CHAPTER 2

LITERATURE REVIEW

2.1 INTRODUCTION

Literature review is a well-integrated discussion and critical evaluation of different

scholarly viewpoints on a given research problem as found in the previous relevant studies

highlighting their strengths, weakness and indicating how a given study, for example this one

will make a contribution to the existing body of knowledge, especially on the research problem

and on other related areas of investigation. This chapter is divided into three sections, which are;

conceptual framework, theoretical framework and empirical literature. The conceptual

framework reviews the basic concepts used in the study, the theoretical framework analysis

existing theories and the empirical literature analysis the relationship between service sector and

economic growth, the serves as a guide to the study.

2.2 CONCEPTUAL FRAMEWORK

2.2.1 PUBLIC INFRASTRUCTURE

Public infrastructure refers to the relatively large physical capital facilities and

organizational, knowledge and technological frameworks that are fundamental to the

organization of communities and their economic development. It includes legal, educational and

public health systems, water treatment and distribution systems, garbage and sewage collection,

treatment and disposal, public safety systems, such as fire and police protection, communication

systems, public utilities and transportation systems (Tatom, 1993). Conceptually, infrastructure

includes permanent sets of engineering construction, equipment, and machinery and the service
they provide to production and household consumption. Infrastructure can be divided as

economic and social ones, the former refers to the public utilities such as electricity,

telecommunications, water supply, sanitary and drainage, public engineering construction such

as dam and irrigation system, and the transport facilities such as railway road, harbor and airport;

while the latter refers to education, medicare and health services (World Bank, 1999; Zhang and

Gao, 2007 There are four channels through which infrastructure can have a positive impact on

economic growth. First, energy and transport are used as inputs in firms' production function and

hence influences their production cost, directly or indirectly, and ultimately their competitiveness

from an international and national perspective (Pradhan and Bagchi, 2013). Second, investment

in infrastructure may boost capital accumulation by providing opportunities for capital

developments (Kirkpatrick, Parker and Zhang, 2004). Third, it can stimulate aggregate demand

by increasing expenditure in construction and maintenance operations (Wang, 2002). Finally, it

may induce other investments by providing signals to key sectors in the economy (Fedderke and

Garlick, 2008).

Studies have shown that the level of public infrastructure development has influence on

the nation’s economic growth and development, populace standard of living, life expectancy,

unemployment and poverty alleviation. This study is of the view that if adequate and modern

economic public infrastructures are available in Nigeria, the cost of production and product

quality would be positively affected in such a way that foreign and smuggled goods would be

priced out of the markets rather than the other way round. The economic public infrastructures

are those that have direct impact on the productive and distributive sectors of the economy.

Examples include electricity, water supply, telecommunication system, and transportation (roads,

railways, waterways and airways). Similarly, social public infrastructures have potentials to
create harmony, social integration and security of lives and property which invariably impact on

productivity, life expectancy and, economic growth and development.

Infrastructural development in developing countries has not been given adequate

attention by successive government in Africa and Nigerian government cannot be exonerated for

this. Some scholars have even acknowledged the important role of infrastructure in stimulating

foreign direct investment, among them are Wheeler and Moody (1992), Richard et al. (1999),

Morisset (2000), Asiedu (2000), Sekkat et al. (2004), these scholars argued that infrastructural

development is a necessary condition for foreign investors to operate successfully as poor

infrastructural development increase costs for firms. Infrastructure should therefore improve the

investment climate for FDI by subsidizing the costs of investment by foreign investors and

increase their (ROI) return on investment. As the availability of good infrastructures like roads,

railways, highways, ports, communication networks and electricity with a stable polity would

increase productivity and thereby attract higher levels of FDI. Wei (2000) opined that, “location

with good infrastructure is more attractive than the others”. Asiedu (2002) analyzed some

countries (34) concluded that with good infrastructural development the countries were rewarded

with more investments. However, for a country like Nigeria with many nearby developing

countries, infrastructural development could be a comparative advantage to attract investment.

According to Edun (2011), this is why it is imperative for the country to invest more on

infrastructural facilities and try to bring down the escalating price of cement, with incentives for

investors to enter the building material market; it is this infrastructural development that will act

as the foundation for FDI attraction into the most populous nation in Africa.

Nigeria has been plagued with the numerous challenges of infrastructural development,

and no doubt, one of the reason for poor diversification of productive capacities in the economy.
The small, medium enterprises have been relegated to the background due to the infrastructural

bottlenecks. A number of potential entrepreneurs have been rendered ineffective; those who

dared to stick out their necks have been forced to pack up due to the infrastructural constraints. It

is impossible to talk of effective diversification of the economy when the bedrock of its survival

is not properly addressed.

