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 19601970, 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.

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

many more cases of economic instability has lead to a current debate about the links between government expenditure and economic growth and has amounted to enormous resurgence of interest in growth theory which has prompted several researchers to want to verify and understand the correlation between the size of public spending and growth. On the theoretical ground, the major controversy has been on whether or not the public expenditure increases the long run steady state growth rate of the economy. Capital expenditure in Nigeria is a major determinant of economic stability because it is one of the instruments of fiscal policy and fiscal policy deals with government policy concerning the rising of revenue through taxation and other means. Before the emergence of private sector, government has to respond to enormous social and infrastructural needs of its citizenry. Government expenditure affects aggregate resource use. It affects the producers, consumer and influence distribution of income and wealth in the Nigeria economy.

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 Underdeveloped 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

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

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 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. in health, education, water supply, transport and

(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)

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 not voted for a project. (ii)Accelerate the completion of a specific capital project However, the interest to understand the implication capital expenditure increase in the Nigeria economy has made me choose this topic.

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;

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

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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.

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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.

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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

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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 expenditure on 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
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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.

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(iii)

Market mechanism: the term refers to the instrument used to

determine prices of goods and services in a market. An example of such is the Demand and Supply mechanism.
(iv)

Oil boom: this is a period of surplus supply of oil resources.

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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

inherent tendencies for activities of different layers of a government (such as central and state government) to increase both intensively and extensively. According to Henreson (1993) Wagner stated three main reasons for increase in the role of government. Firstly, industrialization and modernization would lead to a substitution of public for private activities. Expenditure on law and order as well as on contractual enforcement would have been increased. That is increase in expenditure of a system of justice will regulate investment and monitor activities of investors. Secondly, an increase in real income would lead to an expansion of the income elastic cultural and welfare expenditure; he sited Education and culture to be two major areas in which the government could be a better provider than the private sector. Thus, the public sector would grow after basic needs of the people expand towards activities such as education and culture. Thirdly, natural monopolies such as the Rail roads, Bridges, Street-lights, pipe-borne water had to be taken over by the government because private companies would be unable to run these undertakings effectively because it

18

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.

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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.

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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.

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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

strong discretionary market powers, which distort the signals and create results increasingly at variance with socially desirable goals. It is often used when referring to a Goods and Services Tax. (National defense, Police protection, Education, Health, Environmental control and Cultural services) have to be provided communally outside the market system, and financed differently from the signals of market prices. Disadvantaged groups, minorities and under-privileged areas often require direct protection, on the basis that social and moral obligations in those spheres transcend market criteria. There is a large amount of literature available on the method that can be used to measure the relationship between public investment and economic growth. This include the production function approach used in the research work which include Aschauer (1989), Shah 1992, Rioja (1998), Nourzad (2000), Devarajan et al (1996), Miller and Russek (1997), Kneller et al (1999) and Ashipala and Haimbodi (2003). However, the production function approach is criticized on the basis that treating public investment as a factor input and production function like private capital and labour, violate

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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

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

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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

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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.

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3.4 Identification of Variables The variables identified for utilization are: The dependent variable is Gross Domestic Product (GDP) and independent variables are Capital expenditure (CAP), inflation (INFL), and Manufacturing output (MAN). 3.5 Model Specification Restatement of Hypothesis This research will be guided by the already stated hypothesis which is in null and alternative hypothesis. The hypotheses are as follows; Ho: there is no significant relationship between economic growth and Capital expenditure H1: there is significant relationship between economic growth and Capital expenditure. This research focused on the econometric-views software intends to analyze the effect of capital expenditure growth in Nigeria (1978 2008). The model

28

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

The model could also be expressed in econometrically, when error term is included as; GDPt *= o + 1CAP t * + 2INFLt * + 3M t * + Uit (3) Where t is 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. 3.7 A Prior Expectations 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, CAP GDP > 0, INFL GDP > 0 MAN

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

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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

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.

