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This study examines the impact of public expenditure on economic growth in Nigeria using time series data over the period 0f 1981-2016. The study is primarily aimed at ascertaining the relationship between federal government expenditure and economic growth in Nigeria. To achieved this objective, the study adopted the econometric technique of Ordinary Least Squares (OLS) and Error Correction Mechanism (ECM). The Augmented Dickey Fuller test was used in the study to check for unit root. The ADF result showed that all the variables were stationary at first difference and the co-integration test indicated a long run relationship among the variables.The findings reveal that federal government capital expenditure, federal government recurrent expenditure and gross fixed capital formationare statistically significant while inflation rate is statistically insignificant.On the bases of the foregoing, the study recommends relevant authorities should monitor each project issued out to avoid diverting the fund meant for public good. Government expenditure should be promoted in as much as it is geared to productive investment that will facilitate growth and development in the country.
TITLE PAGE- – – – – – – – – — – – – – – – – – — – – – – – – – – – – – -i
APPROVAL PAGE – – – – – – – – — – – – – – – – – — – – – —– – – -ii
DEDICATION- – – – – – – – – — – – – – – – – – — – – – – – —- – – iii
ACKNOWLEDGEMENT- – – – – – – — – – – – – – – – — – —– – iv
TABLE OF CONTENT- – – – – – – – — – – – – – – – – ———- – v
ABSTRACT- – – – – – – – – —- — — – — – – – – – – – – – —- – ix
1.1 BACKGROUND OF THE STUDY- – – – – – — – – – – — —- — – -1
1.2 STATEMENT OF PROBLEM – – – – – – — – – – – – – – – — – – — – 4
1.3 OBJECTIVE OF THE STUDY- – – – – – — – – – – – – – – — – ——7
1.4 RESEARCH QUESTION——————————————–8
1.5RESEARCH HYPOTHESIS- – – – — – – – – – – – — – ——– – – – 8
1.6 SIGNIFICANCE OF THE STUDY – – – — – – – – – – – – — – – – —9
1.7 SCOPE AND LIMITATIONS OF THE STUDY – – – – – – — – — 9
2.0 CONCEPTUAL LITERATURE – – — – – – – – – – – – — – – – – – 10
2.1 CONCEPT OF GOVERNMENT EXPENDITURE————–10
2.2 CLASSIFICATION OF GOVERNMENT EXPENDITURE—–10
2.2.2 RECURRENT AND CAPITAL EXPENDITURE————–10
2.3 CONCEPT OF ECONOMIC GROWTH————————–11
2.4 THEORETICAL REVIEW—————————————–12
2.5 EMPIRICAL LITERATURE REVIEW- – – – – – – – – — – – — —13
2.6 SUMMARY OF RELATED LITERATURES———————-16
2.7 LIMITATIONS OF PREVIOUS STUDIES————————16
3.0 METHODOLOGY – – – – – – – — – – – – – – – – — – – – — ——-17
3.1 THEORETICAL FRAMEWORK————————-———17
3.2 MODEL SPECIFICATION – — – – – – – – – – — – – – – – ———18
3.3METHOD OF EVALUATION———————————– — 19
3.3.1 PRELIMINARY TEST——————————————–19
22.214.171.124 STATIONARITY TEST————————————– –19
126.96.36.199 CO-INTEGRATION TEST———————————— 19
188.8.131.52 ERROR CORRECTION MECHANISM———————–20
3.3.2 ECONOMIC TEST OF SIGNIFICANCE————————21
3.3.3 STATISTICAL TEST OF SIGNIFICANCE———————-21
184.108.40.206 TEST FOR GOODNESS OF FIT—————————–22
220.127.116.11 t-TEST OF SIGNIFICANCE———————————-22
18.104.22.168 f-TEST OF SIGNIFICANCE———————————-22
3.3.4 ECONOMETRIC TEST OF SIGNIFICANCE——————23
22.214.171.124 NORMALITY TEST—————————– ————–23
126.96.36.199 GRANGER CASUALITY TEST——————————-24
3.4 NATURE AND SOURCE OF DATA——————————25
4.0 PRESENTATION AND ANALYSIS OF RESULTS – — – ——-26
4.1 EMPIRICAL RESULTS——————————————–26
4.1.1 UNIT ROOT TEST RESULTS———————————-27
4.1.2 COINTEGRATION TEST REULTS—————————–28
4.1.3 ERROR CORRECTION MECHANISM RESULT AND INTERPRETATION—————————————————–29
4.2 EVALUATION OF REGRESSION RESULTS——————-31
4.2.1 EVALUATION BASED ON ECONOMIC CRITERION——-31
4.2.2 EVALUATION BASED ON STATISTICAL CRITERION—–32
188.8.131.52 R2 RESULT AND INTERPRETATION———————–32
184.108.40.206 t-TEST RESULT AND INTERPRETATION—————–32
220.127.116.11 RESULT AND INTERPRETATION OF F-TEST————33
18.104.22.168 RESULT AND INTERPRETATION OF AUTOCORRELATION TEST———————————————————————33
22.214.171.124 NORMALITY TEST RESULT AND INTERPRETATION—34
4.3 EVALUATION OF RESEARCH HYPOTHESES—————-36
4.4 IMPLICATION OF THE RESULTS——————————-36
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION————————————————- 38
5.1 SUMMARY OF FINDINGS————————————– -38
REFERENCES– – – – – – – – — – – – – – – – – — – – – – – – – – — —–40
The management of the economy is now in circle of functions of governments throughout the world. The abandonment of laissez fair doctrine of the classical school brought about the government intervention in the working of the economy. Governments all over the world now feel compelled to ensure that their economies are managed to achieve major desirable objectives of full employment, price stability, economic growth and external balance (Ohale and Onyema 2002). John Maynard Keynes, an English Economist, popularized public expenditure as a stabilization tool through his philosophy of active government intervention in an economy that pulled many economies out of the Great Depression of 1930s. Government now play serious role for most economics of the world by intervening in the economy to achieve macro-economic goals, price stability, creation of employment, achieve industrialization and maintain a reasonable level of economic growth.
