makati project

8/6/2019 Makati Project

1/53

CHAPTER ONE

GROWTH IMPLICATION OF CAPITAL EXPENDITURE IN

NIGERIA (1978 2008)

INTRODUCTION

1.0 BACKGROUND TO THE STUDY

The Nigerian economy has had a truncated history. In the period 1960-

1970, the Gross Domestic Product (GDP) recorded 3.1 per cent growth

annually. During the oil boom era, roughly 1970-78, GDP grew positively

by 6.2 per cent annually a remarkable growth. However, in the 1980s, GDP

had negative growth rates. In the period 1988-1997 which constitutes the

period of structural adjustment and economic liberalization, the GDP

responded to economic adjustment policies and grew at a positive rate of

4.0. In the years after independence, industry and manufacturing sectors had

positive growth rates except for the period 1980-1988 where industry and

manufacturing grew negatively by -3.2 per cent and -2.9 per cent

respectively. The growth of agriculture for the periods 1960-70 and 1970-78

was unsatisfactory.

1


2/53

The apparent increase in industry and manufacturing from 1978 to 1988

was due to activities in the mining sub-sector, especially petroleum. Capital

formation in the economy has not been satisfactory. Gross domestic

investment as a percentage of GDP, which was 16.3 per cent and 22.8 per

cent in the periods 1965-73 and 1973-80 respectively, decreased to almost

14 per cent in 1980-88 and increased to 18.2 per cent in 1991 -98. Gross

National Saving has been low and consists mostly of public savings

especially during the period 1973-80. The current account balances before

official transfers are negative for 1965-73, 1980-88 and 1991-98.

The economy never experienced double-digit inflation during the

1960s. By 1976, however, the inflation rate stood at 23 per cent. It decreased

to 11.8 per cent in 1979 and jumped to 41 percent and 72.8 per cent in 1989

and 1995, respectively. By 1998, the inflation rate had, however, reduced to

9.5 per cent from 29.0 per cent in 1996.

The on-going economic reform programme is an attempt to put the economy

on a recovery path with minimal inflation. The analysis that follows tries to

discuss the developments in the economy for different periods. This and

2


3/53


4/53

The substantial increase in the federal government spending in Nigeria

cannot be overemphasized since the last few decades. The starting point of

the theory of public expenditure recognizes market failure of market

mechanism to respond fully to the need of the society. In particular, history

is replicated by the fact that the type of investment needed at earliest stages

of development frequently includes large outlay such as those involved in

the development of transportation system or the opening up of Under-

developed part of the country. The development of public investment

through increase in capital spending perform a major function in the design

of development plans as government is expected to engage in both direct

productive activities and social overhead such as education, health,

transportation, housing and communication facilities. The involvement of

Nigeria government in these activities aggravates her capital expenditure. It

also leads to public sector-led industrial development during the period of

oil boom.

Following independence, the governments while encouraging private

sector initiative also believe in accelerating economic growth; Government

4


5/53

took active part in social overheads such as infrastructure, manufacturing

and road haulage during the second national development plan. The windfall

from oil boom of the 1970s also provided needs revenue for direct

government involvement in the economy. Wealth from inflow of oil

intensify government controlling the commanding height of the economy

thus, we may say the government use huge revenue derived from oil to

finance as increasing expenditure. The fall in oil later landed the country in

fiscal deficit and inflation as other export stagnated and high debt service

burden set in which adversely influence growth. Nigeria went into reunion in

the 1980s and the prevalence of the crisis essentially dictated a reserved

lesser role for government to disengage and concentrate only on a social

overhead capital.

The functional classification of government expenditure along the line

is Administration (defense and Security), Economic services (Agriculture,

construction, manufacturing, mining, transport and communication), Social

and Community service (education, health and housing). From historical

perspective, capital expenditure in Nigeria could be analyzed by examining

5


6/53

developmental planning effort. Development started in Nigeria with the

preparation of the ten year plan of development and welfare; 1944 1954

with an estimated capital of expenditure of about #110m. The investment

was to be made primarily in the provision of social and economic

infrastructure in health, education, water supply, transport and

communication.

NIGERIA CAPITAL EXPENDITURE

Capital expenditure is paid from the Development Fund and the

Minister of Finance can incur it only through the issuance of one of the

following Warrants:

(A) Development Fund Annual General Warrant (DFAGW)

This authorizes the Accountant-General of the Federation to issue funds for

expenditure on capital projects, as contained in the approved Capital

Estimate, and mandates the Officers controlling expenditure Votes to

disburse on the capital projects envisaged. The authority to incur expenditure

will be conveyed after the National Assembly has approved the Capital

Expenditure Budget.

6


7/53

(B) Provisional Development Fund General Warrant (PDFGW)

This is issued before the approval of the Capital Estimates by the National

Assembly at the beginning of the financial year. It authorizes payments from

the Development Fund of such amount that is necessary for carrying on the

projects for which expenditure have been authorized in the previous

financial year, for a period of 6 months or until the authority of the National

Assembly has been obtained, whichever is shorter.

