the Impact of Public investment in infrastructure on economic growth in nigeria

The

THE IMPACT OF PUBLIC INVESTMENT IN INFRASTRUCTURE

ON ECONOMIC GROWTH IN NIGERIA
A Research Proposal

NAME: AZEEZ TEMIDAYO ABOLAJI

MATRIC NO: 206879
COURSE: ECO 306
COURSE TITLE: RESEARCH METHODOLOGY
DEPARTMENT: ECONOMICS
 Matric no: 206879

Introduction

Background of the Study

Most studies have analyzed the relationship between infrastructure and economic growth. The general
consensus of these studies is that infrastructural facilities are related to economic growth. Shakirat (2018)
posited that infrastructure is a strategic economic growth driver with numerous potentials: it serves as a
catalyst for public development in the entire government agenda, such as healthcare delivery,
transportation, education and food security.

Other studies also discussed the channels through which infrastructure can positively affect economic
growth: (i) Infrastructure may simply be regarded as a direct input into the production process and hence
serve as a factor of production; (ii) infrastructure may be regarded as a complement to other inputs into
the production process, in the sense that its improvements may lower the cost of production or its
deficiency may create a number of costs for firms, (iii) infrastructure may stimulate factor accumulation
for example, providing facilities for human capital development; (iv) infrastructure investment can also
boost aggregate demand through increased expenditure during construction, and possibly during
maintenance operations; and finally, (v) infrastructure investment can also serve as a tool to guide
industrial policy; Government might attempt to activate this channel by investing in specific
infrastructure projects with the intention of guiding private-sector investment decisions (Fedderke and
Garlick, 2008).

The importance of infrastructure, thus, to a nation cannot be overemphasized as efficient infrastructure

facilities act as catalysts for development. For instance, a good road transport infrastructure raise
productivity especially in the agricultural sector of the economy and lowers production costs.

Same can be established of educational infrastructure, such as the available of a standard educational
system. Quality educational system and infrastructure acts to improve the productive capacity of the
populace of a nation, equipping them with the ability to utilize modern technology. Thus boosting the
production, national income, aggregate demand, standard of living, growth and economic development of
the nation.

1|Page
 Matric no: 206879

This also applies to investment in technology which acts to boost the productive potential of a nation;
investment in health infrastructure; investment in power and communication. However, within the
Nigerian context, divergent views play up among academic scholars as to whether or not public
investment in infrastructure affects economic growth (Chan, Ramly and Abdkarim, 2017). This, as would
be covers later in the study, is evidenced in the equally divergent results of research conducted by
literature reviewed on this study.

A plausible reason for the existence of different views in evidenced in the fact that government spending
on infrastructure in Nigeria seems to be a waste of scarce resources and to the detriment of the taxpayers
because the growth in the economy does not physically depict infrastructural development. For example,
Nigeria has failed in producing electricity nationwide, the high cost of food, and the scarcity of drinkable
water in many areas of the country, and consequently the high rate of poverty prevalent in the country
(Raheem, Ayana, & Fashedemi, 2014).

Statement of Problem

Nigeria continues to increase investment in infrastructure which is evidenced in the recent heavy public
investment projects embarked by the Nigerian government; with them all targeted towards growing the
economy and easing the burden of the citizens by making available to them efficient transportation and
communication, standard educational system and infrastructure, and maintaining a steady supply of basic
health care services, food, and security.

However, ironically, these investments do not deliver these desired goals. As a result, the economic
growth, as observed in the Annual Gross Domestic Product figures, recorded by these investments has not
translated into improved welfare as the case of developed economies in the world like USA.

The crux of this study is of the opinion, thus, that when government expends on education, road
construction, healthcare delivery, transportation, power and technology such investments should be able
to grow the economy. In order words, there should be a casualty between government investment in
infrastructure and economic growth.

Hence, it is essential to find out reasons why there is little or no growth in the economy despite huge
public investment in infrastructure especially in this era of democracy in Nigeria.

2|Page
 Matric no: 206879

Justification for the Study

While there appears to be a general consensus on the relationship between public investment in
infrastructure and economic growth, no consensus, it would appear, can be ascertained when the
individual components of infrastructure are examined in relation to economic growth. For instance, Enya
and Ezeali (2021) revealed a negative relationship between investment in transport and economic growth
while Adebosin, Salami, and Saula (2021) concluded a positive relationship.

Secondly, depending on the number of years over which the study is carried out, different results appears
to be the case for different studies conducted. For instance, a study by Siyan, Eremionkhale and Makwe
(2015) that examined the impact of road transportation infrastructure on economic growth concluded a
negative relationship between investment in road transport infrastructure and economic growth while
Adebosin, Salami, and Saula (2021) that carried out similar study with additional time lag, that is, extra
amount of year data points concluded on a positive relationship between the same variables. This would
also be observed on the different results given by reviewed studies on the relationship between
educational infrastructure and economic growth; and health and economic growth (Enya and Ezeali, 2021;
Kehinde 2020). This study thus examines the impact of public investment in infrastructure on economic
growth from 1981 to 2020 which will aid in filling a knowledge gap due to time lag.

