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Impact Of Defense Expenditure On Nigeria Economy 1986-2019

ABSTRACT

The study presents empirical evidence on the relationship between the level of economic growth and defense expenditures in the case of Nigeria from the period of 1977 to 2006. The study employed the supply model based on the production function proposed in Feder(1983) as extended by Biswas and Ram(1986).It further explore the use of unit root tests and found that the variables of capital stock, labor stock, defense expenditure are all stationary at the first difference except for labor stock which was stationary at the first level. The result of the Granger causality test shows that there is a unidirectional causality running from economic growth to defense spending. This study suggests that for Nigeria, a policy of increasing the defense budget to promote economic development growth might be inappropriate, but that same funds channeled towards other governmental program.

 

 

CHAPTER ONE

INTRODUCTION

1.1 Background to the study

There has been wide literature on defense spending and economic growth. However, the conclusion about the direction of the causal relationship between the two is ambiguous. Studies have found that defense expenditure can influence an economy both positively and negatively. For example, military expenditure can affect an economy positively through an expansion of aggregate demand  or through increase security (Waheeduzzaman and Rahman, 2003); and negatively through a crowding out of investment (Deger, 1986). However there are limited study as to the direction of causal effect between defense expenditure and economic growth.

In the Keynesian submission, defense expenditure which is an integral part of government expenditure serve as an injection to the economy, and as such could positively stimulate the economy through the multiplier mechanics. The increase in any of the aggregate demand variables will increase the capital stock in the society, which will lead to higher profit and may induce higher investment, thus generating short run multiplier effects and higher growth rates on the aggregate economy.

Benoit (1973, 1978) argued that with increase in military expenditure, economic growth can be promoted by increasing human capital capabilities of the workforce through provisions of education where the military industries may provide valuable skill. There are also externalities in defense spending that are crucial to economic growth like the provision of road infrastructure which can be used by both the military and civilian (Barro and Sala.i Martins 1995)

On the contrary, arguments equally suggested, that there exists a negative relationship between defense spending and economic growth. Levine and Renant (1992) argued that, since defense spending is financed by taxation, taxation will not only reduce the amount of resources available to the private sector, but equally affects relative prices like real wage and real interest rates which ultimately distorts economic decisions. Moreover, this negative trend may have a negative impact on economic growth. Defense spending may also crowd out not only private investment but other government spending that could stimulate human capital formation (Shieh et at, 2002). Also, defense spending could create bottlenecks in the demand for highly qualified labor and take resources away from civilian Research and Development activities. Given that government sector is prone to low productivity, the diversion of resources away from civilian to military purposes may impede long term country productivity, technological projects and growth.

1.2   Statement of the Problem

The relationship between government expenditure and economic growth has continued to generate series of debate among scholars. Government performs two functions – protection (and security) and provision of certain public goods (Abdullahi, 2000; Yousif, 2000; Nurudeen and Usman, 2008). Protection function consists of the creation of rule of law and enforcement of property rights. This helps to minimize risks to criminality, protect life and property and the nation from external aggression, defense, roads, education, health, power and communication to mention but a few.

Some scholars argue that increase in government expenditure on socio-economic and physical structures encourages economic growth. For example, government expenditure on health and education raises the productivity of labour and increase the growth of national output. Similarly, expenditure on infrastructure such as roads, communications, power etc reduces production costs, increases private sector investment and profitability of firms, thus fostering economic growth. Supporting this view, scholars such as Keynes (1936), Ram (1986), Barro (1990), Sachs (2006), Ranjah and Sharma (2008), Cooray (2009) conclude that expansion of government expenditure contributes positively to economic growth.

However, some scholars did not support the claim that increasing government expenditure promotes economic growth, instead they assert that high government expenditure may slow down overall aggregate performance of the economy in that in the bid to finance rising expenditure, government may have to increase taxes and/or borrowing. The higher income tax may discourage or be a disincentive to individual working for long hours or searching for additional work which in turn may reduce income and aggregate demand. In the same way, higher corporate tax (profit tax) tends to increase production costs and reduces the profitability of firms and their capacity to incur investment expenditure. Moreover, if government increases borrowing (especially from the banks) in order to finance its expenditure, it will compete (crowds-out) away the private sector, thus reducing private investment. It was further argued that in a bid to score cheap popularity and ensure that they continue to remain in power, politicians and government officials sometimes increase expenditure and investment in unproductive projects or in goods that the private sector can produce more efficiently. Thus, government activity sometimes produces misallocation of resources and impedes the growth of national output. In fact, the studies by Laudau (1986), Hayek (1989), Henrekson (2001), Mitchell (2005) and Sudha (2007) suggested that large government expenditure has negative impact on economic growth.

In Nigeria, the government expenditure has continued to rise due to receipts from oil revenue (Petroleum profit tax and royalties) and non oil revenue (company income tax, custom and excise duties, value added tax [VAT] and others) (CBN Statistical Bulletin, 2012). And increased demand for public (utilities) goods like roads, communication, power, education and health. Besides there is increasing need to provide both internal and external security for the people and the nation.

Available statistics show that total government expenditure (capital and recurrent) and its components have continued to rise in the last few decades under review. For instance, government recurrent expenditure increased from ₦716.1 million in 1970 to ₦4,805.2 million in 1980 and ₦3,310,343.38 million in 2010 (see appendix 1). In the same manner, the composition of government recurrent expenditure shows that expenditure on general administration, defense, National Assembly, internal security, agriculture, construction, transportation and communication, education and health increased during the period under review. Moreover, government capital expenditure rose from ₦187.8 million in 1970 to ₦883,874.75 million in 2010 (see appendix 1). Furthermore, the various components of capital expenditure (that is economic services, social service, defense, agriculture, transport and communication, education and health) also show a rising trend between 1970 – 2012.