(C) Development Fund Supplementary General Warrant (DFSGW)

The Warrant is issued for additional new projects provided for in the

approved Supplementary Capital Estimates. The Minister of Finance has the

power to exclude from the Development Fund Supplementary General

Warrant any item of expenditure which has been in the Supplementary

Capital Estimates.

(D) Development Fund Reserve Expenditure Warrant (DFREW)

7


8/53

This authorizes the release of funds included in the approved Annual or

Supplementary Capital Estimates, but excluded from the DFAGW &

DFSGW. In other words, it is the release of funds which the Minister of

Finance initially withheld in order to exercise special control.

(E) Development Fund Supplementary Warrant (DFSW)

The Warrant authorizes additional expenditure over and above that which is

included in the Development Fund Annual General Warrant or Development

Fund Supplementary General Warrant.

Its purposes are to:

(i) Revote capital expenditure which was provided for in the previous

financial year but not fully expended in that year.

(ii) Accelerate the provision of funds already formally allocated but notvoted for a project.

(ii)Accelerate the completion of a specific capital project

However, the interest to understand the implication capitalexpenditure increase in the Nigeria economy has made me choose this topic.

8


9/53

1.1 STATEMENT OF THE PROBLEM

There has been insufficient evidence on both the empirical impact of

size of government expenditure on growth. In addition, the economy does

not provide a well-developed methodology for the incorporation of

government expenditure in standard growth models.

The controversy generated due to the variable in the empirical

findings of several researchers which has constituted a major problem to

ascertain impact of government capital spending and its implication on

growth. Though these records for capital expenditure between the periods of

1978 2008 in Nigeria, there are difference which have been attributed to

different econometrics techniques and set of data used, the variation in these

results remain a major problem. This controversy has led to the curiosity to

determine the growth and growth implication of capital expenditure in

Nigeria (1978 2008).

1.2 RESEARCH QUESTIONS

This research work seeks to address the following question;

9


10/53

a. On what sector of the economy should the government spend more or

less?

b. Is capital spending having a positive or negative relationship to its

component or not?

c. What part of functional classification of government expenditure is

significant to economic growth?

1.3 OBJECTIVES OF THE STUDY.

The major objective of the study is to examine the growth and growth

implication of government capital expenditure in Nigeria 1978 2008.

Other more specific objectives of this study include:

1. To access the determinant of the growth and pattern of capital

expenditure in Nigeria.

2. To analyze the implications of capital expenditures on growth.

1.4 STATEMENT OF THE HYPOTHESIS.

In other to give an objective of this research is to investigate the

impact of capital expenditure on economic growth using a sample of time

10


11/53

series data on Nigeria. A panel of twenty seven years (30 years) shall be

used precisely 1978 2008. The second part of government expenditure

shall be of functional classification into administrative, economic, social and

community services and transfer expenditure for the same period of twenty

seven years (30years). The data has firstly aggregated and later

disaggregated.

Ho: there is no significant relationship between economic growth and

Capital expenditure.

H1: there is significant relationship between economic growth and Capital

expenditure.

1.5 LIMITATION AND DELIMITATION OF THE STUDY.

There are numbers of inevitable factors which limits this study. Among

these are insufficient numbers of text and material, journals, magazine and

datas of capital expenditure in Nigeria.

11


12/53

The study is also limited by insufficient amount of current annual report of

the statement of account by the federal ministry of finance in both state and

federal library. Also, the study is limited by insufficient numbers of

resources and limited time hampered a much more detailed coverage of the

research work. It is not conducive simply because of inadequacy of

material useable for the research work. Despite the human and material

limitation, the study would serve as a guide for researchers who may like to

focus their study on the same or related topic.

1.6 SIGNIFICANCE THE STUDY.

This study is of high significance as it focuses on growth, which is one

of the macroeconomics objectives. Since growth is the aspiration and

yearning of every government in the world, this research work takes a look

at the effect of various disaggregated government expenditure on growth.

More so, it investigates the aggregate expenditure on growth.

12


13/53

The importance of this study can also be felt, as it tends to use local data to

find empirical solutions to the misallocation of resources via government

expenditure.

Thus, it aims at helping the government to set her expenditure

priorities in the manner that will reduce misallocation and increase

productivity.

In addition, the study can be used to assess the current privatization

programme in the Nigerian economy, to justify if the current privatization

programme is worthwhile or a development in a wrong direction. The

relevance of the study to the Nigeria economy is to propound government

expenditure priority that will usher the country of its present profitless

expenditure to a better one despite the governments huge spending. This

work is also useful for policy making and economic planning.

1.7 JUSTIFICATION FOR THE STUDY

13


14/53

The reason for the study grew out of the objectives of the government

National Economic Empowerment Strategy (NEED), which emphasizes

the growth implication of government expenditure on the economy. In

essence, the study sought to provide a robust theoretical basis for adding

government in formulating and implementing capital expenditure in

Nigeria as a precursor to economic growth.

