PUBLIC INVESTMENT AND ECONOMIC GROWTH IN NIGERIA: A CAUSAL ANALYSIS

PUBLIC INVESTMENT AND ECONOMIC GROWTH IN NIGERIA: A CAUSAL ANALYSIS

BẢN GỐC: IT IS MORE THAN THE APPLICATION OF THE SAFETY ...

INTRODUCTION                 

One of the major objectives of the Structural Adjustment Programme (SAP) adopted in Nigeria in 1986 as a solution to the fundamental balance of payment problem was to drastically “lessen the dominance of investment in the public sector, improve the sector’s efficiency and identify the growth potential of the private sector”. Following the drastic reduction of government expenditure due to SAP, it has been observed that the performance of the economy has fallen efficient and should be increased. Such spending   is   largely   for goods called infrastructure. Adam Smith (1937) referred to spending on infrastructure as the third rationale for the state (behind the provision of defence and justice). 

These capital goods include highways, mass transit systems, airports, electric and gas facilities, wastewater treatment facilities, water supply and distribution, in addition to the facilities and equipment used in governmental and judicial administration, police and fire protection and health and educational institutions (Tatom, 1991). It is interesting to observe that the focus of World Development Report 1994 was on infrastructure for development. 

The report observed that infrastructure is one of the areas in which government policy and finance have an important role to play because of its impact on economic development and human welfare. The report went further to observe that the adequacy of infrastructure helps determine one country’s success and another’s failure – in diversifying production, expanding trade, coping with population growth, reducing poverty, or improving environmental condition. Good infrastructure raises productivity and lowers production cost, but it has to expand fast enough to accommodate growth (World Bank, 1994).

In the same fashion certain empirical research tend to argue that improved infrastructural facilities have significant positive effects on economic growth. Most of these works suggest that a decline in the growth of infrastructural investment since the early 1970s caused a “productivity slump” in various economies lowering profitability and investment (Okonkwo, 1992). Along the same line of thought, Aschauer (1990) observed that he has accumulated evidence that points to the lack of sufficient investment in infrastructure as a primary cause of nations slump in private investment, poor profitability on private capital, and declining productivity growth.

            The purpose of this article is to investigate the effect of public investment on economic growth recognizing that there is a body of literature that argues that government spending is a substitute for private sector spending. Recent attention to this view owes much to its elaboration by Kormendi and Meguire (1986) who developed the direct substitution channel for crowding out. They contend that public sector investment may dampen private investment activity to the extent that it substitutes for private projects. They argue that high public investment rates may crowd-out private investment activity when heavy spending for public sector capital projects leads to high interest rates, severe credit rationing, or a heavier current or future tax burden.
The premise of this paper is that public investment leads to economic growth. This viewpoint is referred to as the infrastructure deficit hypothesis. This choice follows the practice of other researchers who refer to this measure of public capital as infrastructure. The major debates on the effect of public investment on economic growth tend to ascribe important causal role to public investment, but there has been very little empirical investigation to ascertain the nature and the strength of the causal relationship between public investment and economic growth. This paper will also address this issue.
The rest of the paper proceeds as follows: part I reviews the adopted model, part II presents the result of the estimated model. Part III presents the causality test, while Part IV contains the conclusion and policy implications.

I.          SPECIFICATION OF THE GROWTH MODEL

Economists have long been interested in the factors, which cause different countries to grow at different rates and achieve different levels of wealth. Although neoclassical economic theory has become dominant in economic analysis, development economists have been reluctant to adopt neoclassical growth theory as it predicts stable growth independent of policy decisions. Chenery (1986) makes the case for the inadequacy of the neoclassical equilibrium approach for developing countries as it does not take into account disequilibrium factors such as internal demand constraints, external market constraints, economies of scale, learning by doing, and imperfect factor markets. In recent years, economists working within neoclassical theory have provided models, which address a number of issues, raised by development economists (Murphy, Shleifer, and Vishny 1989). In particular, new models of endogenous economic growth have been developed which allow for policy influence on growth and divergent outcomes among countries. 
These models deal with general issues of growth and important policies such as the operation of financial markets, trade policy, and government expenditure. In particular, numerous studies have been undertaken on the role of the government in economic growth Landau (1986); Mueller (1987); Ram 1986a, 1986b, 1987); Reynolds (1983) World Bank (1988); Barro (1989a, 1989b); Romer, (1989); Balassa (1988). The overall role of government is usually proxied by the size of government, which is represented by either the ratio of government expenditure to GDP or that of government revenue to GDP. Some researchers have found that economic growth and the share of government spending in GDP are positively related. Government spending can also contribute to growth by creating an efficient and stable environment for economic activity that allows resources to be used where they will be most productive, as well as by supporting the private sector with the necessary public goods.

