Government Expenditure and Economic Growth in Nigeria: A Cointegration and Error Correction Modelling

Abutu, Usman Ojonugwa and Agbede, Esther Abdul (2015): Government Expenditure and Economic Growth in Nigeria: A Cointegration and Error Correction Modelling.

Abstract

This study examined the relationship between government expenditure and economic growth in Nigeria using a co-integration and error correction model for the period 1970-2010. A time-series data was obtained from the Central Bank of Nigeria for the analysis. The outcome of the ADF unit root test indicated that all variables included in the model were non-stationary at their levels but integrated of order one, I(1). From the long-run analysis, the results revealed a positive and significant linear relationship between the two categories of government expenditure and economic growth (measured by real GDP), whereas on the short-run, economic growth had a positive and significant linear relationship with recurrent expenditure and negative but significant relationship with capital expenditure. The result of the Pairwise Granger Causality test in a Vector Error Correction Model indicated a unidirectional (one-way) causality, running from economic growth to capital expenditure and recurrent expenditure to economic growth, while bi-directional causality runs from capital expenditure to recurrent expenditure and vice versa. Therefore, the study recommended the need to stimulate economic growth by allocating appropriate proportion to capital expenditure of government in the national budget.

• Item Type: MPRA Paper
• Language: English
• Keywords: Public Expenditure, Economic growth, Granger Causality, Cointegration, Augmented Dickey-Fuller
• Subjects: F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F43 - Economic Growth of Open Economies

References

Abu-Bader, S. and Abu-Qarn A.S (2003). “Government expenditures, military spending and economic growth: causality evidence from Egypt, Israel, and Syria”, Journal of Policy Model 25(6-7):567-583. [http://www. sciencedirect.com/science/journal/01618938]

Adeniyi, O.M, and Bashir A.O (2011). “Sectoral analysis of the impact of public investment on economic growth in Nigeria (1970-2008)”, European Journal of Social Sciences 20(2):259.

Adewara, S.O and Oloni E.F (2012). “Composition of public expenditure and economic growth in Nigeria”, Journal of Emerging Trends in Economics and Management Sciences 3(4):403-407.

Afzal, M. and Q. Abbas, (2012). “Wagner’s law in Pakistan: Another look”, Journal of Economics and International Finance, 2(1): 12-19.

Akpan, N.I (2005). “Government expenditure and economic growth in Nigeria: A disaggregated approach” CBN Economic and Financial Reviews, 43(1):51-69

Aliyu, S.U.R (2009). “Impact of oil price shock and exchange rate volatility on economic growth in Nigeria: Empirical investigation”. http://mpra.ub.uni-muenchen.de/16319.

Central Bank of Nigeria (2011). Statistical Bulletin (Various Issues), December, Abuja-Nigeria, downloaded from www.cenbank.org.

Chang, T. (2002). “An econometric test of Wagner’s Law for six countries based on cointegration and error correction modeling techniques”, Applied Economics, 34: 1157-1170.

Chang, T., W. Liu and S. Caudill (2004). “A re-examination of Wagner’s Law for ten countries based on cointegration and error-correction modeling techniques”, Applied Financial Economics, 14: 577-589.

Dicker, D.A. and Fuller, W.A. (1979). “Distribution of the Estimates for Autoregressive Time Series with a Unit Root. J.A.M Statistical Association, 74:123-144. Dolado, J. and Lutkepohl, H. (1996). “Making Wald tests work for cointegrated VAR systems”, Econometric Review, 5:369-386. Ekpo A.H (1994).“Public expenditure and economic growth in Nigeria, 1960-1992”, Final Report African Research Consortium (AERC), Nairobi, Kenya.

Essien E.A (1997). “Public sector growth, an econometric test of Wagner’s law”, Central Bank of Nigeria Economics and Financial. Reviews, 35:3

Gandhi, V.P., (1971). “Wagner's Law of Public Expenditure: Do Recent Cross-Section Studies Confirm it?”, Public Finance, 26: 44-56.

Granger, C.W.J, (1969). “Investigating causal relations by econometric models and cross-spectral methods”, Econometrica, 37(3): 422-438.

Ighodaro CAU, Oriakhi DE (2010). Does the relationship between government expenditure and economic growth follow Wagner’s law in Nigeria?” Annals of the University of Petrosani, Economics 10(2):185-198.

Islam, A.M., (2001). “Wagner’s law revisited: Cointegration and exogeneity tests for USA” Applied Economics, 8: 509-515.

Johansen, S. (1995). Likelihood-based Inference in Cointegrated Vector Autoregressive Models, Oxford University Press, Oxford. Johansen, S. (1988). “Statistical Analysis of Cointegrated Vectors”. Journal of economic Dynamics and Control, 12:231-251. Johansen Soren, and Juselius, Katarina (1990), “Maximum Likelihood Estimation and Inferences on Cointegration – With Application to the Demand for Money”, Oxford Bulletin of Economics and Statistics, Vol. 52, No. 2, pp. 169-210 Keynes, J.M (1936). The general theory of employment, interest and money. New York: Harcourt, Brace & Co. Liu Chih-HL, Hsu C, Younis M (2008). “The association between government expenditure and economic growth: the Granger causality test of the U.S. data, 1974-2002”, Journal of Public Budgeting, Accounting and Finance Management, 20(4): 439-452.

Loizides J, Vamvoukas G, (2005). “Government Expenditure and Economic Growth: Evidence from Trivariate Causality Testing”. Journal of Applied Economics, 8(1): 125-152.

Masih, R. and Masih, A.M. (1996). “Macroeconomic Activity Dynamics and Granger Causality: New evidence from a Small Developing Economy Based on a Vector Error-Correction Modelling Analysis”, Economic Modelling, 13:407-426. Musgrave, R.A., (1969). Fiscal Systems, Yale University Press, New Haven and London.

Mutuku, C.M and Kimani, D.K (2012). “Investigating Wagner’s law: Cointegration and Granger Causality Tests for Kenya”, Current Research Journal of Economic Theory, 4(2) 43-52

Nurudeen A, Usman A (2010). “Government expenditure and economic growth in Nigeria: 1970-2008: a disaggregated analysis”, Business and Economic Journal, 4: 1-11.

Obinna, O.E. (2003). Public finance. Nigeria: Nsukka, AP and P Press ltd, Pp. 210.

Ogiogio GO (1995). “Government expenditure and economic growth in Nigeria”. Journal of Economic Management, 2(1):1

Okoro, A.S. (2013). “Government spending and economic growth in Nigeria:1980-2011)”. Global journal of management and business research, economic and commerce, 13(5) version 1.0.

Omoke, P., (2009). “Government expenditure and national income: A Causality test for Nigeria”, European Journal of Economics and Political Studies, 2(2): 1-11.

Oyinlola O. (1993). “Nigeria’s national defense and economic development: an impact analysis”, Scand Journal of Development Alternatives, 12(3):241-253

Oyinlola, M.A. and Akinnibosun, O. (2013). “Public expenditure and economic growth nexus: Further evidence from Nigeria”, Journal of Economics and International Finance, 5(4).

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.

Wagner, A., (1883). Three Extracts on Public Finance. In: Musgrave, R.A. and A.T. Peacock, (Eds.), 1958, Classics in the Theory of Public Finance. Macmillan, London.

Ziramba, E., (2008). “Wagner’s law: An econometric test for South Africa, 1960-2008”, Series of African Journal of Economics, 76(4).