1.8 ORGANIZATION OF THE STUDY

This study shall be organized in five chapters. Chapter one shall be

the introductory part featuring the background of the study, statement of

problem, research question , objectives of the study, limitation and

delimitation of the study, significance of the study, justification of the

study, organization of the study and definition of terms. The objective of

this research is to investigate the growth implication of capital expenditureon the Nigeria economy using a sample of time series data on Nigeria. A

panel of thirty (30) years shall be used precisely 1978 2008. The second

part of government expenditure shall be of functional classification into

14


15/53

inflation, capital expenditure and manufacture output for the same period

of thirty (30) years.

The chapter two discussed about literature review and theoretical

framework, chapter three covers the methodology of empirical analysis,

chapter four states data presentation and analysis while chapter five is the

final stage and states the summary of findings, conclusion and policy

recommendation.

1.9 DEFINITIONS OF TERMS

Some of the words or phrase not to familiar with and possible

abbreviation that are used in this study work are briefly explain below.

(i) Capital expenditure: these are expenditure of the government

used to provide essential services for the masses. Examples are roads,

street light, and pipe-borne water e.t.c.

(ii) Growth: growth as used this study refers to the increase in both

per capita income and productivity in an economy.

15


16/53


17/53

CHAPTER TWO

THEORETICAL FRAMEWORK AND LITERATURE REVIEW

2.1 CONCEPTUAL CLARIFICATION

This chapter sought a critical review of previous works on capital

expenditure vis vis economic growth with a view of first sharpening

the general picture of the problems under focus and; secondly, exposing the

loopholes of the existing studies that present work aspires to fill, the review

has been tailored along the lines of theoretical and empirical studies with the

former focusing on theoretical postulation on expenditure and public growth.

THEORY OF CAPITAL EXPENDITURE AND GROWTH

There are theories of increasing public expenditure; likewise there are

theories of public expenditure. The theories capital expenditure growth are

discussed below, Wagners law of increasing state activities.

Adolf Wagner (1835 1917) was a German economist who based his law of

increasing state activities on historical facts, primarily of Germany. He was

the first scholar to recognize a positive correlation between economic

growth and growth in capital expenditure. According to Wagner there are

17


18/53


19/53

would be impossible to raise such huge finance that are needed for these

natural monopolies and the presence of free riders.

THE DISPLACEMENT EFFECT HYPOTHESIS by PEACOCK AND

WISEMAN (1961)

Wiseman and Peacock put this thesis dealing with the growth of public

expenditure forth in their study of capital expenditure in UK for the period

of 1890 1955. It has close link with the Wagner law though with some

difference between them. The main thesis of this hypothesis is that Capital

expenditure does not increase in a smooth and continuous matter but in jerks

or steps like fashion. They argue that under normal condition of peace and

economic stability, changes in government spending are rather limited.

While at times, some social or other disturbance take place creating a need

for increased capital expenditure, which the existing public revenue can not

meet.

During the normal condition, there is sufficient pressure on capital

expenditure, the revenue constraint was dominating and restraining an

expansion in capital expenditure, and now under changed requirement such a

restraint gives way.

19


20/53

The capital expenditure increases and makes the inadequacy of the

present revenue quite clear to everyone. The movement from older level of

expenditure and taxation to a new and higher level is The Displacement

Effect. The inadequacy of the revenue as compared with the required

capital expenditure creates an inspection effect. However, empirical

studies by Bor Cherding (1965) and others do not find much support for the

hypothesis.

PUBLIC CHOICE THEORY OF BUREACACY BY NISKANEN (1971)

He emphasizes the role of self-interest of the bureaucrats. The bureaucrats

are interested in maximizing their own utility. Their utility function consists

of salary, prestige, power or status, public reputation among others. But

these items have a direct function of the budget of the bureau budget.

However, the theory probably overemphasizes the role of the bureaucrats in

the ultimate analysis; the bureaucrats have to depend upon the politician for

their budget. The politicians possess the real power with regards to the

budget.

20


21/53

DEVELOPMENT MODEL OF PUBLIC EXPENDITURE MANGROVE

AND RUSTON

Mangrove, in his theory found changes in the income elasticity of

demand for public services in three ranges of per capita income. At low level

of per capita income typical of pre- industrial society in developing

countries, demand for public services tends to be generally low. This is

because at such a stage, nearly all income is devoted to satisfying primary

needs. When per capita income start to rise above there low levels, a demand

for services supplied by the public sector such as health, education and

transport, starts rising, forcing government to increase expenditure on them.

Also at the high level of per capita income typical of developed economics,

the rate of public sector growth tends to fall as more base wants satisfied.

Ruston and Mangrove argued that public sector investment is necessary to

gear up the economy from takeoff stage into the middle stage of economic

growth and social development in the middle stage of economic; the

government continues to supply investment goods but this time public

investment complimentary to the growth of private investment.

