Project Abstract

<p> </p><p>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</p><p>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<br>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,<br>it provided important clues to the future direction of research.</p> <br><p></p>

Project Overview

<p> </p><p>INTRODUCTION</p><p>1:1 Background of the Study</p><p>The place of public expenditure as a catalyst to economic growth is<br>not in doubt. Infact, as early as 1893 Adolf Wagner had formulated the law<br>of expanding state activity which states that government expenditure leads to<br>a higher level of economic development. The postulate was derived from the<br>nineteenth century German experience of rapid industrial and economic<br>growth.<br>According to Herming (1991) public expenditure is government<br>spending on production of goods and services not necessarily for present<br>consumption, but includes public spending that adds to public physical<br>capital stock, such as building of roads, ports, schools, hospital etc. Public<br>expenditure represents a form of government intervention designed to<br>promote allocative efficiency through a correction of market failures,<br>redistribute resources equitably and promote economic growth and stability.<br>Economic growth is fundamental for sustainable development. It is<br>not possible, for a developing country, to ameliorate the quality of life of its<br>growing population without economic growth. This is mainly enhanced by<br>the expansion of infrastructure repair, the improvement of education and<br>health services, the encouragement of foreign and local investments, low<br>cost housing, environmental restoration, and the strengthening of the<br>agricultural sector. This approach consists of stimulating the economy by<br>addressing the nation’s foremost needs. Dealing with these issues will result<br>in a great amount of money spending by the government and certainly lead<br>to substantial budget deficits. However, this would generate a large number<br>of socially useful jobs and business opportunities.<br>Interest in public expenditure has been on the increase especially in<br>developing economies as they strive towards sustainable economic<br>development. However, given the openness of less developed countries,<br>trade dependency and vulnerability to external shocks, the role of<br>government becomes germane to adjustment and stabilization programmes.<br>The basis of this being that sector with high social priority and low rates of<br>return would not attract private investment and hence the need to channel<br>government funds.<br>The effectiveness in stimulating economic growth has been<br>empirically contentious. Two schools of thought exist in the discussion of<br>government participation in the economy. The first argues that larger<br>participation by government is inimical to efficiency, productivity and<br>growth in the system. The basis for this view is that public sector is not<br>responsive to market signals as it has an enormous regulatory process and<br>engenders higher production costs and is prone to distortions arising from<br>both monetary and fiscal policies. They contend that the operation of<br>government is inherently bureaucratic and inefficient and therefore stifles<br>rather than promote growth.<br>The opponents of this school argue that the participation of<br>government in economic activity can spur long-run growth. They cite<br>government role in ensuring efficiency in the resource allocation, regulation<br>of markets, stabilization of the economy and harmonization of social<br>conflicts as some of the ways in which government could facilitate economic<br>growth. They further articulate the need for provision of certain goods and<br>services that would otherwise not be provided by private sector, in order to<br>place the economy on a predetermined growth path using the premises of<br>market failure arising from externalities, they contend that the aim of<br>government is to attain better allocative and distributional equity through<br>greater disbursement of public and quasi public goods. The basis of this is<br>that sectors with high social priority and low rates of return would not attract<br>private investment and hence the need to channel funds.<br>Public Finance encompass government capacity to raise revenues, set<br>spending priorities, allocate resources and effectively manage the delivery of<br>those resources. Public expenditure pattern is concerned with how<br>effectively public resources are utilized to meet the needs of the economy in<br>an equitable manner.<br>The trend of rising public expenditure in developing countries since<br>independence call for worry, this increasing expenditure can be attributable<br>to three factors. First, the independence necessitates the assumption of<br>diplomatic services abroad, and their own defense expenditure. Secondly,<br>government assumes greater roles for social services and as well as public<br>investment programmes in these fields. Finally, increasing population and<br>GNP calls for more public expenditure and engenders higher production<br>costs.</p><p>1:2 Statement of the Problem</p><p>There is no proper consensus on the impact of public expenditure<br>pattern and economic growth. Economic theory does not provide a well<br>developed methodology for incorporating government in standard growth<br>model. Studies that have found a negative relationship between the size of<br>government expenditure and growth include Landau (1986) and Barro;<br>(1990) others that have found a positive relationship are those of Enweze<br>(1973), Longe (1984), Ram (1986) and Aschauer 1989.