GOVERNMENT CAPITAL EXPENDITURE AND ECONOMIC GROWTH IN NIGERIA

GOVERNMENT CAPITAL EXPENDITURE AND ECONOMIC GROWTH IN NIGERIA

This research proposal investigates government capital expenditure and its effects on economic growth in Nigeria.

GET RELATED PROJECT TOPICS HERE

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Over the years, capital expenditure of governments in Nigeria has continued to rise above recurrent expenditure. Some scholars argue that an increase in government expenditure on socio-economic and physical infrastructures encourages economic growth. In Nigeria for instance, despite the huge amount of capital and recurrent expenditures, there is still a low level of development witnessed. Government expenditure on all sectors of the economy is expected to lead to economic growth in the sense that public expenditure should boost the productive base of the economy which in turn leads to growth. Maritala and Taiwo (2011) defined a country’s economic growth as a long term rise in capacity to supply increasingly diverse economic goods to its population, this growth capacity based on advancing technology and the institutional and ideological adjustment that is demand. In other words, economic growth refers to an increase in a country’s potential Gross Domestic Product (GDP), although this differs depending on how the national product has been measured. According to Ogundipe and Oluwatobi (2010), economic growth must be sustained for a developing economy to break the circle of poverty. Economic growth can be defined as the steady process by which the productive capacity of the economy is increased over time to bring about rising levels of national output and income (Todaro and Smith, 2005). However, it is pertinent to note that growth is concerned solely with quantitative and measurable attributes (Ogboru, 2006)

Furthermore, Lipsey and Chrystal (2007) regarded economic growth as the engine for generating long-term increases in the overall standard of living. This justifies why every economy aims at achieving economic growth annually. Economic growth is also defined as the increase in the market value of the goods and services produced by an economy over time. It is conventionally measured as a percentage rate of increase in real gross domestic product (GDP). (IMF, 2012). This conceptualization by IMF is adopted as the working definition for this paper because real GDP will be used to proxy economic growth.

Jhinghan (2011) stated that economic growth is the quantitative sustained increase in a country’s per capita output or income, accompanied by an expansion in its labour force, consumption, capital and volume of trade. While economic development is economic growth plus change. An economy can grow but may not develop. However, it is difficult to imagine economic development without economic growth.

The interest by economists in Nigeria and other jurisdictions on the effect of government expenditure varies. Barro (1990) conducted an endogenous model of government spending and the rates of growth and savings (1980 – 1990). He concluded that an increase in resources devoted to non-productive government services is associated with lower per capital growth. Therefore, advised that government expenditure which enhances growth should be tailored towards productive services.

According to Barro and Grilli (1994), government spending includes all government consumption and investment but excludes transfer payments made by a state. Government expenditure can be for the acquisition of goods and services for current use to directly satisfy the collective needs of members of the community or individual. It can be for the acquisition of goods and services intended to create future benefits such as infrastructural investment and the expenditure can represent the transfer of money, such as social salaries and the cost of Administration.

The government performs two functions; protection (security) and provision of certain public goods (Abdull, 2000 and Al-Yousif, 2000). Protection function consists of the creation of the rule of law and the enforcement of property rights. This helps to minimize risks of criminality, protection of life and property, and the nation from external aggression. Under the provision of public goods are defense, roads, education, health, and power, to mention a few. Scholars such as Ranjan (2008), Cooray (2009) concluded that expansion of government expenditure contributes positively to economic growth. However, some scholars did not support the claim that increasing government expenditure promotes economic growth, instead, they assert that higher government expenditure may slow down overall performance of the economy. For instance, in an attempt to finance rising expenditure, the government may increase taxes or borrowing. Higher taxes discourage individuals from working for long hours even searching for jobs. This, in turn, reduces income and aggregate demand. In the same vein, higher profit tax tends to increase production costs and reduce investment expenditure as well as the profitability of the firms. Studies by Landan (1986), Baro (1991), has a negative impact on economic growth. In Nigeria, government expenditure has continued to rise due to the huge receipts from production and sales of crude oil, and the increased demand for public (utilities) goods roads and communication, infrastructure, power, education, health.