Unfortunately, rising government expenditure has not translated to meaningful growth and development, as Nigeria ranks among the poorest countries of the world. In addition, many Nigerians have continued to wallow in abject poverty, while more than 60.9% of over 163 million population poor. The Business Day Newspaper of Tuesday 14 February, 2012 reported that the percentage of Nigerians living in abject poverty – those who can afford only the bare essentials of food, shelter and clothing – rose to 60.9% in 2010 as compared to 54.7% in 2004. Although the Nigerian economy is projected to be growing, poverty is likely to get worse as the gap between the rich and the poor continues to widen. Couple with this, is dilapidated infrastructure (especially roads and power supply) that has led to the collapse of many industries, including high level of unemployment. Moreover, macroeconomic indicators like balance of payments, imports obligations, inflation rates, exchange rate, and national savings reveal that Nigeria has not fared well in the last couple of decades under review. Given the issues raised above, this research seeks to examine the impact of government expenditure on economic growth in Nigeria using GDP as dependent variable, and recurrent expenditure, capital expenditure and other controlling variables such as import, export, foreign direct investment  to examine the impact of government expenditure on economic growth in Nigeria from 1970 to 2012.

1.3 objective of the study

The objective of this study is to examine the direction of the causal effect between defense expenditure and economic growth in Nigeria from 1977-2006. The choice of this period is underscore by the fact that considerable part of the period under discussion fall under Nigeria military rule couple with the involvement of Nigeria state in heavy international military peace keeping in some Africa countries; these developments influenced the amount expended on defense.

1.4    Significance of the Study

The study investigates the impact of defense expenditure on economic growth in Nigeria. Many people have carried out studies on government expenditure and how it affects economic growth in Nigeria. But we are trying to add a new dimension to it by breaking down the explanatory variables into government consumption expenditure, government investment, and government investment expenditure on human capital development, stock of capital, Labour force and private investment. The most closely related works are outlined below.  Nurudeen and Usman (2010) studied the impact of government expenditure in Nigeria using data from 1977-2007 and ECM method. The variables used are recurrent expenditure and capital expenditure on defense, agriculture, education, transport and communication. He did not make use of aggregate production function since labour and capital are excluded. This study consolidates expenditures on human capital (education and health). It also fails to aggregate the other government investment and consumption spending in Nigeria. Usman, Mobolaji, Kilishi, Yaru and Yakubu (2011) examine the impact of public expenditure on economic growth in Nigeria for the period of 1970-2008 using aggregate production function of Barro (1990). The study classified government expenditure into administration, education, transport and communication. Just like Nurudeen and Usman (2010), they did not aggregate government expenditure on human capital. The study also did not consolidate government investment and government consumption expenditure into separate categories.

Maku (2009) examines the link between government spending and economic growth from 1970-2006 using Ram (1986) production function. The study classified government expenditure into education, health, government consumption spending and private investment. In the course of the analysis, the study kept both education and health spending separately but analyses them jointly as if they were consolidated. Our study is an improvement over these studies since our study integrates both education spending and health spending to indicate human capital development.

This study is distinct from all other studies because it classifies government expenditure into non-productive and productive government expenditures based on Barro (1990) classifications. The non-productive expenditure relates to all government consumption expenditure excluding health and education. The productive government expenditure relates to government expenditures on human capital development and government investment.

Secondly, the study is based on long period of analysis from 1970-2010, which is a sufficient time frame for the analysis of the problem of the study.

Thirdly, we believe that this study will provoke and pave a way for further studies in the area as it reveals the difficulty in resolving the empirical question of the impact of government spending on growth.

Fourthly, this study incorporates the most recent data and employs both qualitative analysis and a more advanced econometric technique (vector error correction) model to study the impact of government spending on economic growth. Thus the outcome of this study will provide result and policy implication to policy makers by bridging the aforementioned gap.

1.5 Research Question

  1. what is the impact of defense expenditure on economic growth ?
  2. what type of relationship exist between defense expenditure and economic growth?

1.6 hypothesis of the study

Ho: there is no bi-directional relationship between defense expenditure and economic growth

H1: there is a bi-directional relationship between defense expenditure and economic growth

1.7    Scope and Limitations of the Study

This study is restricted to the impact of defense expenditure on economic growth in Nigeria from 1986-2019.

One of the limitations of this study arises from lack of agreement on the causes of economic growth. Economists are not yet certain about the relative importance of elements which influence economic growth. Without such knowledge, it is difficult to make a meaningful conclusion on the impact of government expenditure on economic growth.

Another limitation of the study is that it does not explicitly consider the quality of government spending, which is probably the most important factor. The calibers of the civil servants and the conditions in which they function have impact on creative and efficient use of public resources. Unproductive public spending can take various forms, including spending on wages and salaries of unproductive or ghost workers. Public spending is also unproductive when government expenditures do not reach designated spending objectives. This happens for example when government officials are corrupt and seek bribes for preferentially selecting beneficiaries of government programmes, for authorizing private investment projects etc.

The econometric result of this study is also limited by the quality of the data. This limitation arises from the problem of inconsistency of data as reported by different institutions and even by different departments in the same institutions.

The limitations of this study lies in the following areas:

The data used for the study covers only the period of 1970-2010, no matter the relevance of time series data for any period before or after this period for this analysis, are not considered

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