THE EFFECT OF GOVERNMENT CAPITAL EXPENDITURE ON THE PERFORMANCE OF MANUFACTURING SECTOR OUTPUT IN NIGERIA

THE EFFECT OF GOVERNMENT CAPITAL EXPENDITURE ON THE PERFORMANCE OF MANUFACTURING SECTOR OUTPUT IN NIGERIA

This study concerns itself with the effect of government capital expenditure on manufacturing
output in Nigeria.

1.1 Background to the Study

The role of government capital expenditure on the output and input of the manufacturing industry in
Nigeria has been a growing concern despite the fact that the government had embarked on
several policies aimed at improving the growth of the Nigerian economy through the contribution of
manufacturing industry to the economy.
The term capital expenditure is defined as spending on assets. It is the purchase of items that
will last and be used time and time again in the provision of goods and services. In the case of
government, examples would be the building of a new hospital, the purchase of new computer
equipment or networks, constructing new roads, etc. (IMF, 2010). Also, according to CBN
(2011). Government capital expenditure is the money spent on goods that are classified as
investment goods. This means spending on things that last for a period of time. This may include
investment in schools, hospitals, power sector, telecommunication, and road construction. The
role of government capital expenditure in output of manufacturing industry in Nigeria has been a
growing concern, despite the fact that the government had embarked on several policies aimed
at improving the growth of the Nigerian economy through the contributions of manufacturing
industry to the economy (Adebayo,2010; Peter and Simeon 2011 and Loto, 2012).
Libanio (2006) through the use of Kaldor’s first law defined the manufacturing sector as the engine
of growth of the economy. The manufacturing sector refers to those industries which are involved in
the transformation of items and indulge in either creation of new commodities or in value
addition (Adebayo, 2010). The final products can either serve as finished goods for sale to
customers or as intermediate goods used in the production process. Manufacturing sector (Loto,
2012) refers to an avenue for increasing productivity in relation to import replacement and export
expansion, creating foreign exchange earning capacity, raising employment and per capita
income which causes unrepeatable consumption patterns. The manufacturing sector is involved in the
process of adding value to raw materials by turning them into product Mbelede (2012).
Thus, manufacturing industries are the key variable in an economy and motivate the conversion of
raw materials into finished goods. In the work of Charles (2012), manufacturing industries
create employment which helps to boost agriculture and diversify the economy on the process
of helping the nation to increase its foreign exchange earnings. The manufacturing sector are
categorized into the engineering sector, construction sector, electronics sector, chemical sector,
energy sector, textile sector, food and beverage sector, metalworking sector, plastic sector.
Manufacturing industries came into being with the occurrence of technological and socioeconomic transformations in the 18th-19th centuries. This period was widely known as the Industrial
revolution. It all began in Britain and replaced the labor-intensive textile production with
mechanization and the use of fuels. In recent times, some manufacturing industries in Nigeria have
been characterized by declining productivity rate, by extension employment generation, which is
caused largely by inadequate electricity supply, smuggling of foreign products into the country,
trade liberalization, globalization, high exchange rate, and low government expenditure.
Therefore, the slow performance of the manufacturing sector in Nigeria is mainly due to massive
importation of finished goods and inadequate financial support, which has resulted in the
reduction in capacity utilization and input of the manufacturing sector in the economy (Tomola,
Adebisi and Olawale 2010).
Furthermore, in Nigeria, the level of growth in the manufacturing sector has been affected negatively
because of high-interest rate on lending and this high lending rate is responsible for the high cost of
production in the country’s manufacturing sector. Hence, it is observed that the level of Nigerian
manufacturing industries’ performance will continue to decline because of low implementation
of government budget and difficulties in assessing raw materials and stiff competition with
foreign firms.
From 1982 to 1986, Nigeria’s value-added in manufacturing fell considerably partly because of
inefficient resource allocation caused by distorted prices and prohibition of importation.
Between 1986 and 1988, the World Bank induced structural adjustment program (SAP) in the
economy contributing a larger increase in the manufacturing industry and to the GDP, which grew 8
percent in 1988. The deregulation of the foreign exchange market was also reckoned to make
manufacturing industries more competitive by increasing input costs (CBN, 2010). The
manufacturing sector share in the GDP in recent years (1990-2010) has not been relatively
stable. In 1990, it was about 5.5% while it drops to 2.22% in 2010. Also at the same period, the
overall manufacturing capacity utilization grew from 40.3% in 1990 to 58.92% in 2010. This
may be attributed to the increase in government expenditure in recent times.
This change in manufacturing share in GDP and capacity utilization has shown that firms that are
efficient can contribute to job creation, technology promotion and as well ensure equitable
distribution of economic opportunities and the macroeconomic stability of the country.
Recently, government policies began to show more concern about the management and
improvement of the economy. Government over the years embarks on various macroeconomic
policy options to grow the economy in terms of growth and development and the policy option
employed is that of fiscal policy (using government expenditure) (Peter and Simeon 2011).
Based on the nature and importance of the relationship between government capital expenditure
and the manufacturing sector, the study becomes necessary in Nigerian where output and capacity
The utilization of the manufacturing sector has suffered rapid fluctuations in recent years. Since
government desires to increase total spending in the economy with fiscal policy which can either
increase its spending or reduce taxes in maintaining manufacturing sector stability, this study
investigates the effect of government capital expenditure on the manufacturing sector output in
Nigeria.