21


22/53

2.2 LITERATURE REVIEW

In previous studies, many authors recognized the fact that public

investment can lead to a change in private investment with implication for

changes in economic growth. According to Aboyade (1983) every national

economy, whether developed or underdeveloped and whether with or

without a comprehensive system of economic planning economic

planning, control and direction of economic activity by a central public

authority. In its modern usage, economic planning tends to be pitted against

the laissez-faire philosophy which developed in the 18th cent. , requires the

intervention of government in its development process. Economists such as

Aboyade (1983) and Ashipala and Haibodi (2003) argued that public

investment is based on the conventional public goods argument that the

private sector is unable to provide public goods for international level and

fairly and equitable redistribute income. According to them, the factors of

production are not easily or quickly responsive to the signals of mobility,

because of various market imperfections and institutional rigidities. There

are serious defects in market information and in the ability to interpret

correctly the signals there from. There are structural imperfections and

22
http://encyclopedia2.thefreedictionary.com/economic+planninghttp://www.thefreedictionary.com/redistributehttp://www.thefreedictionary.com/redistributehttp://encyclopedia2.thefreedictionary.com/economic+planning


23/53


24/53

the standard marginal productivity theory In economics, the theory that

firms will pay a productive agent only what he or she adds to the financial

earnings of the firm. Also in literature the new neo-classical growth model

of Solow, this includes the work of Kandenge (2007) in which he looked at

the impact of domestic public and private investment on economic growth in

Nambia.

2.3 BACKGROUND OF CAPITAL EXPENDITURE IN NIGERIA

From a historical perspective, Capital (public) expenditure in Nigeria

could be analyzed by examining developmental planning effort.

Development planning started in Nigeria with the preparation of the ten year

plan of development and welfare; 1944 54 with an estimated capital

expenditure of about #110m. The investment was to be made primarily in

the provision of social and economic infrastructures in health, education,

water supply, transport and communication. However, the plan had to be

revised and tuned in line with political development. The first National

Development plan which had an estimated public expenditure outlay of

#1,351.4 million was executed for the period of 1962- 1968 and later

24


25/53

extended to 1970 because of civil war. The prominent among the projects

planned for the period were the construction of Kanji Dam, which was to

cost $68.1million and Steel Mill to cost $30million however, Steel mill was

not executed at this period.

The second National Development plan which involved a revised public

sector investment of #3.349.9 million was later revised to about #43.3billion.

The actual sector capital expenditure for the period was #29.5billion with the

federal and state government accounting for #22.3billion and #7.2billion

respectively.

The fourth National Development plan 1981 1985, which had an

estimated capital investment of about #82 billion, was poorly implemented

due to financial distress consequent upon the dwindling fortunes of revenue

from crude oil. Aside these four developments plan several rolling plans and

annual budgets were set in place by the government to influence the growth

of the nation.

Public expenditure which accounted for about 40 percent of Gross

Domestic Product (GDP), have played a critical role in Nigerias strategy for

translating national economic rent from oil export into the basis for growth

25


26/53

and development. In the early years of oil boom, public investment focuses

on the social sectors and infrastructure. In the later years, a strategy of public

sector led industrial development saw large industrial plant.

But the oil boom, and the roughly US $ 175billion of investment it

financed has a little impact on the standard of living of the average Nigeria.

2.4 FACTORS ACCOUNTING FOR GROWTH IN CAPITAL

EXPENDITURE IN THE COUNTRY

A number of factor have been identified as inevitably leading to

growth in public spending in countries over time some of these are general,

having relevance to all countries being been discussed. These factors

include;

A. Rising income level

B. Urbanization of the population

C. Technological and innovative changes

D. Inflation

E. Changes in political and bureaucratic structure

F. National crises / war

G. The productivity lag factor

26


27/53

CHAPTER THREE

METHODOLOGY

3.1 Research Design

This study makes use of the ex-post facto design to examine the

growth implication of capital expenditure in Nigeria 1978 2008 and also

establish the impacts of the relationship between the considered variables.

3.2 Population of Study

The study will cover the growth implication of capital expenditure in

Nigeria 1978 2008 which is a period of thirty (30) years. The choice of the

base year 1978 was because of the significant impact Nigeria experienced

from the time after the country increased its capital expenditure in the

countrys budget, 2008 was chosen has the limitation year because the data

to be assessed are readily available up to this year.

3.3 Type and Source of Data

Data were obtained from publications of the Central Bank of Nigeria;

the statistical bulletin 2006 Annual report (various issues). Some data were

also obtained from the National bureau of statistics via the internet.

27


28/53


29/53

The study specifies a model that captures the implication of capital

expenditure growth in Nigeria. To captures this we specify an economic

growth model that is fairly standard in the literature. This model permits the

estimation of the relationship between the economic growth, capital

expenditure and other variables that affects capital expenditure using Nigeria

data.

