CHAPTER ONE

INTRODUCTION

Background of Study

Nigeria is a middle-income, mixed economy and emerging market, with expanding manufacturing, financial, service, communications, technology and entertainment sectors. It is ranked as the 30th-largest economy in the world in terms of nominal GDP, and the 23rd-largest in terms of purchasing power parity. It is the largest economy in Africa; its re-emergent manufacturing sector became the largest on the continent in 2013, and it produces a large proportion of goods and services for the West African subcontinent. In addition, the debt-to-GDP ratio is 11 percent, which is 8 percent below the 2012 ratio.

Previously hindered by years of mismanagement, economic reforms of the past decade[when?] have put Nigeria back on track towards achieving its full economic potential. Nigerian GDP at purchasing power parity (PPP) has almost tripled from $170 billion in 2000 to $451 billion in 2012, although estimates of the size of the informal sector (which is not included in official figures) put the actual numbers closer to $630 billion. Correspondingly, the GDP per capita doubled from $1400 per person in 2000 to an estimated $2,800 per person in 2012 (again, with the inclusion of the informal sector, it is estimated that GDP per capita hovers around $3,900 per person). (Population increased from 120 million in 2000 to 160 million in 2010). These figures were to be revised upwards by as much as 80% when metrics were to be recalculated subsequent to the rebasing of its economy in April 2014.

Although oil revenues contribute 2/3 of state revenues, oil only contributes about 9% to the GDP. Nigeria produces only about 2.7% of the world's oil supply (in comparison, Saudi Arabia produces 12.9%, Russia produces 12.7% and the United States produces 8.6%).Although the petroleum sector is important, as government revenues still heavily rely on this sector, it remains a small part of the country's overall economy.

The largely subsistence agricultural sector has not kept up with rapid population growth, and Nigeria, once a large net exporter of food, now[when?] imports some of its food products, though mechanization has led to a resurgence in manufacturing and exporting of food products, and the move towards food sufficiency. In 2006, Nigeria successfully convinced the Paris Club to let it buy back the bulk of its debts owed to them for a cash payment of roughly US$12 billion.

In Nigeria, attempts to empirically verify the relationship between public expenditure and macroeconomic variables have not been well documented in literature. Most works on public expenditure in Nigeria centred on the factors that are responsible for increase in government expenditure (Ezirim,2006:90; and others). Other works along this line which investigate the disaggregated components of public expenditure include, Fajingbesi,et.al. (1999), Ekpo (1995), Ogiogio (1995) and Odusola (1996). Ekpo (1995) regresses the disaggregated components of government capital expenditure on private investment, using ordinary least square approach with annual data from 1960- 1990.

 Ogiogio (1995) investigates the growth impact of recurrent, capital and sectoral expenditures over the period 1970-1993. Odusola (1996) adopts a simultaneous equation model to capture the interrelationship between military expenditure and economic growth in Nigeria. Three studies which adopt a broader methodological framework to understand the links between public expenditure and economic growth in Nigeria are Fajingbesi, et. al. (1999), Ezirim (2006) and Tsauni (2007). It is a fact that both public expenditure and economic growth are bicausually related. This makes any deductions from a single equation model invalid. This is owing to the possibility of simultaneity bias.

The work of Fajingbesi,et.al.(1999) aim at 6 analysing the existing link between public expenditure and economic growth in Nigeria. The ordering of the variables are inflation rate, output and total expenditure. The studies by Ezirim (2006: 87) investigates the factors that truly affect public expenditure in less developed countries using data from Nigeria. The studies by Tsauni (2007: 93) examines whether there is any causal relationship between education expenditure and economic growth and whether education expenditure is a good predictor of economic growth or vice-versa.

These studies are very comprehensive, illustrating a wide range of analytical approach for assessing impacts of public expenditure on economic growth. However, no one adopted an economic-wide approach which allows capturing interaction of various factors through direct, indirect and multiple-round effects over time. Furthermore, the existing studies do not contrast alternative government spending strategies, discussing their advantages and drawbacks for deeper evaluation. Most of these studies did not take into cognizance a wide range of growth determinants like employment rate, investment, inflation rate, capacity utilization among others. This research is an attempt to fill this lacuna by adopting a holistic approach which will incorporate the major determinants of growth on economic wide 7 basis. The study will adopt a wider variety of variables incorporating multiple linear regression approach to examine the impact of public expenditure on macroeconomic growth. The way in which public expenditure are allocated has significant effect on economic growth and poverty alleviation. “The link between public outlay and economic growth in Nigeria calls for empirical investigation.

 The work of Adubi and Obioma (1999: 182) examine public expenditure management in Nigeria. They perceive that the role of the pubic sector in the growth and development process led to tremendous growth in public expenditure and consequently the public sector itself. Good economic policy is critical for meaningful national development. According to Hiley (1999: 11), the four main goals of macroeconomic policy are controlling inflation, maintaining a stable and competitive real exchange rate, exercising fiscal prudence, and operating efficient capital markets. In order to realise these obligations, government must have some instruments for operating on the macroeconomic variables (investment, employment, inflation, capital utilization, economic growth etc.). Pubic expenditure happens to be one of these instruments; others may include Net-Export, government subsidy, etc.

The Gross Domestic Product (GDP) in Nigeria was worth 375.77 billion US dollars in 2017. The GDP value of Nigeria represents 0.61 percent of the world economy. GDP in Nigeria averaged 97.52 USD Billion from 1960 until 2017, reaching an all time high of 568.50 USD Billion in 2014 and a record low of 4.20 USD Billion in 1960.

Source; National Statistical Bulletin

1.2 Statement of Problem

As a result of poor economic condition in Nigeria relevant information is of great interest to me for investigation if viable economic solution can be revealed.

Nigeria considered as one of the third world countries is been assessed by their income yearly.  It is a simple logic of our living that it country’s income is high with considerable population, the enjoyment of the citizens of that country would be high, while the enjoyment is low with low national income.  It is on this point that I find it very expedient to analyze the national income of Nigeria and make necessary recommendation for the improvement of the economy for the betterment of the citizenry. (Bamidele,2013)

1.3. Objectives of the Study:

The primary objective of this study is to study the regression analysis on National Income using the expenditure approach. However, the secondary objectives are to:

•         Econometrically examine the relationship between Aggregate Expenditures and economic growth in the long-run.

•         Examine the impact of Aggregate Expenditure on economic growth in Nigeria.

1.4.      Research Questions:

The questions are as follows:

•         Does a long-run relationship exist between Aggregate Expenditure and Economic Growth?

•         Is there any significant impact of Aggregate Expenditure on Economic Growth in Nigeria?

1.5.      Hypothesis of the Study:

This study seeks to test the following null hypothesis:

H01:      There is no long-run relationship between Aggregate Expenditure and Economic Growth in an economy.

H02:      There is no significant impact of Aggregate Expenditure on Economic Growth in Nigeria.

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