2.2.2 THE SERVICES SECTOR

The service sector consists of several industries such as transportation, banking, retail and

wholesale trade, tourism, real estate, telecommunications, information and communication

technology, health, education, and entertainment. The service sector is currently the fastest

growing sector in the world. Transportation is characterized as moving objects, persons from one

point to another, for one purpose or another. The movement can be at sea, on air or on land. For

its own sake, transport is hardly in demand, rather it is organically connected to the survival of

other sectors namely social, economic and political. The increase in capability and the ability to

carry vast volumes of goods or persons over long distances at high speeds in terms of comfort

and safety has become an index of humanity and, in particular, of technical development.

Therefore, we cannot underestimate the need for transport services in any economy.

Transportation studies in Nigeria have become relevant due to the views or thoughts researchers

seeking to formulate better policies that will positively affect the transportation sector that will

later bring about a secure, reliable and normal transportation network. Adebayo (2011). This has

resulted in a rapid increase in the demand for transport services in the country over the year.

Nigeria’s transport network is seen as the means by which the Nigerian economy can achieve

growth and development. An efficient working form must be laid down to attain such

production. Transport has become to play a crucial role in every field of human life, which ranks
it among the most significant determinants of any performance in such human’s activities.

Transport network growth and productivity is a prerequisite target of all developing countries.

Money and funds have been applied selectively to this specific area of growth and it is now

widely agreed that improving transport is perhaps the most important single contribution to

economic, political and social development. For example, the transport network is used to meet

the needs of various economies, transporting raw materials to the manufacturing industries or

finished goods to the consuming areas.

Information and communication is an extended term for information technology (IT) that

emphasizes the role of unified communication and the convergence of telecommunications

(telephone lines and wireless signals) and computers, as well as the need for enterprise

applications, middleware, storage and audiovisual systems that allow users to view, archive,

distribute and control inflation. The term ICT is often used to refer to the integration of

audiovisual and telephone networks with digital networks via a single cable or connection

structure. There are major economic benefits to integrate the telecommunications network with

the computer network infrastructure by way of a single centralized wire, signal delivery and

management structure. During the past two decades, substantial development of information and

communication has prompted many researchers to examine its economic consequences,

especially IC’s contribution to rising productivity, promoting economic growth and reducing

poverty. Most studies have shown that information and communication technology is a key

factor in the country’s economic and social development, as it has positive effects on economic

growth, productivity and employment. Governmental organizations like UN, the Governmental

Telecommunication Union, the OECD and the World Bank also claim that the ICT sector is a

crucial driver of sustainable growth. A report conducted by the World Economic Forum showed
that a 10% rise in a country’s digitization will resulting a 0.75% rise in GDP per capita and a

1.02% increase in GDP per capita. Increased ICT development and use has the potential to

generate job opportunities, transfer skills and increase policy and accountability and thus

contribute to economic growth.

Health services are made up of medical practitioners, associations and ancillary health

personnel who provide medical care to those in need. Health services are accessible to patients,

families, societies and population. They include emergency, preventive, rehabilitative, long-term

hospital, surgical, primary and palliative. These programs are focused on making health care

available, of high quality and patient-centered. In order to provide effective health services,

several different types of treatment and providers are required. Health services is also referred to

as a public service that provides medical aid to individuals and groups. Good health is

fundamental to human development and happiness. It also contributes significantly to economic

growth, as healthier people live longer, become more active and save money (WHO). It has been

recognized that increased wealth of a nation is associated with improving individual and societal

health. Noble Laureate Amartya Sen suggested that health (such as education) is part of the

essential capabilities that give human life meaning. The richness of any nation can be measured

by its citizens’ health status. This is the true confirmation of the famous saying that “health is

wealth”. The basic vision for poverty reduction for the world is reflected in the eight Millennium

Development Goals of the United Nations. Four of these eight targets relate to health: reduction

of infant mortality, enhancement of maternal health and the fight against HIV/AIDS, malaria and

other disease. Such potentially significant changes in health are in themselves highly valuable

targets and acts as tools for achievement (Rume, 2012). Health in other words is a fundamental

factor of economic growth and development. Along with education, they are the most crucial
sectors where in order to ensure greater human growth, public interest should be centered.