1.2 Statement of the Problem

Some studies have suggested that an increase in government expenditure on socio-economic and
physical infrastructures have an impact on long-run growth rates. For instance, the government
expenditure on health and education raises the productivity of labour and increase the growth of
national output. Similarly, expenditure on infrastructure such as road, power, etc. reduces
production costs, increase private sector investment and profitability of firms (Barro, 1990; Barro
and Sala-i-Martin, 1992; Neill, 1996). On the other hand, Tullock (1980) observed that growth
in government spending causes deadweight loss of output gives rise to additional
inefficiencies by encouraging rent-seeking by various interest groups, unhealthy competition
with the private sector over resources and investment opportunities.
The persistence of these problems in the Nigerian economy, therefore, makes it necessary to study
the performance of the expenditure policy of the government, particularly the capital component,
and not just its size as this could have a great impact on the manufacturing sector as a component
of growth. This work is expedient as the Central Bank of Nigeria’s statistical bulletin
(CBN, 2008) reveals that the contribution of manufacturing sector to the Nigerian economy is
insignificant as compared to the oil and the agricultural sectors despite several strategies
embarked upon by government which were aimed at improving industrial production and
capacity utilization of the sector.
Most studies in Nigeria had focused on the effect of total public expenditure on the
manufacturing sector and economic growth with conflicting findings. For instance, while
some conclude that government expenditure has a positive effect on manufacturing output
(Mwafaq, 2011; Muritala and Taiwo, 2011; Sikiru and Umaru, 2011; and Peter and Simeon,
2012), others found that government expenditure has not been effective in the area of
promoting manufacturing sector development and sustainable economic growth in Nigeria
(Nurudeen and Usman, 2010; Ighodaro and Okiakhi, 2010; Omitogun and Ayinla, 2007). The
controversy might stem from non-disaggregation of government expenditure to know the
component that contributes more significantly to economic growth through its contribution to
manufacturing sector development. Only a few had examined the effect of the capital component of
that expenditure on manufacturing output in Nigeria.
This work aims to contribute to the debate on the effect of government expenditure
particularly the capital component on economic growth through its effect on manufacturing
sector’s output. The work will, therefore, investigate the effect of the capital component
of public expenditure on the manufacturing sector by looking at the Short and Long-run effects in
order to provide better insight on prudent and efficient allocation of public funds so as to bring
about economic growth and development via manufacturing sector development.

1.3 Objectives of the Study

To fill the research gap above, the broad objective of the study is to ascertain the effect of
government capital expenditure on the performance of the manufacturing sector output in Nigeria.
The specific objectives of the research are the following;
1. To analyze the trend between government capital expenditure and manufacturing sector
output;
2. To determine the effect of government capital expenditure on manufacturing sector
output in Nigeria.

1.4 Justification of the Study

This study will contribute immensely to aiding the government, policymakers, economic
planners and academia generally. It will provide insight and understanding to the
government on how to be prudent in spending public funds that would bring about economic
growth and development. It is also of immense help in providing insight and knowledge to the
general public, policymakers, economic planners, and manufacturing sector regulatory
authorities on the impact of government expenditure on the manufacturing sector in Nigeria.
To the academia, the findings of the study will contribute to the available literature on the current
a scenario of the manufacturing sector in Nigeria and it is the level of contribution to the GDP.
The findings of this research will assist monetary authorities in assessing the performance of the
fiscal policy tools in Nigeria particularly in terms of their impact on the output of the manufacturing
sector. This work is also of immense benefit to the policymakers and economic planners in

terms of using its findings in formulating and implementing appropriate policy measures towards
accelerating economic growth through the manufacturing sector.

1.5 Scope of the Study

This study concerns itself with the effect of government capital expenditure on manufacturing
output in Nigeria.

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