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CHAPTER FOUR DATA ANALYSIS AND INTERPRETATION. 4.0 INTRODUCTION This chapter focused on the analysis and interpretation of data collected to explain the growth implication of government capital expenditure on the Nigeria economy. This analysis intends to determine the econometrics effect of some explanatory variables such as: inflation, capital expenditure, manufacturing output (explanatory variables) on the Gross Domestic Product (dependent variable). The regression analysis is explained in this chapter using Ordinary Least Square (OLS) estimation technique. Further more this chapter also examines the problem of serial correlation (Autocorrelation) and test the serial correlation (Autocorrelation) of the data.

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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 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 GDP 29212.4 29948 31546.8 251052.3 246726.6 230380.8 227254.7 253013.3 257784.5 255977 275409.6 295090.8 328606.1 328644.5 337288.6 342540.5 345228.5 352646.2 367218.1 377830.8 388468.1 393107.2 CAPITAL EXPENDITURE 5200 4219.5 10163.4 6567 6417.2 4885.7 4100.1 5464.7 8526.8 6372.5 8340.1 15034.1 24048.6 28340.9 39763.3 54501.8 70918.3 121138.3 212926.3 269651.7 309015.6 498027.6 INFLATION 16.6 11.8 9.9 20.9 7.7 23.2 39.6 5.5 5.4 10.2 38.3 40.9 7.5 13 44.5 57.2 57 72.8 29.3 8.5 10 6.6 MANUFACTURING OUTPUT 40.4 59.7 62.9 72 78.9 58.2 51.2 61.4 48 80.3 83 94.7 100 109.3 112.2 89.3 88.5 83.7 85.1 85 81.7 84.5

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2000 2001 2002 2003 2004 2005 2006 2007 2008

412332 431753.2 451785.7 495007.2 527576 561931.4 595821.6 634251.1 674889

239450.9 438696.5 321378.1 241688.3 351300 519500 552385.8 759323 960900

6.9 18.9 12.9 14 15 17.9 8.2 5.4 12.1

84.8 84.5 89.8 90.3 89.4 89.4 88.1 89.4 89.3

Source: National Bureau of statistics (NBS), Central Bank of Nigeria (CBN) Statistics Bulletin, Vol. 17 Dec. 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 2007 Included observations: 27 after adjustments Variable C CAP INFL(-3) Coefficient Std. Error 141536.3 45264.97 0.453917 0.037740 -731.5159 426.4995 t-Statistic 3.126840 12.02751 -1.715163 Prob. 0.0047 0.0000 0.0998

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MAN R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat

1892.004 0.890796 0.876552 40211.09 3.72E+10 -322.3980 1.523452

548.3837

3.450147

0.0022 369063.9 114446.6 24.17763 24.36960 62.53808 0.000000

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

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 cointegrating 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 respective coefficient, 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.
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ii.

The values of the coefficient of all the independent variables manifest correct and the positive signs which are in consonance with the 'a priori' expectation. That is, the capital expenditure and manufacturing output conforms with our positive 'a priori' expectation and inflation conforms with our negative 'a priori' expectation.

iii.

The model used the regression analysis which contained the following variables; GDP as the dependent variable, inflation, capital expenditure and manufacturing output as the independent variables. Also from the result, it could be seen that inflation was lagged by four (4) years. It had a negative (i.e., -1285.916) relationship with GDP. Thus implies that if there is an increase in inflation rate on the long run, it would reduce the GDP.

iv.

Also the same result, manufacturing output was seen to have a positive relationship with GDP. This implies that if there is an increase in manufacturing output in the long run, there will be an increase in GDP too. However, if the manufacturing output, inflation and capital expenditure are excluded from the model, the model still has a positive constant 0f 154661.2 In general, our parameter estimates 1 (Capital expenditure) and 3 (Manufacturing output) conforms with our positive a priori expectation and also 2 (Inflation) conforms with our negative expect.
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v.

The F-Statistics is used to test for stability in the regression parameter 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 the model.

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 Durbin38

Watson test is 1.78 which falls within the acceptable region of 1.5 <dw< 2.5 meaning that there exist a negative first order serial correlation.