This study also attempts a more comprehensive research on the impact on economic growth of investment
in infrastructure by capturing more components of infrastructure investment. This is line with observation
that most studies generally limit research on infrastructure to single components of infrastructure, for
instance, road transport infrastructure and economic growth or investment in human capital and economic
growth.

General Objectives

 To investigate the impact of public investment in infrastructure on economic growth in Nigeria

between 1981-2020

Specific Objectives

 To investigate the impact of public investment in road transport infrastructure on economic growth.

3|Page
 Matric no: 206879

 To investigate the impact of public investment in Health on economic growth.

 To investigate the impact of public investment in Education infrastructure on economic growth.
 To investigate the impact of public investment in Power on economic growth.
 To investigate the impact of public investment in Technology on economic growth.

Research questions

 To what extent does public investment in road transport infrastructure affect economic growth in
Nigeria?
 To what extent does public investment in health affect economic growth in Nigeria?
 To what extent will public investment in educational infrastructure affect Nigerian economic
growth?
 To what extent will public investment in Power affect Nigerian economic growth?
 To what extent will public investment in Technology affect Nigerian economic growth?

Literature review

Conceptual Review

This section would defines and clarify the key concepts of the research alongside explaining clearly how
they relate to one another.

Public Investment

Public investment can be defined as gross fixed capital formation by the government. It captures all
government expenditure on capital goods, which are by nature long-termed in terms of their returns.
Given this definition of public investment, it will thus be expedient to point out that public investment
thus will imply government capital expenditure, especially on infrastructure.

Public Infrastructure

4|Page
 Matric no: 206879

Investopedia (2021) defines infrastructure as a general term for the basic physical systems of a business,
region, or nation. These systems, it defines further, tend to be capital intensive and high-cost investments,
and are vital to a country's economic development and prosperity.

In addition, Infrastructure investments also tend to be large-scale, expensive and long term in nature.
Facts that make it such that the private sector cannot maintain them on its own, thus necessitating a role
for the government. In other words, the government plays a key role in the planning, delivery, and
financing infrastructural investments (Aghion et al, 2013).

Public Investment in Infrastructure

Recent years have generally seen a rise in the attention and investment of the government in
infrastructural development in Nigeria especially across most commonly identified infrastructures namely
transport (road, rail and air transport) and electricity.

Public investment in infrastructure by convention is divided between physical or tangible investment in

infrastructure e.g. transport, telecommunications and buildings and Intangible or Human investment in
infrastructure such as investment in education skills and knowledge, health and investment in the
consumption of goods and services e.g. welfare benefits and pensions.

Theoretical Review

Adebosin, Salami, and Saula (2021) carried out their study within the framework of the endogenous
growth theories, underpinning their justification for using the theory on the fact that the theory helped in
providing insights into the expected impact of investment in infrastructure; also further stating that the
improvement of the endogenous growth theory, which have increased the usefulness potential of the
theory, have aroused the need to research into the long run impact of infrastructure investment on
economic growth.

Also some studies reviewed employed same theories for their research. Enya and Ezeali (2021) and
Shakirat (2018) both carried out their research using the stakeholder theory, New Public Management
(NPM) theory, public expenditure theory, Fiscal Illusion theory, Economic Growth theory and Keynesian
theory.

5|Page
 Matric no: 206879

Stakeholder theory is based on the assumptions that address morals and values detailed by freeman 1984.
The theory recognizes that there are parties involved in management such as employees, customers,
contractors, financiers, communities, public agencies, political groups, trade associations, competitors and
trade unions who sometimes scrutinize government spending. Stakeholder theory, as used by studies
reviewed, is used as a critical diagnostic tool to identify the points at which stakeholders are vulnerable to
breakdown in the spending process in the part of government spenders.
For instance, stakeholders, such as electorates, tax payers or simply citizens are interested in what the
government offers from spending tax payers’ money. They expect a business-like approach to governance
in the areas of utmost good faith, transparency and accountability as ensured in new public management
theory (Enya F.O., Ezeali B.O., 2021; Shakirat A.B., 2018)

The New Public Management theory emerged in the 1980s. It represents an attempt to make the public
sector more businesslike and to improve the efficiency of the government by incorporating into public
sector borrowed ideas and management models from the private sector. It is a theory that emphasizes the
centrality of citizens who were the recipient of the services or customers to the public sector.

