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IMPACT OF GOVERNMENT EXPENDITURE ON MAJOR MACROECONOMIC VARIABLES IN NIGERIA, 1980 – 2014

Abstract

Using annual time series data from 1980 to 2014, this study investigated the impact of government expenditure disaggregated into capital (CEXP) and recurrent (REXP) on GDP Per Capita (GDPPC), inflation (INF), unemployment (UNEMP), and Gini index (GINCO, proxy for poverty) respectively to construct principally four econometrics models. The study adopted the ex-post facto research design in the study and five hypotheses were proposed and tested.The multiple regression and Granger causality test of the Ordinary Least Square (OLS) technique of analysis were employed in obtaining the numerical estimates of the coefficients in the different equations. The study estimated the models in the statistical procedure of co-integration and Error-Correction Model (ECM). The results of long run regression showed that government capital and recurrent expenditure both had positive and significant impact on GDP per capita;capital expenditure had a significant negative impact on inflation, while recurrent expenditure had positive but non-significant impact on inflation. Government capital expenditure had a significant negative impact on unemployment, while recurrent expenditure had negative but non-significant impact on unemployment; equally capital and recurrent expenditure showed a significant negative impact on poverty. While bidirectional causality exists between recurrent expenditure and inflation, no causality relationship was found between capital expenditure and inflation, capital expenditure and GDP per capita, and recurrent expenditure and GDP per capita respectively.Error Correction Model (ECM) was introduced in all the equations in order to adjust the short-run discrepancies in the parameters, and it showed a speed of adjustment of 72%, 51%, 24% and 27% respectively, to any disequilibrium within a year. The study recommended that government expenditures should be redirected and refocused towards the growth of the real sectors to stimulate general productivity in the economy; and that deliberate efforts are consciously needed to begin at reversing the observed excessive government recurrent expenditures over capital expenditures given the dangerous and inhibiting effect it has on a typical developing economy.

TABLE OF CONTENTS

Title                                                                                                                               i

Approval ii

Declaration                                                                                           iii

Dedication iv

Acknowledgements                                                                                v

Abstract                                                                                  vii

Table of contents                                                                                   viii

List of Tables     xi

List of Figures                                                                              xii

CHAPTER ONE: INTRODUCTION

1.1       Background to the Study                                                1        

1.2       Statement of the Problem                                   6        

1.3       Objectives of the Study                            9        

1.4       Research Questions                                                               9

1.5       Research Hypotheses                                                              10

1.6       Scope of the Study                                                               10

1.7       Significances of the study                                                                        10

            References                                                                     12