CHAPTER FIVE SUMMARY OF FINDINGS, RECOMMENDATION AND CONCLUSION. 5.1 SUMMARY OF FINDINGS Nigeria's economy is characterized by a market economy, with government assuming the role of creating and enabling environment within which business can flourish and contribute to the development of the country's economy (Ogunleye et al, 2006). Government is therefore expected to provide some services that will stimulate investment and this they do in their public expenditure. Public expenditure is classified into capital expenditure and current expenditure. According to Ashipala et al, 2003; and Mittmik et al 2001, capital expenditure promotes efficiency and equity by correcting market failure and improving income distribution. The

39

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.

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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

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 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.

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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

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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 anticorruption agencies in order to tackle the high level of corruption found in public office.

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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. 3 pg.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.

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Fajingbesi, A.A. and Odusola, A. F. (1999), Fiscal Policy Planning and Management 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. publishers.

Millennium

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

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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 Cultural Change, 35: 35-75.

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

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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 Monetary Economics Vol. 23, 1989, Pages 177- 200. Ashipala, J. and Hanboji N.(2003), The Impact of Public Investment on Economic Growth in Namibia, 2003, NEPRU Namibian Economic Policy Research Unit Working Paper No. 88, www.nepru.org.na.
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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 Paper No. 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.

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Gemmell, N. (1999),: "Fiscal Policy and Growth: Evidence from OECD: see Organization for Economic Cooperation and Development. Countries", Journal of Public Economic, Vol. 74, 1999, 171-190. Nourzad F., (2000) "The Productivity Effect of Government Capital in Developing and Industrial Countries". Applied Economics Vol. 32, 2000,1181-1187 Watson, M.W (1994): Vector Auto regression and Co integration in R.F. Engle and D.C McFadden (Eds) Handbook of Econometrics, Vol. 4, North-Holland,Amsterdam 2844-2915, 1994.

APPENDIX
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Selected Economic indicator used for the research is presented below in table format.
YEAR 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 GDP 29212.4 29948 31546.8 251052.3 246726.6 230380.8 227254.7 253013.3 257784.5 255977 275409.6 295090.8 328606.1 328644.5 337288.6 342540.5 345228.5 352646.2 367218.1 377830.8 388468.1 393107.2 412332 431753.2 451785.7 495007.2 527576 561931.4 595821.6 634251.1 674889 CAPITAL EXPENDITURE 5200 4219.5 10163.4 6567 6417.2 4885.7 4100.1 5464.7 8526.8 6372.5 8340.1 15034.1 24048.6 28340.9 39763.3 54501.8 70918.3 121138.3 212926.3 269651.7 309015.6 498027.6 239450.9 438696.5 321378.1 241688.3 351300 519500 552385.8 759323 960900 INFLATION 16.6 11.8 9.9 20.9 7.7 23.2 39.6 5.5 5.4 10.2 38.3 40.9 7.5 13 44.5 57.2 57 72.8 29.3 8.5 10 6.6 6.9 18.9 12.9 14 15 17.9 8.2 5.4 12.1 MANUFACTURING OUTPUT 40.4 59.7 62.9 72 78.9 58.2 51.2 61.4 48 80.3 83 94.7 100 109.3 112.2 89.3 88.5 83.7 85.1 85 81.7 84.5 84.8 84.5 89.8 90.3 89.4 89.4 88.1 89.4 89.3

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

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Dependent Variable: GDP Method: Least Squares Date: 12/22/10 Time: 06:16 Sample (adjusted): 1982 2007 Included observations: 26 after adjustments Variable C CAP INFL(-4) MAN R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat Coefficient 154661.2 0.467365 -1285.916 1862.348 0.916180 0.904750 35247.48 2.73E+10 -306.9446 1.781206 Std. Error 40428.48 0.033730 377.9080 482.2281 t-Statistic 3.825551 13.85625 -3.402721 3.861964 Prob. 0.0009 0.0000 0.0026 0.0008 373602.9 114208.0 23.91881 24.11237 80.15604 0.000000

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

SUMMARY OF WORK:
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Total Pages Chapter(s) References used

63 5 36

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