Besides, there is increasing need to provide both internal and external security for the people and the nation. Available statistics show that total government expenditure both capital and recurrent and it’s components have continued to rise in the last thirty years. For instance, the government total recurrent expenditure increased from N3,819.20 million in 1977 to N4,805.20 million in 1980 and further to N36,219.60 million in 1990. Recurrent expenditure was N416,600.00 million and N1,589,270.00 billion in 2000 and 2007 respectively. Moreover, government capital expenditure rose from N5,004.60 million in 1977 to N10,163.40 million in 1980 and further to N24,048.60 million in 1990. The value of capital expenditure stood at N239,450.90 million and N759,323.00 million in 2000 and 2007, respectively. Furthermore, the various components of capital expenditure are Defense, Agriculture, Transport and Communication infrastructure, education and Health also show a rising trend between 1977 and 2007 unfortunately, rising government expenditure has not translated to meaningful growth and development, as Nigerian ranks among the poorest countries in the world. In addition, many Nigerians have continued to wallow in abject poverty, while more than 50% live on less than us$2 per day. Couple with this, is dilapidated infrastructure (especially road and power supply) that has led to the collapse of many industries, including high level of unemployment. Moreover, macroeconomic indicators like a balance of payments, import obligations, inflation rate, exchange rate, and national savings reveals that Nigeria has not fared well in the last couple of years. (Olugbenga and Owoye, 2007). According to Okoro (2015) gross domestic product (GDP) is considered the broadest economic growth indicator. It represents the market value of all goods and services produced in an economy during a given period usually a year. The relationship between capital expenditure and economic growth is particularly important for developing countries. This is due to the need for them to unchain themselves from the grip of abject poverty and continue steadily on the path of rapid development expenditure has a positive and significant effect an economic growth – other scholars are of the opinion that a rise in government expenditure (especially when it is funded by borrowing) may impede economic growth. These include Egbetude and Fasanya (2013), Folster and Henrekson (2001) who suggested in their work that there is no significant relationship between government expenditure and economic growth.

1.2 STATEMENT OF THE PROBLEM

Governments continue to increase spending on education, health, agriculture, mining and infrastructure with a view toward economic growth to ease the burden of citizens. Specifically, efficient transportation and communication should be available, people should enjoy basic healthcare delivery with minimal effort and there should be food security; but, ironically, this is not the case. The problem is that the economic growth recorded has not translated into improved welfare as expected in some nations (Babatunde, 2015; Mitchell, 2005). This problem is of concern to this study because the trend has to be reversed, therefore, this study is based on an objective that considers the identified problem and is necessary because scholars are still arguing over the matter based on divergent views. For instance, Mandl, Dierx, and Ilzkovitz (2008) suggest that there should be further improvement in the efficiency and effectiveness of public spending. Nonetheless, their study does not cover developing nations where there is a shortage of such research. The present study fills this gap in that it covers Nigeria, which is a developing nation. Their study is not specific as to what improvements are needed and how to address these, nor is the theoretical underpinning relied upon in the study discussed. The current study uses a theoretical framework to help fill this gap and makes recommendations based on the findings. Odior (2011) found that investing in education is one of the pro-growth policies for promoting economic growth; however, the study does not explain the theoretical underpinning for such a conclusion.

What is at stake here is how a government should allocate public spending across various sectors of an economy in order to maximize prospects of achieving its growth and development objectives. Given the lack of consensus on country studies and a relatively insignificant number of country-specific studies in this direction, our study represents an attempt to re-examine the issues in the light of the Nigerian experience. Specifically, it is concerned with determining the relative contributions to economic growth in Nigeria of government capital expenditures on agriculture, education, health, mining, services, and infrastructures. The importance of disaggregation government expenditure for proper appreciation of the role of the state in the Nigerian economy is being underscored in this study. In addition, Raheem, Ayeni, and Fashademi (2014) found that there is poor implementation of developmental policies using secondary data but provide no theoretical underpinning for the conclusion. The present study is based on some established public sector and economic theories. Darma (2014) examines federal capital expenditure and its impact on economic growth in Nigeria. The study found that there is a mismanagement of funds by government officials but does not relate that finding to economic growth; the theoretical underpinning is also ignored. Aregbeyeni and Kolawole (2015) found that there is no causality between government spending and economic growth, but will there be economic growth if the government folds its arms and spends nothing? Although highly doubtful, the study does not resolve this. The current study uses empirical analysis with a robust statistical technique to drive home its points of arguments, and the interpretation of its findings is based on a theoretical framework. Recently, Connolly and Li (2016) investigated government spending and economic growth in Organization for Economic Cooperation and Development (O.E.C.D.) countries and found that an increase in spending heads in the opposite direction from that of economic growth.