Many developing countries are currently undergoing substantial macroeconomic adjustment. It is not clear how such programmes are affecting government expenditures and hence longer-term economic growth and poverty reduction. Thus, it is important to monitor trends in the levels and composition of government expenditures, and to assess the causes of change over time. It is even more important to analyze the relative contribution of various expenditures to production growth and poverty reduction, as this will provide important information for more efficient targeting of these limited and often declining financial resources in the future.
The link between public expenditure and economic growth has attracted considerable interests on the part of economic researchers both at the theoretical as well as empirical level. Roughly speaking, one may distinguish between two opposing views: On the one hand, there is the Keynesian approach according to which government spending is an important policy tool to be used to ensure a reasonable level of economic activity; correct short-term cyclical fluctuations in aggregate expenditure (Singh and Sani, 1984); and secure an increase in productive investment, thus providing a socially optimal direction for growth and development (Ram, 1986). The opposite view is that excessive state intervention in economic life affects growth performance in a negative way for two reasons: first, because government operations are often conducted less efficiently, they reduce the overall productivity of the economic system, second, because excessive government expenditure (usually accompanied by high taxation levels) distorts economic incentives and results in suboptimal economic decisions (Barrow 1990; King and Rebel 1990).
Those who support larger size of the government give credence to the provision of certain goods and services that would otherwise not be provided by the private sector. They assert that government comes into economic activities due to failure of the market and externalities to establish a predetermined growth path. Government exists so as to provide social and physical infrastructure, by undertaking some investment and expenditures. By these ways, the government can directly or indirectly improve the productivity of the private sector by efficient and effective allocation of resources. The existence of government is correctly justified when one looks at the legal functions of the government, in terms of property rights (Atkinson and Stiglitz 1980:5), provision of security, maintenance of law and order, etc. In this sense, government expenditures have become expedient and necessary to overcome the obstacles of economic development.
However, when the size of the public sector becomes very large it can impinge on economic growth and development (Peden and Bradley (1989: 239), Vedder and Gallaway (1998), Folster and Henrekson (2001), etc). The larger the size of the public sector, the more difficult it becomes to coordinate the activities of the key players in the system. Larger governments tend to crowd out private investment, which invariably impinges on domestic output (Ahmed and Miller, 1999). Larger sizes of government can also create output volatility (Acemoglu and Ziliboti, 1997; and Koskela and Viren, 2003).
Maintaining law and order, in particular, securing property rights is probably the most acceptable rationale for government intervention. Theoretically, it is argued that enforcement of property rights being a public good, its provision can only be materialized through collective action (Gradstein, 2004). The rationale for the existence of government anywhere, including Nigeria, can be viewed from the perspective of the institutions of property rights, rule of law, governance, security, enforcement of the rule of law, etc. Nigeria is a Federal state with three tiers, with multiple and diverse ethnic and other socio-political differences, which most often determine the volume and rate of spending. The nature of public spending (in Nigeria) depends majorly on the revenue – of which oil controls a greater percentage – and which is also determined by the vagaries of world market interactions. The other institutional factors which can influence the public spending and economic growth include institutional quality (the enforcement of property rights), political instability (riots, coups, civil unrests, civil wars, etc), characteristics of political regimes (elections, constitutions, executive powers), social capital (the extent of civic – private – activity and organizations) and social characteristics (differences in income and in ethnic, religious, and historical background) (Aron, 2000:100). All these affect nations’ investments directly as they create harsh environment and insecurity, which increases transaction costs and mar the private investment for growth.
According to North (1990:110), “Third World countries are poor because the institutional constraints define a set of payoffs to political/economic activities that do not encourage productive activity”. Such rules affect both individuals and organizations, defined as political organizations (city councils, regulatory agencies, political parties, tribal councils), economic organizations (firms, trade unions, family farms, cooperatives, etc), educational bodies (schools, universities, vocational training centres), and social organizations (churches, clubs, civic associations) (Aron, 2000). The inability of the government to enforce the rule of law affects the economies of developing countries, including Nigeria, and as such, rent-seeking behaviours, corruption, bribery and protection of individuals and organizations connected with highly placed people become the common phenomenon. These behavioural attitudes raise the transaction costs and costs of information in the production process and make the rule of law unreliable.
