economies today governmentintervenes in undertaking fundamental roles of allocation, stabilization, distribution and regulationespecially where or when market proves inefficientor its outcome is socially unacceptable. And alsogovernments particularly in developing economiesintervene to achieve macroeconomic objectivessuch as economic growth and development, fullemployment, price stability and poverty reduction.Theoretically, both Keynesians and neoclassicaleconomists provided varieties of policies and toolsof government intervention, which are broadlygrouped into fiscal and monetary. The choice of a policy or tool depends on how relatively effective itis, in achieving the set of macroeconomicobjectives based on theory or evidence. Thus, it isimportant to carry out country specific study so asto identify the efficacies of different policyinstruments. This study focuses on expenditureaspect of fiscal policy. Public expenditure has over time become the key instrument by whichgovernments seek to promote economic growth anddevelopment especially in developing countrieslike Nigeria.However, there is no consensus in the theoreticalliterature on the impact of public expenditure ongrowth (Paternostro et al, 2007). And empirically,
Public Expenditure And Economic Growth In NigeriaAbstract
 
AuthorUsman, A ; Mobolaji, H. I; Kilishi, A.A.; Yaru, M. A.; And Yakubu, T. A.
Department of Economics, University of Ilorin,Ilorin, Nigeria.
E-mail:abdullateefusman@gmail.com The debate on the use of fiscal policy for economic stabilization andinducement of economic growth is an old one. Key issue in this debate relatesto the efficacy of public expenditure on stimulating economic growth. Theneo-classical school held on extreme position by refuting the usage of fiscal policy to regulate the economy even in the time of economic crisis. At theother extreme are those who emphasize the efficiency of fiscal policy instabilizing economic fluctuations and stimulating growth. There is nearly aconsensus on the short-run effects of fiscal policy on the economy. Fiscal policy can temporarily raise or lower national income or counteractmacroeconomic disturbances that would otherwise influence national output.This paper contributes to this debate by investigating the effect of federalgovernment expenditure on economic growth in Nigeria.An augmented Solow model is specified in Cobb-Douglas form with publiccapital as one of the factors. Public expenditure is used as proxy for publiccapital which is further decomposed by sectors. This helps us to investigatethe impact of each sector on economic growth. The decomposition is in threeexpenditure streams: (i) expenditure on building human capital- publicexpenditure on education and health; (ii) expenditure on buildinginfrastructure- public expenditure on transport and communication, and other social services; and (iii) expenditure on administration which is necessary for the functioning of government;A multivariate time series framework is used. Augmented Dickey- Fuller testindicated that two of the variables are stationary at first difference while other variables are stationary at levels. While Phillips Peron tests show that threeare stationary at levels and others at first difference. Results of the regressionsshow that in the short run public spending has no impact on growth.However, Cointegration and VEC results show that there is long runrelationship between public expenditure and growth.
 
 
 
© AESS Publications, 2011 Page 105
 Asian Economic and Financial Review, 1(3),pp. 104-113 2011
there are plethora of studies on the relationship between public expenditure and economic growth.While Studies like Easterly and Rebelo (1993),Singh R.J and Weber, R (1997); Bose, N et al(2007), Haque and Kim (2003), Sutherland et al(2009), Semmler et al (2007), Aschaeur (1989),Motmmell (1990) and Delorme et al (1999) foundsignificant positive growth effects of publicexpenditure, Others especially on the rich countriesindicated that large government size is detrimentalto economic growth (Schaltegger and Torgler (2006) and Abu- Badaer and Abu Quarn (2003).Thus, the grounds for allocating public expenditureto areas that are most likely to contribute to growthneed to be clearly established empirically.Unfortunately, most of the available studies arecross- country studies. This study is a countryspecific study that focus on Nigeria, where there isgrowing contest over “Fiscal Space” by varioussectors, regions and different arms of government.The main objective of this study is to examine andanalyze the impacts of the composition of publicexpenditure on economic growth in Nigeria.Specifically, the study explores the relative impactsof different components of public expenditure oneconomic growth. Resulting from this, the study provides a guide for allocation of public resourcesto stimulate higher growth. The study presents Nigeria’s case by examining the effects of publicexpenditure composition on economic growth.The data used in the study covered the period between 1970 to 2008. The sources of the datainclude; Central Bank of Nigeria StatisticalBulletin and National Bureau of Statistics. Theremainder of the paper is organised into four sections. Following this introduction is section twowhich presents the review of empirical literature,section three presents the theoretical framework and methodology. Section four focuses on theresults and analysis of the estimated models.Section five presents the conclusion.
Review of Empirical Literature on PublicExpenditure and Growth
Several studies had been undertaken on therelationship between public expenditure andeconomic growth. According to Romp and DeHaan (2005), the techniques adopted by theempirical studies can be grouped into: the production function approach, which is the mostcommonly used, the cost function approach, whichexploits the dual properties of cost and productionfunctions, vector autoregressive (VAR) studies,cross-country, or regional cross-section growthregressions and structural econometric models with public investment (see also Sturm (1998) on thisissue). But the findings are generally mixed.Some of the recent empirical studies include Bose,et al (2007) which examined the growth effect of  public expenditure by sectors using data for a panelof 30 developing countries covering the period of 1970-1990. The finding shows that, public capitalexpenditure is positively correlated with economicgrowth, while the growth effects of currentexpenditure is insignificant for the group of countries. Meanwhile, at sectoral level, governmentexpenditure on education is the only outlay thatremains significant throughout the analysis. Whilethe growth effect of transport and communication,defence initially had significant impact but couldnot survive when other sectors and budgetconstraints were incorporated into the analysis.Devarajan et al (1996) studied the effects of different expenditure component on growth. Thestudy covered 43 countries for periods of 1970 to1990. The study shows that current expenditure has positive impact on growth, while capitalexpenditure exerts negative impact on growth. Butwhen a subsample of developed countries wereconsidered the result was reversed indicating that,the earlier result might be as a result of corruptionand inefficiency in the use of public funds in thedeveloping countries.Haque and Kim (2003) examined the impacts of  public investment on economic growth of 15developing countries using dynamic panel datatechniques. The findings indicated that publicinvestment in transportation has dynamic effects oneconomic growth. Sutherland et al (2009) alsoexamined the effects of infrastructure on economicgrowth by running a cross country growthregression. The study confirmed that investment in public infrastructure, especially in form of telecommunications and energy generation have astrong and significant effect on economic growth.Similarly, Romp and De Haan (2005) following asurvey of the recent empirical literature on thesubject found that, with respect to the earlier contributions, there is more agreement about the positive effect of public capital on growth.Semmler et al (2007) investigated whether acountry could use fiscal policy (and in particular,the level and composition of public expenditure) to promote sustainable growth and welfare in low-and middle –income countries. The study covered35 countries and a model was developed followingthe production function approach. The model wascalibrated. The study found that composition of  public investment expenditure matters, as the gainsof moving to optimal allocation between publicinfrastructure, and education and health facilities
 
