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Testing the applicability of Wagner’s law in Nigeria (1985-2012)

Testing the applicability of Wagner’s law in Nigeria 

(1985-2012)

ABSTRACT

We carried out this research to test the applicability of Wagner’s law in Nigeria within the period of 1985 to 2012. We used Ordinary Least Square (OLS) method was applied while the procedure for estimation is in this order, unit root test, Johansson co-integration and Granger causality. The findings of this work confirmed that there is a long-run relationship between government expenditure and national income and also that government expenditure granger cause national income. This implies that Wagner’s Law holds in Nigeria within the period of this study. Base on the finding of this work we now advice the Nigerian government policy makers to take Nigeria capital expenditure as an instrument for national growth and ensure that there is no misappropriation of public fund and to be more rational and improve on their capital spending for increased national income.

CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

            Countries of the world make efforts to achieve their macroeconomic goals through their fiscal and monetary policies, the impact of public expenditure in realizing these fiscal policy goals of pursuing economic growth, equity in income distribution and maintaining macroeconomic stability have emerged as one of the great issues in recent years. Developed economic and developing nations have been faced with an increasing size of government activities and its effect (impact) on economic growth has become an emerging debate. However, the over-riding growth in government spending (expenditure) appears to be a universal phenomenon applying to most countries of the world regardless of their level of economic advancement.

            Before now, fiscal policy is a fundamental instrument that can be used to reduce short-run fluctuations in output and employment. Meanwhile, in macroeconomic issues such as high rate of inflation, high unemployment rate, inadequate national savings, large public debt burdens and excessive budget deficits fiscal policy has been acknowledged to hold stage in policy debate in the developed and developing nations. During the global economic recession of the 1930s the public sectors of developed and developing nations played a crucial role in stimulating economic growth and development, as advocated by Keynes. In such situations every nation’s attempted to promote its economic growth through increasing government expenditure and reducing taxes. These empirical achievement and the Keynesian theoretical outpourings generated considerable interest among economists and policy makers to the issues of fiscal policy as a stabilizing force.

            Public expenditure is a fundamental instrument that influences the sustainability of public finance via effects on fiscal balances and government debts. Moreover, public expenditure can also pursue other goals, including employment, output and redistribution of income which can contribute to economic well being. On the other hand, tax policy can as well be used to achieve the fiscal policy objectives of efficient allocation, fair distribution of income and wealth economic stabilization and so on. Taxes affect economic growth in so many ways; discourages savings and investment, distorts decisions made by individuals, firms, and entrepreneurship, discourages work efforts as well as workers acquisition skills and morale to work. Although the financing of government expenditure can be growing increasingly in general, the provision of social and physical infrastructures through these government spending (financing of government expenditure) can enhance and improve productivity through a more efficient and effective allocation of resources.

            Thus, wager’s law originally states that as population of a country increase, government activities increase intensively and extensively as a result of an increase in government spending. This simply implies that government expenditure is a function of increasing population growth. The policy implication of the whole scenarios is that an effective and working policy has to be employed first, to control the growing population rate in order to check mate the excessive increase of government spending. Wagner was the first person to model a relationship between government expenditure and economic growth of a country. He argued that government expenditure is an endogenous factor, which is determined by the growth of national income. (Wagner 1890). This view is popularly known as Wagner’s law in the empirical literature.

            Nigeria, being the focus of this research work, her government has passed through number of different administrative processes, each of these administrations undertook different policies and programmes during their administrations that impacted and transformed the generality of the populace, such policies among others includes; policies on education, health, agriculture, industry and so on.

   Following the political independence in 1960, the successive government of Nigeria started undertaking the primary responsibility of building capital and infrastructural base with the mind-set of promoting economic growth and social well being of the entire population (people). This led government to increase its spending on social and hold fare activities. The outcomes of these activities also have manifested in many human development indicators in Nigeria. In 1980s also, government expenditure in Nigeria increased, although not as rapid as in the 1970s. This was possible as a result of the military intervention in 1985 to resuscitate the economy from the shocks of oil price collapse. According by Aregbenyen (2006), the federal government expenditure every five years, which cut across 1985 and 2003 in Nigeria, increased at an average of 28.35 percent.

1.2 Statement of the Problem    

Since 1960, government expenditure has been on the increase side except around late 1970s and 80s when there was a sharp decline in oil price, however, it is of notice that all the increase in government expenditure, it never reflected on the increase in national income.