Due to the mixed feeling on the above the debate has been inconclusive on whether or not increasing government spending induces economic growth or not. Based on the above this paper attempts to investigate whether increasing government spending induces economic growth performance in Nigeria.
Nigeria has consistently had deficit spending over the years without equivalent rate of economic growth. Data shows that output of Nigeria has been fluctuating for some years and the sources of these shocks may not be clear. The growth rate (real GDP growth) of output was 3.2, 2.4, 2.8, 3.8 and 4.7 respectively, in 1997, 1998, 1999, 2000 and 2001, while the total expenditure growth was 12.1, 15.6, 28.1, 15.6, and 19.3 per cent in 1997, 1998, 1999, 2000, and 2001, respectively (CBN, 2001). This implies that the growth rate of public expenditure was far higher than that of economic growth.
The aggregate expenditure of the Federal Government, in nominal terms, increased by 32.2 per cent in 2008 (CBN, 2008). As a proportion of GDP, total expenditure increased by 13.5 per cent, from 11.7 per cent in 2007, while the GDP growth rate was 6.4 percent, almost the same as the 6.5 per cent recorded in 2007 and the average annual projected growth rate for the period 2004 – 2008. This implies that the public expenditure is growing faster than the rate at which the output is growing. As a percentage of GDP, recurrent expenditure increased from 1.2 percentage points to 8.8 per cent. Most of the components of recurrent expenditure increased relative to their levels in 2007. As a proportion of Federal Government revenue, capital expenditure was 30.1 per cent, exceeding the stipulated minimum target of 20.0 per cent under the West African Monetary Zone (WAMZ) secondary convergence criteria. The data speaks volume that the economy does not grow at a fast rate as the growth rate of government expenditures. It is expected that as the public expenditure expands output is expected to expand also, because public expenditure should be translated into output growth. Or does it imply that much of the public expenditure find their ways into some other paths different from the intended routes?
However, in 2009, the aggregate expenditure of general government fell by 5.1% from its level in 2008, which represented 29.4% as compared with 31.5% in 2008, while GDP growth rate, at 1990 constant prices, was 6.7%, which exceeded the 6.0% recorded in 2008 and annual growth rate of 6.4% forth period of 2005 – 2009 (CBN Annual Report, 2009:74). In 2010, the aggregate expenditure of general government increased by 15.3% from the level in 2009. As a proportion of GDP, it represented 28.4% as compared with 28.8% in 2009, while the growth rate of GDP was 7.9% which exceeded the 7.0% recorded in 2009 and the average annual growth rate of 6.7% but lower than the target growth rate of 10% for the year (CBN, 2010).
From these data, the rate at which the output grows has been lower than that of the growth of public expenditure simply implies that there is need to investigate whether the rises in public expenditure have been accompanied by rise in the output of Nigerian economy. The data on the fluctuations of the GDP and public (government) expenditure are inexhaustible. This makes it expedient to understand the nature of such fluctuations in the macroeconomic variables and how they impact on the output of the economy.
Given the issues raised, the major objective of the study is to ascertain whether there is a relationship between federal government expenditure and economic growth in Nigeria. The specific objectives include:
1.4 Research Questions
Having stated the research objective, the research questions formulated to guide the study are:
1.5 Research Hypotheses
The hypotheses of this research work are tacitly stated as follows:
H0: federal government capital expenditure has no significant impact on the economic growth in Nigeria.
H1: Federal government capital expenditure has significant impact on the economic growth in Nigeria.
H0: Federal government recurrent expenditure has no significant impact on the economic growth in Nigeria
H1: Federal government recurrent expenditure has significant impact on the economic growth in Nigeria.
H0: Gross fixed capital formation has no significant impact on the economic growth in Nigeria.
H1:Gross fixed capital formation has significant impact on the economic growth in Nigeria
H0: Inflation rate has no significant impact on the economic growth in Nigeria.
H1:Inflation rate has significant impact on the economic growth in Nigeria.
The significance of this study is to consolidate existing issues surrounding the relationship between government expenditure and economic growth. The study would also facilitate the examination of the effects of government expenditure and economic growth in Nigeria and thus boosting the verifiable evidence from Nigeria.
Also, given the verifiable nature of the study, the outcome of this study would help policy makers and regulatory bodies and policy stimulation with respect to the selected variables examined in the study.
It would help the students have in-depth knowledge of the role of government expenditure in the economic growth of Nigeria, and finally, it will be a huge source of information for other researchers in the subject areas.
The study is channeled on examining the impact of public expenditure on Nigeria economic growth from 1981-2016. The major challenges are encountered in this study, they include: inadequate finance and difficult accessibility of research materials. The scope covers a period of thirty-five years (35 years). It is hoped that this will effectively help to achieve the stated objective of the study.