CHAPTER  TWO:  REVIEW OF RELATED LITERATURE

2.1       CONCEPTUAL FRAMEWORK                                                15      

2.1.1    Concept of Government Expenditure    15

2.1.2    Government expenditure and the economy 19

2.1.3    Concept of fiscal policy 21

2.1.4    Concept of Economic Growth     22

2.1.5    Concept of Inflation                                                    25

2.1.6     Concept of Unemployment                                         27

2.1.7    The Poverty Concept                                                   28

2.1.8    Poverty and income inequality                               32

2.2       THEORETICAL REVIEW                                                           34      

2.2.1.   Theories or Determinants of Public Expenditure    34

2.2.1.1 Wagner’s Theory of Increasing State Activity              35

2.2.1.2 The Displacement Effect Hypothesis of Wiseman and Peacock 38

2.2.1.3 The Rostow-Musgrave Development Model             39

2.2.2    Theories of Economic Growth                                                     41

2.2.2.1 The Classical theory of Economic Growth                 41

2.2.2.2 Keynesians Theory of Economic Growth                            42

2.2.2.3 Harrod-Dommar Theory of Economic Growth   43

2.2.2.4 Neoclassical Growth Theory                                                         43

2.2.2.5 Endogenous Growth Model                    45

2.2.3    The Nexus between Government Expenditure and Macroeconomic Variables        47

2.2.3.1 Government Expenditure and Economic Growth          47

2.2.3.2 Government Expenditure and Inflation                          52

2.2.3.3 Government Expenditure and Unemployment    57

2.2.3.4 Government Expenditure and Poverty Reduction             62

2.3       EMPIRICAL REVIEW                                                                     66      

2.3.1    Government Expenditure and Economic Growth     66

2.3.2    Government Expenditure and Economic Growth in Nigeria 71

2.3.3    Government Expenditure and Price Stability                                       75

2.3.4    Government Expenditure and Inflation in Nigeria   79

2.3.5    Government Expenditure and Unemployment 83

2.3.6    Government Expenditure and Unemployment in Nigeria      88

2.3.7    Government Expenditure and Poverty Rate           88

2.3.8    Government Expenditure and Poverty in Nigeria                        92

2.4       Review Summary                                                                     95      

            References                                                                        105

CHAPTER THREE: METHODOLOGY

3.1       Research Design                                                                        128

3.2       Nature and Sources of Data                                                128

3.3       Analytical Framework                                                                    128

3.4       Model Specification                                                                    129

3.5       Description of Model Variables                                     135          

    3.6      Techniques of Analysis                                                      139

3.7       Other Diagnostic Test                                                                          143      References                                                                                                                   145

CHAPTER FOUR: DATA PRESENTATION AND DATA ANALYSIS

4.1       Introduction                                                                                 148

4.2       Data Presentation and Interpretation                              148

4.3       Descriptive statistics                                                      157

4.4       Stationarity and Co-integration Tests                             158

4.5       Test of hypotheses                                                     160

4.5.1     Analysis and Discussions of Result in Model I          160

4.5.2     Analysis and Discussions of Result in Model II             165

4.5.3     Analysis and Discussions of Result in Model III                     169

4.5.4     Analysis and Discussions of Result in Model IV                       173

 4.5.5    Analysis and Discussions of Result in Model V           177

4.5.6     Further Discussion of Results                                 178

4.6        Implications of Results                                                           179 References                                                                                                                 182

CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS

5.1       Summary of Findings                                                               183

5.2       Conclusion                                                                   183

5.3       Recommendations                                                              185

5.4       Contribution to Knowledge                                      186

5.5       Recommendations for Further Study                                 187

            Bibliography                                                                             188

            Appendices                                                                                 213

LIST OF TABLES

Table 2.1: Summary of Empirical Literature

Table 4.1: The annualized data of government expenditure, capital expenditure and recurrent expenditure                                 149

Table 4.2: Annualized data for GDP Per Capita, Inflation rate, Unemployment and GiniCoefficient                                             152

Table 4.3: Summary of the descriptive statistics of the variables      157    

Table 4.4:  Summary of Unit Root and Co-integration Tests         158

Table 4.5: Long-run Regression Results for Model I                               161

Table 4.6: Short-run Regression Results for Model I                       163

Table 4.7: Long-run Regression Results for Model II                    165

Table 4.8: Short-run Regression Results for Model II                   167

Table 4.9: Long-run Regression Results for Model III                      169

Table 4.10: Short-run Regression Results for Model III                        171

Table 4.11: Long-run Regression Results for Model IV                         173    

Table 4.12: Short-run Regression Results for Model IV         175

Table 4.13: Presentation of Granger Causality Result for Model V 177

Table 4.14: Specification Error Test                                                  178

Table 4.15:  Test for Multicollinearity                          179        

LIST OF FIGURES

Fig. 4.1.Is the graphical representation of Government (Total, Capital and Recurrent) Expenditure from 1980-2013.                                                         151

Fig. 4.2. Line graph of trends of per capita gross domestic product from 1980-2013           153

Fig. 4.3. Line graph of trends of inflation rate from 1980-2013     154

Fig. 4.4. Line graph of trends of unemployment rate from 1980-2013     155

FIG. 4.5. Line graph of trends of gini-coefficient from 1980-2013     156a

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