 
© AESS Publications, 2011 Page 106
 Asian Economic and Financial Review, 1(3),pp. 104-113 2011
are significant. Based on the model and thecalibration exercise, a practical rule of thumbsuggests that about two-third of public investmentshould be directed towards public infrastructurethat facilitates market production. The paper alsonoted that greater emphasis on education and healthrelative to investments that may contribute toexpansion of market production may result toslower growth/progress in reducing poverty.Singh and Weber (1997) delves into the link  between public expenditure and economic growthin Switzerland by regressing growth on publicexpenditure on six functional categories(Education, health, social welfare, transport, justiceand national defence) using the data for 1950-1994. The authors used time series models andOLS estimation method and found that fiscalspending can influence long run growth. However,out of the six expenditure categories only two(Education and Health) had been found to have permanent growth effects. The effect of educationwas positive while that of health was negative.Ghani, and Din, (2006) explored the role of publicinvestments in the process of economic growth.The model consists of four variables; publicinvestment, private investment, public consumptionand GDP for the period of 1973- 2004 for Pakistan.Time series and VAR modelling approach wasused for the study and it was found that growth islargely driven by private investment than publicinvestment. And that public investment crowds out private investment.Schaltegger and Torgler (2006) examined thegrowth effect of public expenditure at the state andlocal levels in Switzerland having identified thatmost of the previous studies concentrated onaggregate public expenditure. The study coveredthe period of 1981 and 2001. The finding of thestudy shows that public expenditure at both levelhave negative impacts on growth as found by the previous studies at aggregate levels. Abu-Badaer and Abu-Qarn (2003) investigated the causal link  between government expenditures and economicgrowth for Egypt, Israel and Syria. The study found bidirectional causality from government spendingto economic growth but with a negative long termrelationship between the two variables. At thesectoral level, it was also found that Military burden negatively affects economic growth for allthe three countries and that civilian expenditure hada positive growth effects in Egypt and Israel.Badawi (2003) found that the impact of privateinvestments on real growth in Sudan has been more pronounced compared to that of public investment.While the crowding-out effect of public investmenton private investment was found to be highlysignificant. Similar evidence was found in Pakistan by Ghani and Din, (2006) using a VAR model.Contrary, to Badawi (2003), Ghani and Din,(2006), Blanchard and Perotti (2002) and,Schaltegger and Torgler (2006) found that both private and public expenditure have insignificantimpacts on growth.Recent studies in Nigeria include Maku (2009), Nurudeen and Usman (2010) and Akpan (2005).The resulting findings are equally mixed. Nurudeenand Usman (2010) for instance, show thatgovernment total recurrent and capital expenditurehad insignificant growth effects and the impact of expenditure on education was negative. Onlyexpenditure on transport and communication, andhealth had positive effects on growth in their findings. This is partly in consonance toFajingbensi and Odusola (1999) which found thecontribution of recurrent expenditure to growth asinsignificant. The findings of Akpan (2005) alsoindicated growth effects of the differentcomponents of government expenditure to be weak.This may be as a result of the prevailing corruptionin the country as noted by Haque and Kneller (2008) that corruption increases public investmentand reduces the returns to public investment,eventually, making it ineffective in promotinggrowth.In spite of the diversity of the reviewed empiricalstudies in terms of methodologies, coverage andlevel of countries developments, almost a commonconclusion has been apparent. Public expenditureon education, transportation, infrastructure andtelecommunication has persistently appeared tohave had significant growth effects in both thedeveloped and developing countries. These studiesinclude Easterly and Rebelo (1993), Singh R.J andWeber, R (1997); Bose, N et al (2007), Haque andKim (2003), Sutherland et al (2009) and Semmler et al (2007), Other earlier studies with similar conclusion in the U. S include Aschaeur (1989),Motmmell (1990) and Delorme et al (1999).However, the impacts of capital and recurrentexpenditure on growth have been somehow mixedand inconclusive. While majority of the studiesespecially on the rich countries indicated that largegovernment size is detrimental to economic growth(Schaltegger and Torgler , 2006 and Abu- Badaer and Abu Quarn (2003). From the review above,empirical evidence on the impacts of publicexpenditure on economic growth for Nigeria arescanty. This study therefore, not only contributes tothe debate on the use fiscal policy to influencegrowth but also provide further empirical evidenceon the impacts of public expenditure on growth in Nigeria.

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