                This study adopts the basic statistical model used by Aschauer, (1993), Munnell (1990) and others. The analysis is conducted within the framework of a growth model that is designed to highlight the role of public investment in economic growth. The model is a straightforward production-function that treats public investment as similar to production input. One can then specify an aggregate production function simple as:

---------------------------

Từ đây xem các công thức toán theo đường dẫn (vì chủ Blog không biết cách copy các công thức toán sang đây)

[DOC] 

IT IS MORE THAN THE APPLICATION OF THE SAFETY ... - IABBS

iabbs.net/uploaded_files/JIBER%20VOL.%202.1.doc - Dịch trang này

Định dạng tệp: Microsoft Word - Xem Nhanh
viết bởi TJ Agiobenebo - Bài viết có liên quan
The premise of this paper is that public investment leads to economic growth. ....Okonkwo, I.C. (1992) “Public and Private Partnership in Infrastructure Finance: The ....combating inflation and reducing the burden of external debt servicing on the Government, ...... Ezirim, Chinedu B. (1996) Merchant Banking in Perspective.

---------------------------------

Y = hàm Cobb Douglas của L, PK và GK.

Where Y is rate of growth of aggregate real output, L is rate of growth of labor input, PK represents rate of growth of private investment, and GK measures rate of growth of public investment. Explicitly, then logarith hóa hai vế, ta có:...

and the dots over a variable indicates its rate of growth and b₁, b₂, b₃ are the regression coefficients of L, PK and GK. b₂ is the marginal physical product of public investment. If the model specification is reasonable, the estimated coefficient of PK (b₃) will indicate the direction and magnitude of the impact of private investment on economic growth.

II.      ESTIMATION OF THE MODEL AND THE ANALYSIS OF THE RESULTS

The estimation result presented below in equation (3) used the system of two stage least square. Time series data for Nigeria for the period 1970 to 1994 were used. The examination of the residuals revealed no evidence of heteroscedasticity and therefore suggests that the linear relationship provide a satisfactory fit to the data.

=1.789+0.737+ 0.980+ 0.082  …(3)

        (4.6)     (7.53)      (8.26)        (0.530)

t     =  values are parentheses.

=.90;  SEE = 1.02%;  D.W = .95

The above result is statistically interesting and several points are discerned easily from it. First, the public investment variable has a large and statistically significant coefficient, suggesting that public investment has a positive relationship with growth. This confirms the findings of several other researchers such as Wai and Wong (1982), Ram (1986b), Tyler (1981), Munnell (1990), Cullison (1993), Aschauer (1990) and Hulten (1990) in their various studies of Third World Countries. The private investment variable exhibits a positive sign but not statistically significant. This tends to suggest an element of complementarity to the extent that public investment complements private investment by creating infrastructure and raising the productivity of the private capital stock, private investment requirements per unit of output is reduced. As Talom (1990) observed, public capital increases private sector output both directly and indirectly. The direct effect of public capital on private output depends on whether public capital provides important intermediate  services to private sector firms. If so, an increase in public capital would raise the productivity of private capital. The indirect effect arises because the use of a larger quantity of public capital raises the rate of return on private sector capital, providing an incentive for firms to increase private capital formation. Therefore, private sector output and productivity measured as output per worker or per hour, rise further.

