1.1 Background of the STUDY
The relationship between government spending and poverty reduction has continued to generate series of debate among scholars. The size of government spending and its effect on poverty reduction, and vice versa, has been an issue of sustained interest for decades. Government performs two functions- protection (and security) and provisions of certain public good (Al-Yousif , 2000). Protection function consists of the creation of rule of law and enforcement of property rights. This helps to minimize risks of criminality, protect life and property, and the nation from external aggression. Under the provisions of public goods are defense, roads, education, health, and power, to mention few. Some scholars argue that increase in government spending on socio-economic and physical infrastructures encourages economic growth. For example, government spending 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 Abdullah HA, (2000), Ranjan KD, Sharma C, (2008) and Cooray A, (2009) concluded that expansion of government spending contributes positively to economic growth.
Over the past decades, the Nigeria’s public sector spending has been increasing in geometric term through government various activities and interactions with its Ministries, Departments and Agencies (MDA’s),
(Niloy et al. 2003). Although, the general view is that public expenditure either recurrent or capital expenditure, notably on social and economic infrastructure can be growth-enhancing although the financing of such expenditure to provide essential infrastructural facilities-including transport, electricity, telecommunications, water and sanitation, waste disposal, education and health-can be growth-retarding (for example, the negative effect associated with taxation and excessive debt).
The size and structure of public spending will determine the pattern and form of growth in output of the economy. The structure of Nigerian public expenditure can broadly be categorized into capital and recurrent expenditure. The recurrent expenditure are government expenses on administration such as wages, salaries, interest on loans, maintenance etc, whereas expenses on capital projects like roads, airports, education, telecommunication, electricity generation etc., are referred to as capital expenditure. One of the main purposes of government spending is to provide infrastructural facilities and the maintenance of these facilities requires a substantial amount of spending. The relationship between government spending on public infrastructure and economic growth tends to be an important analysis in developing countries, most of which have experienced increasing levels of public expenditure overtime (World Development Report, 1994). Expenditure on infrastructure investment and productive activities (in State-Owned Enterprises) ought to contribute positively to growth, whereas government consumption spending is anticipated to be growth-retarding (Josaphat and Oliver, 2000).
However, economies in transition do spend heavily on physical infrastructure to improve economic welfare of the people and facilitate production of goods and services across all sectors of the economy so as to stimulate rapid growth in aggregate output. Empirical studies (like Ram, 1986; Deverajan et al., 1993; Nitoy et al., 2003) have found that there exists positive correlation between economic growth and public spending on infrastructural facilities. Manufacturing industries do consider infrastructure services or facilities before locating their production base in order to gain large economies of scale and reduce cost of production. Also, to increase total industrial output at a cheaper price in the economy.
Following the World Bank’s Development Report (1994), developing countries invest $200billion a year in new infrastructure representing 4 percent of their national output and a fifth of their total investment. The result has been a dramatic increase in infrastructure services-for transport, power, water, sanitation, telecommunications, and irrigation. The provision of infrastructure services to meet the demands of business, households, and other users is one of the major challenges of economic development in developing countries like Nigeria.
Public spending represents the annual expenditure by the federal government to achieve some macro-economic objectives which may include poverty reduction, increase in national productivity and macro-economic stability in the system.
Since the late 1980’s, an increase in public spending has become a major instrument in Nigeria. This was attributed to the following reasons as the major causes of an increase in government expenditure in Nigeria. First is the dominant role of public sector in major economic activities in Nigeria. This could be attributed to several factors among them are oil boom of the early 1970’s, the need for reconstruction of war affected areas after Nigerian civil war in 1970, the industrialization strategy adopted at that time by the federal government (import substitution strategy) and the need to raise gross domestic product (GDP).
On the other hand, the collapse of oil prices in and general mismanagement of the economy in 1980’s brought the issue of poverty eradication in Nigeria. Furthermore, the recent flood disaster in Nigeria has reawakened the fight against poverty in Nigeria. In the mid 1980s, it was observed that the private sectors were declining in economic activities as measured by aggregate output, industrial production, non-oil exports etc. were all showing decreasing signs. Above all, there widespread evidence of massive poverty in the economy despite of the growing public expenditure and fiscal deficit in the economy (library of congress country studies 1980’s).
In 1986, all major socio-economic indicators were showing downwards which brought high rate of unemployment and decreased in purchasing power. Poverty was spending among Nigerians especially the low income earners and economic growth was downward sloping.
Poverty in Nigeria did not become an issue of great concern until after the oil boom when the international oil price crashed and there was an international economic slump. The continuous downward trend in the oil prices in the international market increased the poverty level in Nigeria. The overdependency on oil revenue and inadequate efforts to mobilize funds from non oil sources led to a serious decline in government revenue. External reserve deteriorated, and cause huge accumulated trade arrears and thereby limiting government effort in provision of basic amenities and social facilities.