The Wagner's Law of increasing state spending or Wagner theory of public expenditure points out a
positive relationship between public expenditure and economic growth and development. The theory
holds that for any country, public expenditure rises constantly as income growth expands. The law
predicts that the development of an industrial economy will be accompanied by an increased share of
public expenditure in gross domestic product. However, contrary to the prediction of the theory, the
reality have been the opposite which was analyzed to results from elements of fiscal illusion in
government activities as both studies identified.

Fiscal illusion is about the misperception of fiscal parameters (Enya and Ezeali, 2021; Shakirat, 2018).
Afonso (2014) argues that the benefits of government programmes appear to be remote and unrecognized
by citizens, while citizens feel more directly the impact of sources of financing the budget, such as taxes.
The essence of the theory is to expose the fact that sometimes the real programme of government is
concealed to accommodate unnecessary spending. The theory was adopted by both studies because the
real benefits of infrastructure spending may not necessarily translate into economic growth in the same
expectation because of the element of illusion in the system.

6|Page
 Matric no: 206879

On Economic growth theory, both studies attempt to investigate the Solow-Swan modern day theory,
which focuses on three factors that affect economic growth, including labour, capital and technology, with
particular focus on technology regarding infrastructure advancement and economic growth (G.D.P.).

Keynesian theory presupposes that government intervention can stabilize an economy, especially during
a recession when there is little money to spend. The theory argues that with government technological
intervention, there is increased spending and employment (Jahan, Mahmud, & Papageorgiou, 2014). Just
like the Wagner's theory of public expenditure, both studies attempt a theoretical standpoint with the
Keynesian theory underpinning a positive relationship between public expenditure and economic growth.

Empirical Review

Most of the studies reviewed generally found a statistically significant positive relationship between
public investment in infrastructure and economic growth. A disparage results surfaces only when
examining the individual impact of investment in commonly identified components of infrastructure,
namely, education, health, transport, power and technology on economic growth.

Siyan, Eremionkhale and Makwe (2015) examined the impact of road transportation infrastructure and
economic growth in Nigeria using the econometric methods of Augmented Dickey Fuller (ADF) and the
Philips-Perron (PP) for the unit root test to test for the stationarity of the data and Johansen co-integration
test to test for the long-run relationship between transport infrastructure and economic growth and lastly,
the ordinary least square methodology was used for estimating the model. The variables of the model used
in the research are the amount of Road transportation in GDP (ROT), Capital Utilization (CUR),
Government expenditure on Road transportation (GENOT), Exchange rate (EXCHR) and Gross domestic
product (GDP). The result of the study conducted showed a stationarity of all variables included in the
model at 1 percent level; the existence of a long-run relationship between transportation infrastructure and
economic growth in Nigeria as shown by the co-integration test. The study found that road transportation
contribution to GDP (ROT) and government expenditures on road transportation (GENOT) has a positive
impact on economic growth.

Shakirat (2018) investigated the impact of government spending on infrastructure on economic growth.
Both secondary and primary data was employed in the study. The secondary data, sourced from Central
Bank of Nigeria Statistical Bulletin, covers data figures of variables of the model from 1980 to 2016. The
7|Page
 Matric no: 206879

variables of the model are Gross Domestic Product (GDP), Spending on Agriculture and Natural
Resources, Spending on Transport and Communication, Spending on Health Delivery, and Spending on
Education. Findings from the study indicated that government spending on transport and communication,
education and health infrastructure has significant effects on economic growth; while spending on
agriculture and natural resources infrastructure recorded a significant inverse effect on economic growth
in Nigeria. An element of fiscal illusion was observed in the government spending on agriculture and
natural resources, thus, indicating that the government was not contributing as much as the private sector
in spending on agriculture and natural resources infrastructure in Nigeria.

Enya and Ezeali (2021) examined the impact of public Investment in Infrastructure and the economic
growth of Nigeria. Secondary data figures covering from 1981 to 2018 was used in the study. The study,
having established the stationarity of the variables of the model (all variables were stationary at first
difference) and the existence of a long run relationship among the variables, discovered that public
investment in technology, educational infrastructure and power all have positive relationship with
economic growth while public investment in transport has negative relationship with economic growth.
The result of the study contrast earlier studies above that revealed a positive relationship between
investment in transport infrastructure and economic growth.

Kehinde (2020) examined the impact of government expenditure on human capital on economic growth in
Nigeria between the periods of 1981 to 2015. The result of the analysis revealed that government
expenditure on education and other social services have a positive but insignificant effect on economic
growth while expenditure on health has a negative but insignificant effect on economic growth both in the
short and long run within the study period. The study adds another dimension to the ongoing studies
adding further to the lack of consensus on the impact of government investment on infrastructure
especially as regards the individual components of infrastructure. One of the implications identified in this
research was that positive impact of the government allocations to these sectors every year is not felt by
the citizenry. This was, in the study, ascribed to the weak institutional quality of the country which have
brought about the setbacks in the economy. It was therefore inferred that most funds allocated to
education, health and other social services were diverted into other unproductive activities which makes
them insignificant to economic growth.