  

III   CAUSALITY TEST

One of the serious criticisms of previous studies is their neglect of the consideration of the direction of the causal relationship between public investment and growth. Without a causality test, a correlation test is insufficient for an acceptable conclusion.

        To conduct a causality test, we use the Granger (1969) approach. According to Granger, a variable X is said to cause another variable Y, with respect to a given information set that includes X and Y, if current Y can be predicted better by using past values of X than by not doing so, given that all other past information in the information set is used. Therefore, equation (3) is used for the test.

                The question of causality is not the only interesting issue at hand. The size of the effect is of some importance as well. For example, if one finds that growth in public expenditure causes output growth, but also that a steady state increase in public investment would decrease output growth, one would hardly be justified in inferring that the public expenditure hypothesis finds support. The sign of the effect of the causal variable can be checked by using an F test whether is positive or negative. This amounts to a test of whether a steady state increase in public expenditure significantly increases or decreases output growth in Nigeria.

        In this study, the output growth rate is regressed on past value of itself, on past values of public expenditure ratio and on a constant. The public expenditure ratio is also regressed on the same variables. Also on the appropriate lag length, our preliminary estimate shows that with Nigeria’s time series data, one period lag length provides a satisfactory result. The estimated result is presented in equation (4) below. As can be seen from the result, the growth equation showed a negative sign for the lagged growth rate coefficient. But the sum of the coefficients turned out insignificant. The result suggests that there is no support for the causal hypothesis, and therefore no causality characterization should be attached in this case because without evidence of causation the sign of the effect has little meaning in terms of the economic hypotheses. Also the F-statistics

Y_T   = 0.028 – 0.087^I/Y_t-1 + 0.065 Y_t-1   …….4(a)         

            (1.192)   (-0.200)       (0.268)

t = values are in parentheses

F = 1.8;    R² =  . 80;    D.W: = 1.90

 = 0.017 + 0.009 Y_t-1 + 0.926

          (1.029)      (0.0267)        (0.768) …..(4b)

F = 2.1;   R²  = .70; D.W. = 1.80

Also the F-statistics of 1.80 for 4(a) above implies that one cannot make any meaningful conclusion with the result. The same situation applies in 4(b) above, the coefficients are insignificant and the F-statistics is so low to enable us ascertains the direction of causation.

IV CONCLUSION AND POLICY IMPLICATION

The aim of this paper has been to investigate in a systematic way the relationship between public expenditure and economic growth in Nigeria. In line with previous studies on various third world nations, we elected to use a framework of a straightforward production function that treats public investment as a production input. Our results tend to suggest that public expenditure makes a positive contribution to the growth of the economy leading to the standard economic theory argument about the beneficial effects of government spending. This is not surprising as government investment in roads, bridges, airports, port facilities, and other kinds of infrastructure has direct bearing on how easy or difficult it is,  and also how cheap or costly, for many companies to do business. It is in this connection that one advocates increased government capital spending to raise private sector output, productivity and private capital formation. In designing policy and institutional programmes, government need to address more directly and systematically issues relating to practical implementation of the policy, legislative and regulatory framework to further enhance the productivity of public expenditure.

                It is gratifying to note that the World Bank in its 1994 World Development Report has lent its weight in support of growth in public expenditure for infrastructure development provided it is developed in more effective, less wasteful ways. As stated in the World Development Report, the concern needs to broaden from increasing the quantity of infrastructure stock to improving the quality of infrastructure services. Against this background, the report considers new ways of meeting public needs for services from infrastructure, and suggests ways that are more efficient, more user-responsive, more environment-friendly, and more resourceful in using both the public and private sectors. In the light of the above, this paper concludes that public expenditure can positively contribute to economic growth by creating an efficient and stable environment for economic activity that allows resources to be used where they will be most productive, as well by supporting the private sector with the necessary public goods.

REFERENCES

Aschauer, David Alan (1990), “Infrastructure: Spending Trends and Economic Consequences”, Paper presented at the Western Economic Association Meetings, San Diego, CA, June 30.