Structural Adjustment programme that was introduced in 1988 in order to improve fiscal and monetary management, minimize and rationalize administrative control, promote the development of a free market oriented economic that would encourage private enterprise and more efficient use of resources. But at the end of the decades it was clear that structural Adjustment programme (SAP) failed (Ukwu 2010). It was of the view that this programme would improve the economic and material well being of the nation; obviously, the gross national income of Nigeria within this period has been low.

Also, there has equally been increase in unemployment rate in the country. This scenario should not be like that in real sense, as the increase in government expenditure should affect positively, the economic activities of the country thereby reducing the rate of unemployment in the country.

Government expenditure, as a matter of fact should be a vital instrument to help the country’s goal of reducing poverty, increasing the pace of economic growth and development and provide some boost for the ongoing reforms and National Economic Empowerment and Development strategy (NEEDS) and Millennium Development Goals (MDG). Despite the government spending (expenditure), Nigeria has no evidence of accelerating pace in the growth and development of the country. Rather, all we see is the signal of economic stagnation characterized by double digit inflationary trend, unemployment trend and set back in economic growth and development.

The whole of this situation is order on the fact that the per capita income of Nigeria this very low, which indicates that the average Nigeria live within poverty average. This situation has gained the interest of the researcher to evaluate if Wagner’s Law holds for Nigeria. This led to the researchers testing of Wagner’s Law in Nigeria.

1.3     Research Question  

            This research work was poised by the fact that in the recent times, it has not been clear whether Wagner’s Law holds for Nigeria so, the study will examine the following questions.

  1. Is there a long-run relationship between government expenditure and economic growth?
  2. Does government expenditure lead to economic growth in Nigeria?

1.4   Objectives of the Study  

            This study is geared towards exploring and discussing the theoretical and the empirical significance of Wagner’s hypothesis in Nigeria as a panacea to economic growth. The study intend to achieve the following objectives

  1. To determine, if there is a long-run relationship between government expenditure and national income.
  2. To identify the direction of the “causal Arrow” between government expenditure and national income.

1.5    Statement of Hypothesis        

            A hypothesis is an assumption which is made about a parameter. It is generally a statement about the probability distribution of the parameter. The following hypothesis would be tested which will serve as a guide in the course of this study.

Hypothesis for the first objective

Ho: There is no long-run relationship between government expenditure and national income.

H1: There is a long-run relationship between government expenditure and national income.

Hypothesis for the second objective

Ho: The caused arrow does not run from national income to government expenditure.

H1: The causal arrow runs from national income to government expenditure.

1.6       Significance of the Study

            Any study on how to promote economic growth and development is of great important to the government and the society in general as well as individuals. This analysis is important as it would evaluate to what extent government expenditure (Wagner’s Law) has led to economic growth in Nigeria. The findings of this work will be resourceful to monetary houses like the central bank and commercial banks. The government and policy makers would find this research work handy as it will improve the quality of their insight, especially in the area of policy formulation in expenditure and in developing better theories on public expenditure growth in Nigeria for an improved performance of micro and macroeconomics. It will also proffer recommendation to government in development planning, as it will unveil and reveal the direction of the causal between national income and government expenditure. Students of economics and other related fields will also find this research work useful as it will increase the volume of their literature on this aspect of the study as well as serve as a guide to their research work.

The general public will also find this study of great value as it will serve as a reference material to them.

1.7      Scope/Limitation of the Study    

            This study shall focus on the investigation and examination of the theoretical and empirical validity of Wagner’s law in Nigeria as necessitated by the unproductive and insignificance of government spending on Nigeria economic growth. Therefore, this it also investigate it’s impact on other variables. The application of Wagner’s law in Nigeria shall be investigated empirically with data spanning from 1985 to 2012. The choice of the period of reference is vital because government spending is a matter of serious policy consideration.

            The paucity of data placed heavy limitation to this research work. This insufficiency of related materials in the very has posed a limit to this work. In adequate finance to run the study also limit it, as it involves a considerable cost both implicit and explicit which become a serious constraint to the research considering the huge amount of money involved coupled with the fact that the researcher is only a student who has no savings presently. Also dearth of journals posses a restriction on this work. The time frame is short for a wholesome and thorough research work as it is expected that the work be completed and submitted within a session, thus it poses a constraint to the work.

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