PUBLIC EXPENDITURE PATTERN AND ECONOMIC GROWTH IN NIGERIA (1970 – 2007)

Abstract

Implementing the Millennium Development Goals (MDGs) demands effective public expenditure management that is imbued with transparency and accountability measures to achieve strategic outcomes. Undoubtedly, developing countries, although to varying degrees, continue to grapple with

the mechanics of good governance, resource management, including effective revenue generation and efficient allocation of public funds. This paper represents part of a larger research agenda to assess how fiscal policy influence economic growth in Nigeria. The paper attempts to assess the effects of government expenditure on economic growth in Nigeria. The essence of the study is to determine the components of government’s expenditure that enhances growth, and identify those that do not, and
recommend that they should be reduced to the barest minimum. The paper is broadly consistent with literature and it opens new grounds by focusing on the long-run impact of fiscal policy. The analytical framework is based on econometric methodology encompassing, test for Stationarity, test for cointegration and the specification of an error correction model. The study found no significant relationship between most of the components of government expenditure and economic growth. The estimation results were mixed, in particular some of the variables were weakly significant. However,
it provided important clues to the future direction of research.

CHAPTER ONE
INTRODUCTION

1:1 Background of the Study

The place of public expenditure as a catalyst to economic growth is
not in doubt. Infact, as early as 1893 Adolf Wagner had formulated the law
of expanding state activity which states that government expenditure leads to
a higher level of economic development. The postulate was derived from the
nineteenth century German experience of rapid industrial and economic
growth.
According to Herming (1991) public expenditure is government
spending on production of goods and services not necessarily for present
consumption, but includes public spending that adds to public physical
capital stock, such as building of roads, ports, schools, hospital etc. Public
expenditure represents a form of government intervention designed to
promote allocative efficiency through a correction of market failures,
redistribute resources equitably and promote economic growth and stability.
Economic growth is fundamental for sustainable development. It is
not possible, for a developing country, to ameliorate the quality of life of its
growing population without economic growth. This is mainly enhanced by
the expansion of infrastructure repair, the improvement of education and
health services, the encouragement of foreign and local investments, low
cost housing, environmental restoration, and the strengthening of the
agricultural sector. This approach consists of stimulating the economy by
addressing the nation’s foremost needs. Dealing with these issues will result
in a great amount of money spending by the government and certainly lead
to substantial budget deficits. However, this would generate a large number
of socially useful jobs and business opportunities.
Interest in public expenditure has been on the increase especially in
developing economies as they strive towards sustainable economic
development. However, given the openness of less developed countries,
trade dependency and vulnerability to external shocks, the role of
government becomes germane to adjustment and stabilization programmes.
The basis of this being that sector with high social priority and low rates of
return would not attract private investment and hence the need to channel
government funds.
The effectiveness in stimulating economic growth has been
empirically contentious. Two schools of thought exist in the discussion of
government participation in the economy. The first argues that larger
participation by government is inimical to efficiency, productivity and
growth in the system. The basis for this view is that public sector is not
responsive to market signals as it has an enormous regulatory process and
engenders higher production costs and is prone to distortions arising from
both monetary and fiscal policies. They contend that the operation of
government is inherently bureaucratic and inefficient and therefore stifles
rather than promote growth.
The opponents of this school argue that the participation of
government in economic activity can spur long-run growth. They cite
government role in ensuring efficiency in the resource allocation, regulation
of markets, stabilization of the economy and harmonization of social
conflicts as some of the ways in which government could facilitate economic
growth. They further articulate the need for provision of certain goods and
services that would otherwise not be provided by private sector, in order to
place the economy on a predetermined growth path using the premises of
market failure arising from externalities, they contend that the aim of
government is to attain better allocative and distributional equity through
greater disbursement of public and quasi public goods. The basis of this is
that sectors with high social priority and low rates of return would not attract
private investment and hence the need to channel funds.
Public Finance encompass government capacity to raise revenues, set
spending priorities, allocate resources and effectively manage the delivery of
those resources. Public expenditure pattern is concerned with how
effectively public resources are utilized to meet the needs of the economy in
an equitable manner.
The trend of rising public expenditure in developing countries since
independence call for worry, this increasing expenditure can be attributable
to three factors. First, the independence necessitates the assumption of
diplomatic services abroad, and their own defense expenditure. Secondly,
government assumes greater roles for social services and as well as public
investment programmes in these fields. Finally, increasing population and
GNP calls for more public expenditure and engenders higher production
costs.