The model can be specified as follows

GDP = o + 1CAP + 2INFL + 3MAN . (1)

Where:

GDP = Gross domestic product

CAP = Capital expenditure

INFL = Inflation

MAN = manufacturing output

o = Constant parameter

1 = Represent the parameter of the variable to be estimated in the model.

The regression equation for the model is specified as:

GDP = f (CAP, INFL, MAN) (2)

29


30/53

The model could also be expressed in econometrically, when error term is

included as;

GDPt *= o + 1CAP t * + 2INFLt * + 3M t * + Uit (3)

Where tis the time trend.

Putting it in a linear form, the model takes the form:

GDP = o + 1CAP + 2INFL + 3MAN + Ui.. (4)

Ui = error term (Scholastic term) which is assume according to CLS

assumption to be normally distributed in zero mean and constant variance.

3.6 Parameter for Estimation

The following linear equation will be obtain from the model

GDP = o + 1CAP + 2INFL + 3MAN + Ui. (5)

The parameters for estimation from equation 5 are 1, 2, and 3.

3.7A PriorExpectations

In line with the economic theory, it is expected the level of 1CAP, 2INFL

and 3MAN to a large extent determined the growth of the economy.

It may be mathematically denoted as:

GDP > 0, GDP > 0, GDP > 0CAP INFL MAN

Hence 1 > 0, 2 > 0, 3 > 0,

30


31/53

3.8 Theoretical Significance of the Variables

To test the implied hypothesis and the relative significant the

variables, econometric techniques were applied to quantify the important

economic variables that are assumed to either directly or indirectly affect

economic growth. Rather than pre-judge the relative importance of the

variables and their linkage based on theoretical reasoning alone, the data are

given a chance to prove their empirical relevance. The implied hypotheses

exist in accordance with the expected signs of the variables in the equation

specified above.

3.9 Data processing techniques

The secondary data used for the study were processed using E-view

for windows econometrics packages. These packages are suitable because

they are time efficient in terms of output and adequacy of statistics

generated. The E-view is preferred to the Ordinary Least Square (OLS)

because it enables us to correct the serial correlation in the data. The study

employs Error Correction Mechanism (ECM) to overcome the problems of

spurious regression often associated with non-stationary time series data.

The ECM reveals that the change on a variable at time t is not dependent on

31


32/53

lagged changes in its independent variable, but also its own lagged changes.

It is appealing due to its ability to induce flexibility by combing the short run

and long run dynamics in a unified manner.

3.10 Analytical techniques

In the literature, it well posited that a prior, many economic time

series will be non stationary integrated (Granger and Newbold, 1997). To

ascertain the degree of stationarity of variables employed in this study, the

unit root problem will be examined. The unit root problem will be tested for,

by using Augmented Dickey- filled (ADF) test.

32


33/53


34/53

Finally, data with respect to the various macroeconomic variables collected

from various sources from 1978 2008 were tested for statistical

significance using parameter estimates like Standard error, T-test statistics,

Adjusted R, Durbin Watson and F-statistics.

Some other details of the regression are presented in the appendix.

4.1 Data Presentation

Selected Economic indicator used for the research is presented below

in table format.

YEAR GDP CAPITAL

EXPENDITURE

INFLATION MANUFACTURING

OUTPUT

1978 29212.4 5200 16.6 40.4

1979 29948 4219.5 11.8 59.7

1980 31546.8 10163.4 9.9 62.91981 251052.3 6567 20.9 721982 246726.6 6417.2 7.7 78.9

1983 230380.8 4885.7 23.2 58.21984 227254.7 4100.1 39.6 51.2

1985 253013.3 5464.7 5.5 61.4

1986 257784.5 8526.8 5.4 48

1987 255977 6372.5 10.2 80.3

1988 275409.6 8340.1 38.3 83

1989 295090.8 15034.1 40.9 94.7

1990 328606.1 24048.6 7.5 100

1991 328644.5 28340.9 13 109.31992 337288.6 39763.3 44.5 112.2

1993 342540.5 54501.8 57.2 89.31994 345228.5 70918.3 57 88.5

1995 352646.2 121138.3 72.8 83.7

1996 367218.1 212926.3 29.3 85.1

1997 377830.8 269651.7 8.5 85

1998 388468.1 309015.6 10 81.7

1999 393107.2 498027.6 6.6 84.5

34


35/53

2000 412332 239450.9 6.9 84.82001 431753.2 438696.5 18.9 84.5

2002 451785.7 321378.1 12.9 89.8

2003 495007.2 241688.3 14 90.3

2004 527576 351300 15 89.4

2005 561931.4 519500 17.9 89.4

2006 595821.6 552385.8 8.2 88.1

2007 634251.1 759323 5.4 89.42008 674889 960900 12.1 89.3

Source: National Bureau of statistics (NBS), Central Bank of Nigeria (CBN) Statistics Bulletin, Vol. 17Dec. 2006, annual report of (various issues).