Aschauer, David Alan (1993) “Public Capital and Economic Growth”, In the Jerome Levy Economics Institute of Bard College, Public Infrastructure Investment: A Bridge to Productivity Growth. Public Policy Brief, No. 4.

Balassa, B. (1988) “Public Finance and Economic Development”, PPR Working Paper No. 31, July.

Barro, Robert J. (1989a) “A cross-country Study of Growth, Saving and Government, NBER Working Paper No. 2855, Cambridge, MA.

Chenery, H. A. Robinson, and M. Synrquin (1986) Industrialization and Growth: A Comparative Study, World Bank, Oxford University Press.

Cullison, William E. (1993) “Public Investment and Economic Growth”, Economic Quarterly, Federal Reserve Bank of Richmond, Vol. 79, No. 4.

Granger, C. (1969) Investigating Causal Relations by Econometric Models and Cross Spectral Methods, Econometrica, 37, No. 3.

Hulten, Charles R. (1990) “Discussion”, in Alicia H. Munnell, ed; Is There a Shortfall in Public Capital Investment? Boston: Federal Reserve Bank Boston.

Kormendi, Roger C. and Philip Meguire (1986) “Government Debt, Government Spending, and Private Sector Behavior: Reply; American Economic Review, December.

Landau, Dennis (1987) “The Growth of Government: A Public Choice Perspective” IMF Staff Papers 34 1 (March).

Munell, Alicia H.  (1990) “How Does Public Infrastructure Affect Regional Economic Performance?” Is there A Shortfall in Public Capital Investment? Federal Reserve Bank of Boston, Conference Series, No. 34.

Munell, Alicia H. (1992) “Policy Watch: Infrastructure Investment and Economic Growth”, Journal of Economic Perspectives (fall).

Murphy, K. A Shleifer, and R. Vishny (1989) “Income Distribution, Market Size, and Industrialization”, Quarterly Journal of Economics, August.

Okonkwo, I.C. (1992) “Public and Private Partnership in Infrastructure Finance: The B-O-O-T Finance Approach”, Nigerian Financial Review, Vol. 4, No. 4.

Okonkwo, I.C. (1994) Does Public Expenditure Growth Crowd-out Private Sector Investment, Memio?

Ram, Rati (1986a) “Causality Between Income and Government Expenditure:    

        A Broad International Perspective”, Public Finance, 41(3).

Ram, Rati (1986b) ”Government Size and Economic Growth: A New Framework and some Evidence from Cross Section and Time Series Data”, American Economic Review 76, 1 (March).

Ram, Rati (1987) “Wagner’s Hypothesis in

Time Series and Cross Section

Perspectives: Evidence from ‘Real’ Data for 115 Countries”, The Review of Economics and Statistics 69, 2 (May). 

Romer, P.M. (1989) “Human Capital and Growth: Theory and Evidence”, Processed, April.

Reynolds, Iloyd (1983) “The Spread of Economic Growth to the Third World: 1850-1980”, Journal of Economic Literature, 11 (September).

Smith Adam (1937). An Enquiry into the Wealth of Nations, Longman: London.

Tatom John A. (1991) “Should Government Spending on Capital Goods Be Raised?” Review, The Federal Reserve Bank of St. Louis, Vol. 73, No. 2.

Tyler, William G. (1981) “Growth and Export Expansion in Developing Countries”, Journal of Development Economics 9 (August).

World Bank (1988) World Development Report, Oxford University Press.

World Bank (1994) World Development Report, The World Bank, Washington D.C. 

Nguồn:

[DOC] 

IT IS MORE THAN THE APPLICATION OF THE SAFETY ... - IABBS

iabbs.net/uploaded_files/JIBER%20VOL.%202.1.doc - Dịch trang này

Định dạng tệp: Microsoft Word - Xem Nhanh
viết bởi TJ Agiobenebo - Bài viết có liên quan
The premise of this paper is that public investment leads to economic growth. ....Okonkwo, I.C. (1992) “Public and Private Partnership in Infrastructure Finance: The ....combating inflation and reducing the burden of external debt servicing on the Government, ...... Ezirim, Chinedu B. (1996) Merchant Banking in Perspective.