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1.1     Background to the Study

The classical economic school of thought led by Adam smith deemphasized the role of government in the management of the economy and argued that the economy is inherently self adjusting and self-equilibrating. This argument is predicated on the belief that the invisible hand” would allocate resources more efficiently and this philosophy was branded “laissez-faire” (Smith, 1776).

Smith in his ‘wealth of the nations’, argued in favour of free market system which is however regulated to some extent by the government. He pointed out that the price of the commodity was regulated by the market and the demand of those who are willing to pay the price for such commodity. Under competitive environment, the price usually tends towards natural prices at the centre.

Smith puts great faith in the regulatory functions of competition both on demand and supply. He reorganized that sometimes condition may prevail which keep the market prices of commodities well above natural prices (Bell 1967:157). However, the great depressions of 1930’s exposed the inability of the market forces and the inability of the economy to absolutely control the economy as predicted by Adam smith.

Hence Keynes (1936), opined that the government should intervene and stabilize or better still ameliorate the wide swing in the economy. Therefore, it became an acknowledged tenet of the prevailing development theory of the 1950s and 1960s that the economy and urgent problems of development can not be solved by private sector. So the government must get away from its traditional caretaker and regulatory functions and move into the era of active participation in the productive sector.

This development made the public sector the prime-mover of the economy and as a result, the state was viewed by many as an engine of development. In less developed countries (LDC) such as Nigeria, the intervention of the public sector in economic development especially between 1960s and 1970s was necessary because of the need to:

”        Tackle the problems of economic growth and development             as well as income distribution.

”        Provide certain indispensable services without which community life would be meaningless and which their nature cannot be left in the hands of private enterprises, for example, some basic socio-economic infrastructures and services which include national defense, maintenance of law and order, etc.

In Nigeria, the public sector has contributed greatly to the growth and development of the economy since the attainment of political independence in 1960. In view of the above, the public sector took the lead of economic development. Consequently, the federal government and the state government of Nigeria invested heavily in a lot of industries. it has been estimated that by 1986 (before the introduction of SAP) the federal government alone owned nearly 200 non-commercial and commercial parastatals (Ayodele, 1987 and Ojo 1992 cited in Ukpong 1998), while the total number of public enterprises was over 500 with total government investment in them over N36 billion (Ukpong 1998).

In relation to the above, it is obvious that the public sector has contributed greatly to the growth and development of the economy, especially since 1970s. From a share of gross capital formation (GDF) of 24.92% in 1970, the share of public sector gross investment increased to 48.9% in 1974, 63:8% in 1975, 73.4% in 1980 and 81.7% in 1982. In 1984 and 1986, the public sector alone accounted for the total of 100%.

Also public consumption accounted for an average of 15% of the consumption component of aggregate demand within the economy between 1970 and 1980. In addition, the public sector accounted for about 50% of the GDP in the economy and above 60-70% of modern sector employment. (Ayodele (1987), cited in Ukpong (1998). Unfortunately, the public sector became grossly ineffective in service delivery.

The public sector increased the fiscal deficit of the government beyond a reasonable proportion. Faced with these problems, many countries, especially LDCs, embarked on stabilization and adjustment programmes supported by the international monetary fund (IMF) and the World Bank. This led to the adoption of the structural adjustment programme (SAP) which its main objectives are listed below:

  1. Restructuring and diversifying the productive base of the economy in order to reduce the dependency on the oil sector.
  2. Lay emphasis for a sustainable non-inflationary or minimum inflationary growth.
  3. Lessen the dominance of unproductive investment in the public sector in order to improve the sector efficiency and intensify the growth potential of private sector.

From the foregoing, it was believed that privatization and commercialization will reduce inefficiency in resource allocation and use. Having curbed inefficiency, there will be significant reduction in cost since the cost of production and services of these public enterprises incorporate cost of production. Hence society enjoys from the provision of goods and services at lower cost made possible by efficient production units. This will equally ensure improvements in output and increase income.

