Public Sector Spending and Macroeconomic Variables in Nigeria

Abstract

This paper examines public sector activities and macroeconomic variables in Nigeria within a period of forty years (1970-2010). With special focus on the effectiveness in the period of regulation (1970-1985) and deregulation (1986-2010) of the Nigerian economy. A test of causal relationships between government expenditure (GE) and other explanatory variables-GDP, unemployment (UER), inflation (IFR) Balance of payment (BOP) was examined using the following statistical tools – Augmented Dicky Fuller (ADF) stationarity test, Johanson’s co-integration test, OLS, multiple regression analysis and Granger causality test. The time series data were found to be stationary in the short-run and a number of co-integrating equations were found to establish long-run relationships among the variables of study. The results include:

1. Public sector was more effective though marginally in stimulating economic growth (measured by GDP) in the period of regulation and more effective in reducing unemployment and enhancing BOP in the period of regulation.
2. With respect to maintaining price stability, the public sector was significantly more effective in the period of de-regulation.

Granger causality test shows causal flow from government expenditure (GE) to BOP no causal flows to GDP, inflation rate (IFR) and unemployment (UER). We therefore conclude that though public sector is generally effective theoretically, yet it has inherent practical limitations (Social, Political, Cultural, Economic and Geographical) that sometimes tend to minimize its effectiveness. The theoretical implication therefore is to integrate public sector policy theory formation for effectiveness, because of the peculiarities of our situation. The paper therefore recommend appropriate policy mix improvement in quality of government expenditure, infrastructural development value – added export, regulated flow of FDI to retail sector, emphasis on import of capital good, and focus on the agricultural sector among others.