8|Page
 Matric no: 206879

Adebosin, Salami, and Saula (2021) examined the impact of investment in road transport infrastructure on
economic growth using time series data from 1981 to 2015. The study used econometric methods of
augmented Dickey-Fuller (A.D.F.) test for unit test; Johansen test for the co-integration test; and Error
correction model (ECM) to investigate the short-run dynamics among the variables of the model. The
study revealed a long-run relationship among the variables as well as the existence of a short-run
significant positive relationship between road transport infrastructure and economic growth.

Methodology

This section presents the model specification, the econometric approach, and the estimation procedure. A
description of data sources would be given as well.

Research design

The research study would be mostly quantitative in nature. The study will apply time series data as the
variables of study are times series in nature. It will use secondary data obtained from Central Bank of
Nigeria, National Bureau of Statistics and World Bank. The time series data would be annual, spanning
from 1981 to 2020.

Model Specification

In order to produce an empirical study, a functional relationship needs to be established first between
public investment in infrastructure and economic growth. Therefore, the functional model will be
represented mathematical as follows;

Economic growth= f(Public Investment in Transportation, Public Investment in Health, Public Investment
in Education, Public Investment in Power, Public Investment in Technology)

Where, Economic growth would be measured by using Real Gross Domestic Product (RGDP).

Hence,

9|Page
 Matric no: 206879

RGDP= β0 + β1PIR +β2PIH + β3PIE + β4PIP + β5PIT + μ

Where, PIR, PIH, PIE, PIP, and PIT are Public Investment in Transportation, Public Investment in Health,
Public Investment in Education, Public Investment in Power, and Public Investment in Technology
respectively.

μ = Error term

Data analysis

The data collected will be subjected to regression analysis and the method of Ordinary least squares (OLS)
will be employed as estimation criteria.

Timeframe

The project, after careful consideration of the scope of the project, is estimated to require a time period of
six months.

Budget

In order to successfully carry out the project, alongside meeting all the cost requirements the project
would demand, an estimate of twenty thousand naira is budgeted.

References

Adebosin W.G., Salami L.A., and Saula D.T. (2021). Investment in Road Transportation infrastructure
and Economic Growth in Nigeria: A Co-integration Var Approach. Source:
https://www.researchgate.net/publication/352400352_INVESTMENT_IN_ROAD_TRANSPORT_INFR
ASTRUCTURE_AND_ECONOMIC_GROWTH_IN_NIGERIA

10 | P a g e
 Matric no: 206879

Afonso, W. B. (2014). Fiscal illusion in state and local finance- A hindrance to transparency. Sage
Journals, 46(3), 219–228. doi:10.1177/0160323X14550103

Bello, Kehinde (2020). Government Expenditure on Human Capital and Economic Growth in Nigeria.
Source:
https://www.researchgate.net/publication/342751556_Government_Expenditure_on_Human_Capital_and
_Economic_Growth_in_Nigeria/citation/download

Chan, S., Ramly, Z., & AbdKarim, M. (2017). Government spending efficiency on economic growth:
Roles of value-added tax. Perspectives on East Asian Economies and Industries, 46(2), 162–188

Enya Fred Ota and Ezeali Benjamin (2021). Public investment in Infrastructure and Economic Growth in
Nigeria. African Journal of Economics and Sustainable Development, ISSN: 2689-5080, Volume 4, Issue
3, 2021 (pp. 1-22)

Fedderke, J.W. and Z. Bogetic (2009). Infrastructure and Growth in South Africa: Direct andIndirect
Productivity Impacts of 19 Infrastructure Measures. World Development,Vol. 37(9), pp. 1522-39.

Investopedia (2021). What is Infrastructure? Source:

https://www.investopedia.com/terms/i/infrastructure.asp

Jahan, S., Mahmud, A. S., & Papageorgiou, C. (2014). What is Keynesian economics? Finance &
Development, 51(3), 53–54

Raheem, S., Ayeni, J. O., & Fashedemi, A. O. (2014). Easing the “Disease” of poverty in Nigeria.
Developing Country Studies, 4(19), 55–66

Shakirat Adepeju Babatunde (2018). Government spending on infrastructure and economic growth in
Nigeria. Economic Research-Ekonomska Istraživanja, 31:1, 997-1014, DOI:
10.1080/1331677X.2018.1436453

Siyan P., Eremionkhale R., & Makwe E. (2015). The Impact of Transportation infrastructure on
Economic Growth in Nigeria. International Journal of Management and Commerce Innovations ISSN
2348-7585 (Online) Vol. 3, Issue 1, pp: (673-680).

11 | P a g e