Public health is concerned with maintaining and enhancing the health of entire communities,

mainly by community wide efforts by government agencies. All good health care services are

aimed at preventing human disease, injury and disability; protecting people from environmental

health threats and encouraging activities that contribute to healthy physical and mental health

and ensuring accessibility (Rume, 2012).

Education is a mechanism that encourages learning or the development of information,

skills beliefs, values and customs. It is the act or method of imparting or gaining knowledge, of

cultivating the forces of reasoning and judgement and, in general, of preparing oneself

intellectually for a successful existence. It can take place formally or informally settings and any

encounter that has a formative impact on the way one thinks, feels or behaves can be called

educational. Education directly influences economic growth to the extent that it is fundamental to

improve human development. An economy’s production limit relies upon various elements. This

incorporates physical capitals, innovation and the quantity of laborers, just as their quality. This

quality is to a great extent dictated by what is human capital (the supply of knowledge, habits

and skills). An expansion in laborers educational level improves human capital, expanding the

efficiency of these laborers and the economy’s output, as human capital has for quite some time

been viewed as the most unmistakable component of the financial framework and further work

has demonstrated the effect of education on efficiency development experimentally. The world

Economic Forum 2016 recommended three ways through which education influences a nation’s

efficiency. Initially, it expands the aggregate capacity of the workforce to complete existing

assignments all the more rapidly. Secondly, secondary and tertiary instruction particularly

encourage the exchange of knowledge about new data, items, and innovations made by others
(Barro and Lee, 2010). And lastly, by expanding creativity, it supports a nation’s own ability to

make new knowledge, items and advancements.

In Nigeria, it is impossible to talk about the services sector with mentioning the

entertainment industry. The advancement in technology and the new media revolution has to a

large extent changed the trend of production and distribution in the Nigerian entertainment

industry (Ogunleye, 2008). As an industrial sector, the entertainment industry is similar to other

industries that manufacture and produce products for profit. As with other industrial sectors, each

division within the entertainment industry creates a product that is unique to that industry. For

example, each movie created is unique, with different sets of circumstances, deals, and actors.

So, as an economic sector, the entertainment industry consists of a large number of sub-

industries, in terms of specific forms of entertainment. Throughout the late 1990s and into the

new millennium, the entertainment industry went through an intense strategic restructuring that

resulted in the presence of large corporations (music and drama) dominating specific markets, if

not all. Nationally, the entertainment industry is collectively worth over N2.2 billion and is

growing at an annual rate of five percent. Furthermore, by way of substantiating the achievability

of the above stated projection, it is instructive to consider live’ examples of some developed

countries in this regard. In the second quarter of 2021, the sector of arts, entertainment, and

recreation accounted for 0.21 percent of Nigeria's GDP. The industry's participation slightly

declined compared to the first quarter of 2020, when it reached 0.31 percent. However, compared

to 2019, the contribution of arts, entertainment, and recreation to the GDP increased. The

entertainment industry in Nigeria today has propagated the Nigerian message economically,

farther than the concerted efforts of the government’s international diplomacy would have. And

outside the continent, it has become an economic mainstay for the Nigerian and Africans in
diaspora. Many Nigerians today live by the fortunes made from the entertainment industry; by

which the unemployment rate in the nation has been tackled in a practical way, though to a

limited extent, as located within the ambience of the entertainment industry.

2.3. THEORETICAL FRAMEWORK

The provision of social and physical infrastructure through public investment and

expenditure on some goods and services theoretically, can increase productivity in the private

sector when there is an efficient allocation of resources. (Chenery and Syrquin, 1975). According

to the Keynesian theorists, public expenditure promotes economic growth through multiplier

effects of the aggregate demand. Aggregate demand is the sum of expenditures undertaken by

the household, private business firms, government agencies and net exports (Jhingan, 2009).

Increase in investment expenditures positively influences the growth of the economy given that

the economy operates in the short run which is characterized by unemployed resources.

Hemming (1991), observed that, it is more likely that growth is influenced by the

composition of expenditure, since certain types of expenditure may be more growth inducing.

Critical among these types of spending are provision of socio-economic infrastructure,

operations and maintenance, and general administrative and legal frameworks.

The work of Ashauer (1989) focused on a demand side hypothesis that a high marginal

productivity of government spending would yield multiple expansions in output. To the extent

that these expenditures are productive, a reduction in expenditure may affect longer form

movements in productivity. The income effects arising from government expenditures feed into

Wagner's law that addresses the income elasticity of public goods. Although his findings, which

employed US data, indicated that nonmilitary public capital and, in particular, 'core'
infrastructure were important to productivity, they did not support Wagner's hypothesis. Other

theories, such as the Bureau Voting Theory, suggest that the main driver of public sector

expansion is artificial demand for government services created by self-interested government

employees (Niskanen, 1971).