From the table above the economic indicators are explained below as;

Where:

GDP = Gross domestic product

CAP = Capital expenditure

INFL = Inflation

MAN = manufacturing output

4.1.1 ANALYSES OF THE UNIT ROOT TEST

Dependent Variable: GDP

Method: Least Squares

Date: 12/21/10 Time: 21:15

Sample (adjusted): 1981 2007Included observations: 27 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C 141536.3 45264.97 3.126840 0.0047

CAP 0.453917 0.037740 12.02751 0.0000

INFL(-3) -731.5159 426.4995 -1.715163 0.0998

35


36/53

MAN 1892.004 548.3837 3.450147 0.0022

R-squared 0.890796 Mean dependent var 369063.9

Adjusted R-squared 0.876552 S.D. dependent var 114446.6

S.E. of regression 40211.09 Akaike info criterion 24.17763

Sum squared resid 3.72E+10 Schwarz criterion 24.36960

Log likelihood -322.3980 F-statistic 62.53808

Durbin-Watson stat 1.523452 Prob(F-statistic) 0.000000

Source: Researchers Computation.

DISCUSSIONS OF RESULTS.

i. The T-statistics and standard error test revealed that the parameter

were significant except for inflation which was lagged four times.

This shows that the data used for computation are statistically

significant. The lagged error correction term ECM (t-1) included in

the model to capture the long run dynamics between the co-

integrating series was correctly signed and statistically significant.

The ECM also reveals a long run relationship between explanatory

and dependent variables in each model.

From the data estimation result, the standard errors are 40428.48,

0.0337.9080, 482.2281 for o, 1, 2, 3 respectively. In

comparing these standard errors with half of their respectivecoefficient, it was found that S (o) < U2 o, S (1) < U2 1, S

(2) < U2 2, S (3) < U2 3. This shows that all the parameter

estimates are statistically significant at 5% significance level

except for 2.

36


37/53


38/53

v. The F-Statistics is used to test for stability in the regressionparameter coefficient Thus we compare the calculated F* with the

initial value at 5% (0.05) level at K 1, i.e. (3 1 = 2) and N K =

31 3 = 28 degree of freedom (df1 and df2 respectively) for the

model.

Where

K = the number of parameter estimated, and

N = the number of observed years

From the statistical table, F (0.05) at (2, 28) degree of freedom is

3.34 While estimated F* is 80.156 obviously, F*>F (0.05) thus we

reject the Null hypothesis and assert that the independent variables

have significant impact on economic growth and their coefficient

are stable.

vi. The value of the adjusted R-squared must be between 0.5 and 0.99,

the higher the R, the greater the percentage of variation. The value of

the adjusted R-square for the model used in this work is high, pegged

at 0.90475. This implies that inflation, capital expenditure and

manufacturing output explained about 90 percent systematic variation

on economic growth of Nigeria over the period 1978 2008 while

the remaining 10% is explained by other variables exogenous to themodel.

vii. The Durbin-Watson statistics is used to test for the presence of first

order Serial correlation. It measures the linear association between

adjacent residuals from a regression model. The value of the Durbin-

38


39/53


40/53

small proportion of public expenditure as shown in this study may not be

enough to catapult the growth rate needed in Nigeria.

The capital expenditure of government in Nigeria is divided into

administration, economic services, social and community services and

transfer (CBN, 2005).

The purpose of this research work is to investigate the growth implication of

capital expenditure on the Nigeria economy 1978 2008. The model used in

this work studied the relationship that exists between GDP and the factors

that contribute to the growth of capital expenditure like, Inflation,

manufacturing output.

The paper observes that rising government expenditure has not translated to

meaningful development as Nigeria still ranks among the worlds poorest

countries. In an attempt to investigate the effect of government capital

expenditure on economic growth, the research work made used of the

ordinary least square (OLS) estimation method. The results reveal that

government total capital expenditure (TCAP) has little or no effect on

economic growth if not properly monitored.

40


41/53

There was a positive relationship between these components and

GDP. It was found out that, expenditure components contributed positively

to economic growth in Nigeria. It is only inflation that has negative

relationship effect. However capital expenditure and manufacturing output

are significant. The result shows that 90% variation in growth was explained

by the components.

This work also reviews past literatures such as Wagners law of

growth of public expenditure, causality between public expenditure and

economic growth by Adolph Wagner and granger (Turkish case) etc. this

study suggested the reason(s) while results of some variables are

insignificant.

5.2 RECOMMENDATIONS

In the study, we suggested that there should be control of government

expenditure and revenue, this is necessary since some component of

government expenditure and revenue is not significant to the growth of total

expenditure and revenue. I hereby make the following recommendation on

controlling total expenditure

41


42/53

The federal government should make effort to determine optimal level of

government expenditure and revenue of a given point in time for

effective control of expenditure growth.

The federal government mineral resources should be well planned and

managed by competent and skilled workers. This is due to the increase

revenue from mineral derivations.