It is essential to check this trend of poor statistics in the best interest of citizens. The question of what theoretical frameworks are used and how reliable the theories are is seated to this topic; these theories need to be examined to set a solid basis for the arguments emanating from this study out of concern over government spending on infrastructure and economic growth, and further research is necessary given the consequences for citizens’ welfare. Therefore, this study investigates government capital expenditure and its effects on economic growth in Nigeria.

1.3 AIM AND OBJECTIVES OF THE STUDY

This study aims to provide a scholarly contribution to knowledge in the area of government capital expenditure. Therefore it’s objectives are

1. Examine the relationship between capital expenditure on education and economic growth in Nigeria.
2. Assess the extent to which capital expenditure on health impact on economic growth in Nigeria –
3. Evaluate the extent to which capital expenditure on agricultural activities stimulates economic growth in Nigeria.
4. Analyze the extent to which capital expenditure on infrastructure and communication stimulates economic growth in Nigeria

1.4     RESEARCH QUESTION

1. What is the nature of the relationship between capital expenditure on education and economic growth in Nigeria?
2. To what extent has capital expenditure impacted on Health and economic growth in Nigeria?
3. What is the effect of capital expenditure on agriculture and economic growth in Nigeria?
4. What is the relationship between capital expenditure on infrastructure and communication and economic growth in Nigeria?

1.5 RESEARCH HYPOTHESIS

1. There is no significant relationship between capital expenditure on education and economic growth in Nigeria.
2. There is no significant relationship between capital expenditure on health and economic growth in Nigeria.
3. There is no significant relationship between capital expenditure on agriculture and economic growth in Nigeria.
4. There is no significant relationship between capital expenditure on infrastructure and communication and economic growth in Nigeria.

1.6 SIGNIFICANCE OF THE STUDY

This study will significantly improve literature and knowledge in the areas of government expenditure, capital expenditure, and economic growth. Researchers will rely on this work for available literature and further studies, policy analysts would have a timely recommendation to make for government Investment policies; businessmen will have a clear direction on areas to invest their scarce resources. This work in no small measure will contribute to knowledge.

1.7     SCOPE OF THE STUDY

• Geographical Scope

This study intends to cover the entire four geo-political zones of Nigeria. The zones are the North-East, the North–Central, South–West, and South-South.

• Conceptual Scope

The conceptual Scope is limited to Capital Expenditure and Economic growth (1986-2017).

• Unit of Study

The unit of study includes accountants, public analysts, the financial sector, business people and policymakers.

1.7.1 LIMITATION OF THE STUDY

This study will be restricted to the use of secondary data and past literature collected from Central Bank of Nigeria (CBN Bulleting), National Bureau of Statistics (NBS) financial bulletins, journals, and the internet. The data will cover the period of 1986-2017. Data analysis will be limited to the outcome of the result of the e-view regression for the variables stated earlier.

1.8 DEFINITION OF TERMS

• Capital expenditure: Money spent on assets .eg- Building, power generating plants, Roads, Schools, Mining developments.
• Recurrent expenditure: Money spent on overlead and administration. such as wages, salaries, interest on a loan, maintenance.
• Economic growth: The long term rise in the potentials of a nation to supply goods and services.
• Performance: The execution of an action
• Infrastructure: it includes power generation and distribution, mobile and telecommunications installation.
• Public goods: these are social amenities like roads, parks, bridges, schools, hospital, etc.
• GDP: Gross domestic product: this is the market value of all goods and services produced in an economy within a given period usually a year.

1.9 ORGANIZATION OF THE STUDY

Chapter One: Background to the study, statement of the problem, objectives of the study, research questions, research hypothesis, significance of the study, scope of the study, limitation of the study and definition of terms.

Chapter Two: Theoretical review, conceptual review, empirical review, gap identification.

Chapter Three: Research design, data collection method, an operational measure of variables, model specification, method of data analysis.

Chapter Four: Data presentation, summary statistics, correlation analysis, discussion of findings.

Chapter Five: Summary, conclusion and recommendation, contribution to knowledge.