2.4 EMPIRICAL REVIEW

A key development question especially for African countries is whether service sector

growth can contribute to positive and sustained economic transformation? While the

development literature has traditionally argued otherwise, there is a growing literature suggesting

that the current nature of economic globalization enhanced by revolutions in information

technology, and reduced transport cost opens a window of opportunity for the utilization of

modern services as a driver of growth in developing countries (Jensen et al., 2005; Ghani &

Kharas, 2009; Ghani & O’Connell, 2014; Amirapu & Subramanian, 2015; Yusuf 2015; Khanna

et al., 2016) and these can be achieved through investment in public infrastructure.

Several factors have been put forward to have contributed to the increasing growth of

services in many economies. One of which is technological change, which has altered the nature

of structural transformation and the ways in which countries develop (Ghani & O’Connell,

2014). For example, India has focused on the production of tradable services, leading to its

emergence as a frontrunner in the production of IT and IT-enabled services. It is argued that the

case of India is suggestive of a future global trend that will see increase in global trade as

expansion in information technology continue to enhance the possibility of trade in services

(Blinder, 2006). A combination of other factors has also been attributed to India's success, viz:
effective market integration, prevalence of skilled workforce, and supportive infrastructures and

institutions (Ghani, 2009).

Charles, Onuchuku, & Tamuno (2018) examined the impact of government expenditure

on transport and communication, construction on economic growth in Nigeria over the period

1980 and 2016. The study used the Error Correction Modelling method and observed that

government expenditure on construction, transport and communication is negatively related to

economic growth. Ehigiator (2017) appraised the performance of the service sector in Nigeria.

The study noted that in the last 15 years, the service sector has contributed meaningfully to

economic growth, trade and employment. The study also noted that the issue of lack of

investment and inadequate infrastructural facilities constitutes serious impediments to the growth

of the service sector. Nworji & Oluwalaiye (2012) examined the impact of government spending

on road infrastructure on economic growth in Nigeria. The findings of the study revealed that

transport and communication, including defense, had significant impact on economic growth.

Unlocking this potential in the service sector will however require keen investment in

business environment reforms, which are necessary to improve the ease of doing business,

sustain macroeconomic stability, and attract investments. In specific terms, improving human

capital development, providing enabling infrastructure and intellectual property rights are

necessary to drive growth and productivity in the services sector. Infrastructure is required to

drive growth in the services sector, Andrew N., Adedayo A. and Adedayo B. (2018).

According to the World Bank (2013), telecommunications infrastructure and reliable

power supply are the most crucial for services-led growth, aside quality human capital. However,

Nigeria suffers chronic deficits in these areas. Telecommunications infrastructure is weak. As a

result, broadband penetration is low at 21%, lower than 58.6% and 52.6% in South Africa and

Egypt respectively. Similarly, there is a widening power infrastructure deficit, given that

Nigeria's installed power generating capacity is low at 10 GW, when compared with over 39 7G

W and 47 GW in Egypt and South Africa respectively

To cover the shortfall in infrastructure, significant private investments in utility

infrastructure such as telecommunications, power and transport is required. To attract

investment, policies have to be consistent, while regulations need to allow market-reflective

pricing which guarantees cost recovery, and contract enforcement between the private and public

sector. These reforms are necessary to boost competition and promote efficiencies.

The Nigerian services sector has shown impressive gains amid tough economic

circumstances. Retail and wholesale trade, telecommunications, banking, motion pictures

“Nollywood”. Spurred by favourable government policies and increased foreign direct

investment (FDI), growth in these industries has helped to diversify Nigeria’s economy, which a

major statistical rebasing eight years ago revealed to be the largest in sub-Saharan Africa, Erick

(2017).

By convention, infrastructure is broadly divided into two categories: economic and

social. The former conventionally includes transport and communications, road and

constructions, power generation, water supply and sanitation facilities, while the latter includes

education and health-care facilities, Chukwuebuka A., Jisike O, and Patrick A. (2020). This

study, however, will be focused on economic infrastructure as it relates to services sector growth.

The review of the empirical literature showed that while studies exist on the link between

public infrastructure and services sector growth, only a few examined the extent to which public
infrastructure with more emphasis on public expenditure and investment has influence on the

growth of the service sector with particular reference to Nigeria. In this wise, this study attempts

to bridge the gap by examining the relationship between public infrastructure and service sector

growth in Nigeria.

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