During fiscal adjustment, it essential to adopt structural reforms affecting

revenue as well as expenditure in other to guarantee the resources

necessary to support spending on productive sector.

The federal government through its agencies and establishment should

find solution to tax evasion and tax avoidance in which so many people

shy away from paying tax which serves as a main source of government

revenue.

There is however the need to spend more on social services such as health

services, infrastructure and road construction to increase efficiency in

production which will in turn increase the total revenue through VAT.

5.3 CONCLUSION.

42


43/53

The inevitable conclusion of the study therefore is a radical increase

in capital expenditure.The authors makes the following recommendations.

Firstly, government should ensure that capital expenditure and recurrent

expenditure is properly managed in a manner that it will raise the nations

production capacity and accelerate economic growth. Secondly, government

should increase its investment in transport and communication sectors, since

it would reduce the cost of doing business as well as raise the profitability of

firms. Thirdly, government should encourage the education and health

sectors through increased funding, as well as ensuring that the resources are

properly managed and used for the development of education and health

services. Lastly, government should increase its funding of anti-graft or

anti-corruption agencies like the Economic and Financial Crime

Commission (EFCC), and the Independent Corrupt Practices Commission

(ICPC) in order to arrest and penalize those who divert and embezzle public

funds.

It was discovered that government should increase its investment in the

development of transport and communication, in order to create an enabling

43


44/53

environment for business to strive. Thirdly, government should raise its

expenditure in the development of the health sector since it would enhance

labour productivity and economic growth.

Lastly, government should encourage and increase the funding of anti-

corruption agencies in order to tackle the high level of corruption found in

public office.

44


45/53

REFERENCES

Alade, S.O. (2000), Highlights of the year 2000 Federal Government

Budget: CBN Bullion Vol.24 (2).

Essien, A. E. (2001), Nigeria Economic Growth; Performance and

Determinants; CBN economic financial review vol.40, no. 3pg.1639.

Josephat, P. K.: Government Expenditure and Economic Growth.

Oliver Morrissey evidence from Tanzania, Credit and School

Economic University of Nottingham.

Journal of Economics and Financial Studies (2004), Department of

Economics,Adekunle Ajasin University Akungba Akoko, Nigeria.

Koutsoyannis, A. (2001), Theory of Econometrics; Nigeria National

Planning Commission, Abuja. An appraisal of sector investment in

Nigeria Pg. 289 292.

Enweze, c. (1973), Structure of Public Expenditure in Selected Developing

Countries.The Manchester school, Vol. 40.

45


46/53

Fajingbesi, A.A. and Odusola, A. F. (1999), Fiscal Policy Planning andManagement in Nigeria.

John, B.T. (1995), Principle of macroeconomics. Houghton Mifflin

Company Boston Toronto.

Jhingan, M. L. (2006), Monetary Economics. 6th Edition, Vrinda

Publications Ltd New Delhi.

Graham, D. et al. (2006), Economic and Economic Change 2nd Edition.

The Open University Pearson Education Ltd, Harlow, England.

Bell F. W and Murphy N. B. (1976) Economics of Scale in Banking.

Federal Reserve Bank of Boston.

Central Bank of Nigeria, (1993). Perspectives of Economic Policy

Reforms in Nigeria. (1993) CBN.

Ilesanmi A. O. (2004) Elements of Econometrics. Millennium

publishers.

Jhingan M. L. (2003). Advanced Economic Theory; Delhi Vrinda

publications.

46


47/53

Ragner F. (1933). Economic Analysis; An Econometrics Method.

Macmillan, New York.

Schumpeter, J. A. (1934), The Theory of Economic Development

Cambridge Mass: Harvard University Press.

Spencer, M. H. (1993) Contemporary Macroeconomics. Worth

publishers.

Abdullah, H. A. (2000), The Relationship between Government

Expenditure and Economic Growth in Saudi Arabia. Journal of

Administrative Science, 12(2): Pgs. 173-191.

Al-Yousif, Y. (2000), Does Government Expenditure Inhibit or Promote

Economic Growth: Some Empirical Evidence in Nigeria. Indian

Economic Journal, 48(2).

Laudau, D. (1986), Government and Economic Growth in LDCs: An

Empirical Study.Journal for Economic Development and CulturalChange, 35: 35-75.

Barro, R. (1991), Economic Growth in Cross-Section of Countries.

47


48/53

Quarterly Journal Of Economics, 106(2): Pgs. 407-443.Brons, M.,de Groot HLF, Nijkamp. P, (1999), Growth Effects of Fiscal

Policies. Tin Bergen Discussion Paper, Amsterdam: Vrije

University.

Laudau, D. (1983), Government Expenditure and Economic Growth: A

Cross Country Study. Southern Economic Journal, 49: 783-792.

Ram, R. (1986), Government Size and Economic Growth: A New

Framework and Some Evidence from Cross-Section and Time-Series

Data.American Economic Review, 76: 191-203.