Thus the poverty level in Nigeria continues to be on the increased over the past few decades. The 1991 world development report (WDR) showed that Nigeria the most populous country in Africa has a significant number of her population categorized as poor people.In recognition of the adverse effect of poverty in Nigeria, federal government set up Structural Adjustment Program (SAP) to reduce over dependency on oil and to provide food to all Nigerians. This had been followed by the introduction of other policies such as national FADAMA programs. Furthermore, the federal government made poverty reduction the core objectives of its annual budget and also initiated various policies measures aimed at promoting people’s welfare and reducing poverty in the economy.
Poverty become an issue of global dimension with nations striving either to reduce or outright poverty in there economy. The complexity of the phenomenon and its impacts on national economics has attracted the attention of international organizations and agencies with government in different nations embarking on policies aimed at reducing poverty.
Finally, the extent to which government spending have impacted on the well-being of the people particularly poverty in Nigeria prompted this study.
1.2 Statement of the Problem
Over the years public expenditure has been on the rise without seen the consequent effect on the welfare of the populace. The relationship between government spending and poverty reduction has continued to generate series of debate among scholars. In Nigeria, poverty has been on the increase which can be attributed to inequality existing in the economy such as corruption, macro-economic instability and inconsistency in government policies. In an ordinary framework, poverty is concern with absolute, modulate or relatively standard of living or inability to attain a minimal standard of living. Poverty is found to be at the worst in the rural areas. Which is characterized by malnutrition lack of standard education, low life expectancy and sub-standard housing? In attempt to alleviate these problems, three actors are observed in the literature as being involved in any giving country. Namely; the three ties of government (federal, state and local government), international organizations and nongovernmental organizations (NGO’s).
Unfortunately, rising government spending has not translated to meaningful growth and poverty reduction, as Nigeria ranks among the poorest countries in the world. In addition, many Nigerians have continued to wallow in abject poverty, while more than 50 percent live on less than US$2 per day. 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, import obligations, inflation rate, exchange rate, and national savings reveal that Nigeria has not fared well in the last couple of years.
In Nigeria 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 three decades. For instance, government total recurrent expenditure increased from N3, 819.20 million in 1977 to N4, 805.20 million in 1980 and further to N36, 219.60 million in 1990. Recurrent expenditure was N461, 600.00 million and N1, 589,270.00 million in 2000 and 2007, respectively. In the same manner, composition of government recurrent expenditure shows that expenditure on defense, internal security, education, health, agriculture, construction, and transport and communication increased during the years; 1977-2007. Moreover, government capital expenditure rose from N5, 004.60 million in 1977 to N10, 163.40 million in 1980 and further to N24, 048.60 million in 1990. The value of capital expenditure stood at N239, 450.90 million and N759, 323.00 million in 2000 and 2007 respectively.
1.3 Research Question
- To what extent has public expenditure affected the levels of poverty in Nigeria?
- Is there any significant long-run relationship between public spending and poverty level in Nigeria?
1.4 OBJECTIVE OF THE STUDY
In the context of this study, the following objectives will be achieved.
- To evaluate the impact of public spending on poverty reduction in Nigeria
- To determine the long-run relationship between public expenditure and poverty alleviation in Nigeria.
1.5 RESEARCH HYPOTHENSIS
Ho: Public expenditure has no impact poverty reduction in Nigeria
Ho: There is no direction of relationship between public expenditure and poverty reduction in Nigeria.
1.6 Significant of the Study
A research to investigate the impact and relationship between public expenditure and poverty reduction in Nigeria occupies an important detail which cannot be over-emphasized. The parastatas responsible for poverty reduction in Nigeria will find this study useful as it will unveil the current poverty profile and better strategies to alleviate them.
In the other hand, the federal government will benefit from this because it will help them to channel public fund on the economy judiciously. Finally, the rural dwellers whose represent gross poverty in Nigeria remains the most beneficiaries of this study because it will help government to make policies that will promote their standard of living.
1.7 SCOPE AND LIMITATIONS OF THE STUDY
This study is limited to analyze the impact of public expenditure and poverty reduction in Nigeria from 1981-2015. The choice of this period based on the economic history. The 1980s witnessed a radical change in Nigerian economy, which led to the introduction of structural adjustment program (SAP). It also the period when the standard of living index fell, was resulting in further rise in the incidence of poverty.
Furthermore, looking at how government expenditure helps in reducing of poverty, not all sectors of the economy were used. The sectors are those that have direct impact on people’s welfare, which include agriculture and water resources, health, housing and environment, education, transportation and communication.
This research work suffered some limitations because research in economics has never been easy with the researchers. In most cases the researcher is threaten to a number of factors such as; the mobility of involve in this research was stressful; the time required to carry out this research was highly limited as the researcher required time for other academic activities.
Finally, despite of the above problems encountered by the researcher efforts will be made to ensure the research is consistent with standard econometric research.