© 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