Adebiyi, M.A (2006), Public Expenditure and Human Capital in Nigeria.

An Autoregressive Model, 2006: www.isser.org/43%20Adebayo.pdf.

Aboyade, O, (1983), Integrated Economics: A Study of Developing

Economy.2nd Edition Wesley Publishers, London, 1983.

Aschauer, D.A. (1989), "Is Public Expenditure Productive?"Journal of

MonetaryEconomics Vol. 23, 1989, Pages 177- 200.

Ashipala, J. and Hanboji N.(2003), The Impact of Public Investment on

Economic Growth in Namibia, 2003,NEPRUNamibian Economic

Policy Research Unit Working PaperNo. 88, www.nepru.org.na.

48
http://acronyms.thefreedictionary.com/NEPRUhttp://acronyms.thefreedictionary.com/NEPRU


49/53

Central Bank of Nigeria (CBN): Statistical Bulletin, 14, December, 2003.

Central Bank of Nigeria (CBN): Statistical Bulletin, 16, December, 2005.

Davarajar, S. Swaroop, V. and Zou, H. (1996), "The Composition of

Public Expenditure and Economic Growth". Journal of Monetary

Economics Vol. 37, 1996, 33-344.

Iweala, N.O. and Kwaale, P.O (2007): "Nigeria's Economic Reforms:

Progress and Challenges"Bookings Global Economic Development

Working PaperNo. 6, 2007,3-25.

Johansen, S., (1988) "Statistical Analysis of Co integration Vectors".

Journal of Economic Dynamics and Control, Vol. 12, 1988, 231-254.

Kandenge, F.T., (2007): The Impact of Domestic Public and Private

Investment on Economic Growth in Namibia, 2007. Africa Institute

for Economic Development and Planning (IDEP African Institute for

Economic Development and Planning(UN)IDEP Institute Africain de Dveloppement conomique et de

Planification (French: African Institute for Economic Development

and Planning ) www.unidep.org.

49
http://acronyms.thefreedictionary.com/IDEPhttp://www.unidep.org/http://acronyms.thefreedictionary.com/IDEPhttp://www.unidep.org/


50/53


51/53

Selected Economic indicator used for the research is presented below

in table format.

YEAR GDP CAPITAL

EXPENDITURE

INFLATION MANUFACTURING

OUTPUT

1978 29212.4 5200 16.6 40.4

1979 29948 4219.5 11.8 59.71980 31546.8 10163.4 9.9 62.9

1981 251052.3 6567 20.9 721982 246726.6 6417.2 7.7 78.9

1983 230380.8 4885.7 23.2 58.2

1984 227254.7 4100.1 39.6 51.2

1985 253013.3 5464.7 5.5 61.4

1986 257784.5 8526.8 5.4 48

1987 255977 6372.5 10.2 80.3

1988 275409.6 8340.1 38.3 83

1989 295090.8 15034.1 40.9 94.71990 328606.1 24048.6 7.5 100

1991 328644.5 28340.9 13 109.31992 337288.6 39763.3 44.5 112.2

1993 342540.5 54501.8 57.2 89.31994 345228.5 70918.3 57 88.5

1995 352646.2 121138.3 72.8 83.7

1996 367218.1 212926.3 29.3 85.1

1997 377830.8 269651.7 8.5 85

1998 388468.1 309015.6 10 81.7

1999 393107.2 498027.6 6.6 84.52000 412332 239450.9 6.9 84.8

2001 431753.2 438696.5 18.9 84.52002 451785.7 321378.1 12.9 89.8

2003 495007.2 241688.3 14 90.32004 527576 351300 15 89.4

2005 561931.4 519500 17.9 89.42006 595821.6 552385.8 8.2 88.1

2007 634251.1 759323 5.4 89.4

2008 674889 960900 12.1 89.3

Source: National Bureau of statistics (NBS), Central Bank of Nigeria (CBN) Statistics Bulletin, Vol. 17Dec. 2006, annual report of (various issues).

51


52/53

Dependent Variable: GDPMethod: Least Squares

Date: 12/22/10 Time: 06:16

Sample (adjusted): 1982 2007

Included observations: 26 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C 154661.2 40428.48 3.825551 0.0009

CAP 0.467365 0.033730 13.85625 0.0000

INFL(-4) -1285.916 377.9080 -3.402721 0.0026

MAN 1862.348 482.2281 3.861964 0.0008

R-squared 0.916180 Mean dependent var 373602.9

Adjusted R-squared 0.904750 S.D. dependent var 114208.0

S.E. of regression 35247.48 Akaike info criterion 23.91881

Sum squared resid 2.73E+10 Schwarz criterion 24.11237

Log likelihood -306.9446 F-statistic 80.15604

Durbin-Watson stat 1.781206 Prob(F-statistic) 0.000000

SUMMARY OF WORK:

52


53/53

Total Pages 63

Chapter(s) 5

References used 36

makati project

Documents