1:2 Statement of the Problem

There is no proper consensus on the impact of public expenditure
pattern and economic growth. Economic theory does not provide a well
developed methodology for incorporating government in standard growth
model. Studies that have found a negative relationship between the size of
government expenditure and growth include Landau (1986) and Barro;
(1990) others that have found a positive relationship are those of Enweze
(1973), Longe (1984), Ram (1986) and Aschauer 1989.
It is however widely recognized that public expenditure on
infrastructure such as roads, ports, or communication systems, public
research spending and the provision of basic education and medical services
raises the economic potential of an economy. At least since the influential
study of Aschauer (1989) and the following discussions, it is argued that a
rise in productive government activity increases output. Easterly and Rebelo
(1993) and, more recently, Canning and Pedroni (2004) find evidence for
long-run growth effects associated with public investment in infrastructure.
Despite the development of increasingly sophisticated methods for
assessing the desirability of public expenditure during 1960s and 1970s,
large increases in public investment in many developing countries between
1974 and 1982 yielded few returns (Little and Mirreless, 1990). There are of
course many possible reasons for this. One of the reasons being the method
available to assess the desirability of public expenditure alternatives were
flawed badly implemented. To date many developing countries including
Nigeria face difficulty in public expenditure planning and management.
In the words of Iyoha (1998) uncertainty is a common phenomenon
that seriously affects public sector investment plans in Nigeria. He identifies
some of the sources of uncertainty to include the following; social-political
instability, macro-economic instability arising from external shocks,
exchange rate volatility and uncertain demand or fluctuating real output.
In Africa, the recognition of public expenditure as a prime mover of
economic growth stems from its significance to development. Minogue
(2000) argues that with efficient and effective utilization of resources and
improved public expenditure African countries would be the pearl of the
world developed economies. The impact of public expenditure on economic
growth is more contentions in empirical than theoretical studies hence, the
need to examine the relationship between public expenditure and economic
growth in different dispensations.
To say that Nigeria’s public expenditure over time has been on a
tremendous rise in consonant with Adolf Wagner’s law of ever increasing
state activities emanating from increasing population (urbanization),
servicing and repayment of public debt, continuous rise in price, the role of
government in global diplomacy, its obligations to the state (provision of
defence, justice, law and order, maintenance of the state and provision of
social amenities) and rational tendency towards development is to state the
obvious. What agitates the mind of rational thinkers is that, does the increase
in expenditure generate a positive multiplier effect on growth? In the light of
the above the following questions are generated.
 What is the relationship between public expenditure pattern and
economic growth?
 What are the effects of public expenditure failure on economic
growth?
 What are the channels through which public expenditure is
transmitted to economic growth?
1:3 Objective of the Study
This study seeks in broad terms to establish the impact of public
expenditure pattern on economic growth in Nigeria. Specifically the
objectives are:
 To determine the relationship between public expenditure pattern and
economic growth in Nigeria.
 To ascertain the impediments to economic growth via public
expenditure failure in Nigeria.
 To determine the channels through which public expenditure is
transmitted to economic growth.
1:4 Research Hypotheses
 There is no significant relationship between public expenditure pattern
and economic growth in Nigeria.
 Public expenditure failure has no effect on economic growth of
Nigeria.
 The transmission mechanism of public expenditure to economic
growth is not effective.

1:5 Significance of the Study

The desire to achieve rapid economic growth by most countries of the
world is uncontestable. This research work it is hoped will provide policy
makers with the right policy mix to follow. It will also help policy makers to
design appropriate expenditure pattern necessary for sustainable economic
growth in Nigeria.
Finally, the study will add to existing knowledge of public
expenditure literature. The findings of this work will also be a handy
material for researchers in similar field.

1:6 Scope of the Study
The study will cover the period between 1970 and 2007. This is the
period of Nigeria’s experiment on different fiscal policy measure. This
choice is based on data availability.
1.7 Limitations of the study

This study was not without limitations especially for the fact that
some of the variables were not easily quantifiable. However, the researcher
ensures that variables that are relevant are explicitly captured in the model
while those deemed not too important, and as a result could not have any
serious effect on the findings were subsumed in the stochastic disturbance
(error term).
Similarly, they were problem emanating from the nature of the data
itself, especially as estimated budget figures were used for analysis and as
most macroeconomic time series data are non-stationary and this often
results in spurious results, For instance since they contain a trend the result
may suggest the existence of significant relationship even where none
existed.
The researcher’s constraints also include that of time, finance and
logistics. This though did not restraint him from attaining the goal of this
work.