The government and private sector have been partners in the economic development of the nation. In the past, the governments have been the bigger partner and we have been the consequences of lopsided partnership and accordingly decided to device the size of government participation and beef up the private sector. Following this line of reasoning, it is clear that a reform of the public sector is needed.

This will really refer to privatizing the later to unproductive public enterprises to make them self-sustaining. According to Oriakli (2001), privatization presupposes the existence of high level of creative, effective leadership, efficient services, technological advancement and accountability of the private sector in Nigeria.


1.2     Statement of the Problem.  

In the last two decades, economic policies, global growth and development have changed dramatically. Immediately after the attainment of political independence of most African countries, Nigeria inclusive, there was the belief that they would close the gap separating them from the advanced countries. Economic literature liberally discussed the quantum leaps in economic growth which the communist and socialist countries made in the first half of the country.

In an attempt to bridge these gaps and attain these quantum leaps in the economy, emphasis was placed on the development of the public sector. So much money has been spent by the government in running of her enterprises with practically, little or no impact on the economy. Reference could be made on government procured $500 million loan from World Bank for NEPA, and just recently, the Bureau of public enterprise (BPE) said the authority needed about $10 billion to take its power generation capacity from 4,000 mega walts to 10,000 mega walts, (Obadan, 1997).

Billions of dollars have been spent on NEPA over the years, yet it has remained a public waste causing more nuisances to the economy than positive contribution. Government expenditure on these companies has been a big loss to the public purse. This raises most controversial questions posed before Nigerian economists: Has the government increased deficit solved the intended problem of economic growth? And or does increase in   government expenditure on public enterprises lead to increase in GDP? What will be the state of the economy? Should the reform (privatization and commercialization, deregulation, etc) be fully implemented? Or what does the reform policy hold for Nigeria?

The above puzzles are what this study is set to address after rigorous empirical analysis.

1.3 Research Question

          This research work shall be guided by the following research questions

1. Does government expenditure on education has any impact on Nigeria economy?

2. What are the impacts of government expenditure on health on the economic growth of Nigeria?

1.4 Objective of the Study.

The broad objectives of the study are to examine the impact of government expenditure and growth of Nigeria economy.

The specific objectives are:

  1. To examine the impact of government expenditure on education on

the economic growth of Nigeria.

  1. To evaluate the impact of government expenditure on health on the

economic growth of Nigeria.


1.5     Hypothesis of the Study.

HO:   There is no significant relationship between government expenditure

on education and the economic growth of Nigeria.

H1 There is a significant relationship between government expenditure   on

education and the economic growth of Nigeria.

HO: there is no significant relationship between the government

expenditure on health and the economic growth of Nigeria.

HI  There is significant relationship between the government expenditure

on health and the economic growth of Nigeria.

1.6 Significance of the Study

The findings from this study would be relevant to government policy formulation especially in budgeting allocations and control. It would be useful reference for credit guidelines and sectoral allocation. This is expected to help in reducing government fiscal deficit since it would be made obvious which sectors of the economy actually requires government assistance instead prizes have become.

This study derives significance from the fact that it is one practical attempt to appraise objectively the impact of public sector reform on the nation’s economy. In addition, the study will be of great intellectual value to students of economic and other disciplines who would want to make further research and interested members of the public who are desirous of knowing how government has gone with it’s public sector reforms effort. And finally, it be of significance given the fact that this study will definitely enrich and update already existing literature on the subject.

1.7 Scope and Limitation of the Study

This study covers the effect of government expenditure on the economic growth of Nigeria for the period of 32 years (1980-2011). Many constraint were experienced in the course of the research,. Some of the data needed for this research were not in existence. Data inconsistence as a consequence of poor and outdated data storage system in Nigeria, closely related to this is the choice of appropriate econometric techniques to estimate the parameters of the relationship under study.

Time constraint has shown no mercy to the research. The limited time has to be shared among many alternative uses, which includes, reading, attending lectures and writing of this research.


One Response

  1. daniel January 22, 2016

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