<br>It is however widely recognized that public expenditure on<br>infrastructure such as roads, ports, or communication systems, public<br>research spending and the provision of basic education and medical services<br>raises the economic potential of an economy. At least since the influential<br>study of Aschauer (1989) and the following discussions, it is argued that a<br>rise in productive government activity increases output. Easterly and Rebelo<br>(1993) and, more recently, Canning and Pedroni (2004) find evidence for<br>long-run growth effects associated with public investment in infrastructure.<br>Despite the development of increasingly sophisticated methods for<br>assessing the desirability of public expenditure during 1960s and 1970s,<br>large increases in public investment in many developing countries between<br>1974 and 1982 yielded few returns (Little and Mirreless, 1990). There are of<br>course many possible reasons for this. One of the reasons being the method<br>available to assess the desirability of public expenditure alternatives were<br>flawed badly implemented. To date many developing countries including<br>Nigeria face difficulty in public expenditure planning and management.<br>In the words of Iyoha (1998) uncertainty is a common phenomenon<br>that seriously affects public sector investment plans in Nigeria. He identifies<br>some of the sources of uncertainty to include the following; social-political<br>instability, macro-economic instability arising from external shocks,<br>exchange rate volatility and uncertain demand or fluctuating real output.<br>In Africa, the recognition of public expenditure as a prime mover of<br>economic growth stems from its significance to development. Minogue<br>(2000) argues that with efficient and effective utilization of resources and<br>improved public expenditure African countries would be the pearl of the<br>world developed economies. The impact of public expenditure on economic<br>growth is more contentions in empirical than theoretical studies hence, the<br>need to examine the relationship between public expenditure and economic<br>growth in different dispensations.<br>To say that Nigeria’s public expenditure over time has been on a<br>tremendous rise in consonant with Adolf Wagner’s law of ever increasing<br>state activities emanating from increasing population (urbanization),<br>servicing and repayment of public debt, continuous rise in price, the role of<br>government in global diplomacy, its obligations to the state (provision of<br>defence, justice, law and order, maintenance of the state and provision of<br>social amenities) and rational tendency towards development is to state the<br>obvious. What agitates the mind of rational thinkers is that, does the increase<br>in expenditure generate a positive multiplier effect on growth? In the light of<br>the above the following questions are generated.<br>ï‚· What is the relationship between public expenditure pattern and<br>economic growth?<br>ï‚· What are the effects of public expenditure failure on economic<br>growth?<br>ï‚· What are the channels through which public expenditure is<br>transmitted to economic growth?<br>1:3 Objective of the Study<br>This study seeks in broad terms to establish the impact of public<br>expenditure pattern on economic growth in Nigeria. Specifically the<br>objectives are:<br>ï‚· To determine the relationship between public expenditure pattern and<br>economic growth in Nigeria.<br>ï‚· To ascertain the impediments to economic growth via public<br>expenditure failure in Nigeria.<br>ï‚· To determine the channels through which public expenditure is<br>transmitted to economic growth.<br>1:4 Research Hypotheses<br>ï‚· There is no significant relationship between public expenditure pattern<br>and economic growth in Nigeria.<br>ï‚· Public expenditure failure has no effect on economic growth of<br>Nigeria.<br>ï‚· The transmission mechanism of public expenditure to economic<br>growth is not effective.</p><p>1:5 Significance of the Study</p><p>The desire to achieve rapid economic growth by most countries of the<br>world is uncontestable. This research work it is hoped will provide policy<br>makers with the right policy mix to follow. It will also help policy makers to<br>design appropriate expenditure pattern necessary for sustainable economic<br>growth in Nigeria.<br>Finally, the study will add to existing knowledge of public<br>expenditure literature. The findings of this work will also be a handy<br>material for researchers in similar field.</p><p>1:6 Scope of the Study<br>The study will cover the period between 1970 and 2007. This is the<br>period of Nigeria’s experiment on different fiscal policy measure. This<br>choice is based on data availability.<br>1.7 Limitations of the study</p><p>This study was not without limitations especially for the fact that<br>some of the variables were not easily quantifiable. However, the researcher<br>ensures that variables that are relevant are explicitly captured in the model<br>while those deemed not too important, and as a result could not have any<br>serious effect on the findings were subsumed in the stochastic disturbance<br>(error term).<br>Similarly, they were problem emanating from the nature of the data<br>itself, especially as estimated budget figures were used for analysis and as<br>most macroeconomic time series data are non-stationary and this often<br>results in spurious results, For instance since they contain a trend the result<br>may suggest the existence of significant relationship even where none<br>existed.<br>The researcher’s constraints also include that of time, finance and<br>logistics. This though did not restraint him from attaining the goal of this<br>work.</p> <br><p></p>