THE IMPACT OF GOVERNMENT EXPENDITURE ON MANUFACTURING SECTOR OF NIGERIA FOR 20YEARS

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Manufacturing sector development is a basic tool for attaining a desired level of economic growth and development by any nation hence, countries across the world develop and implement policies on industrialisation even our dear country: Nigeria (Echekoba and Ananwude, 2016). Theoretically, promoting economic growth and development through government expenditure is mainly viewed from two distinctive perspectives. The first is the Keynesian and endogenous theories proponents who posited that planned sectorial government expenditure is a veritable tool to achieving sustained growth. The classical together with neoclassical theories is the second aspect which in Twumasi [2012], view governments as inherently bureaucratic and less efficient,  and  as  a  result  they  tend  to  hinder rather  than  facilitate economic  growth.  Beyond the Keynesian and Neoclassical arguments, there are also the Ricardian economists who are of the  opinion  that  a  country  could  experience growth  and  development  without  government expenditure. In order words, changing the consumption pattern of citizens is cumbersome notwithstanding the amount of money the government injects in the economy through expenditure. The term government capital expenditure is defined as a spending on assets. It is the purchase of items that will last and be used time and time again in the provision of good or service. In the case of government, examples would be the developing of a new hospital, the procurement of new computer equipment or net works, constructing new roads etc. (IMF, 2010). Also according to CBN (2011), Government expenditure is the money spent on goods that are classified as investment goods. This is to say, spending on things that last for a range of time. This may also involve investment in hospitals, schools, power sector, telecommunication and road construction. Government expenditure plays a role in output and capacity utilization of manufacturing sector in Nigeria has been of more concern, despite the fact that, the government had embarked on several policies aimed at improving the growth of the Nigerian economy through the contributions of manufacturing sector to the economy and capacity utilization of the sector (Adebayo, 2010; Peter and Simeon 2011 and Loto, 2012). Manufacturing sector refers to those industries which are involved in the manufacturing and processing of items and indulge or give free rein in either the creation of new commodities or in value addition (Adebayo, 2011). According to Dickson (2010), manufacturing sector accounts for a significant share of the industrial sector in development countries. The end product can either serve as completed goods for sale to customers or as intermediate goods used in the production process. Loto (2012) refers to manufacturing sector as an avenue for increasing productivity in relation to import replacement and per-capita income which causes unrepeatable consumption pattern. Thus, manufacturing industries are the key variables in an economy and motivates conversion of raw materials into finished goods. In the work of Charles (2012), it is posited that the manufacturing industries create employment which helps to boost agriculture and diversify the economy on the process of helping the nation to increase its foreign exchange earnings. Manufacturing industries came into being with the occurrence of technological and socioeconomic transformations in the western countries in the 18th -19th centuries (CBN, 2011). This period was widely known as industrial revolution. It all began in Britain and replaced the labour intensive textile production with mechanization and use of fuels (Olakunori, and Ejionueme, 1997) introduction to marketing. Manufacturing sector are categorized into; Engineering sector, construction sector, electronics sector, Chemical sector, Energy sector, Textile sector, food and beverage sector, metal-working sector, plastic sector, transport and telecommunication sector (CBN, 2012). In recent times, some manufacturing industries in Nigeria have been characterized by declining productivity rate, by extension employment generation which is caused by inadequate electricity supply, smuggling of foreign products into the country, trade liberalization, globalization, high exchange rate and inadequate government investments in infrastructure. It has been argued that the persistent poor performance of the manufacturing sector in Nigeria is mainly due to massive importation of finished goods, inadequate financial support and other variables which has resulted in the reduction in capital utilization and output of the manufacturing sector of the economy (Tomola, Adebisi and Olawale, 2012). Looking at the manufacturing sector share in the GOP in recent years (1999-2018), it has not been relatively stable. This may be contributed to the increase in government expenditure in recent times. Furthermore, in Nigeria, the level of growth in manufacturing sector has been affected negatively because of high lending rates, which invariably is responsible for high cost of production (Adibiyi, 2001 and Rasheed, 2010). Okafor (2012) further observed that the level of Nigerian manufacturing sector performance has continue to decline because of low implementation of government budget and difficulties in assessing raw materials. Based on the forgoing relationship between Government capital expenditure and manufacturing sector, a study such as this is necessary. This study, therefore, is designed to investigate the impact of government expenditure on the manufacturing sector of Nigerian economy.

1.2 STATEMENT OF THE PROBLEM

Some studies have suggested that increase in government expenditure on socio-economic and physical infrastructures has impact on long run growth rate. For instance, government expenditure on health and education raises the productivity of labour and increase the growth of national output. Similarly, expenditure on infrastructure such as road, power etc. reduces production costs, increase private sector investment and profitability of firms (Barro, 1990; Barro and Sala-i-Martin, 1992; Neill, 1996). On the other hand, Tullock (1980) observed that growth in government spending causes deadweight loss of output, gives rise to additional inefficiencies by encouraging rent seeking by various interest groups, unhealthy competition with the private sector over resources and investment opportunities. The persistence of these problems in the Nigerian economy therefore makes it necessary to study the performance of the expenditure policy of the government, particularly the capital component, and not just its size as this could have great impact on the manufacturing sector as a component of the growth. This work is expedient as the Central Bank of Nigeria’s statistical bulletin (CBN, 2008) reveals that the contribution of manufacturing sector to the Nigerian economy is insignificant as compared to the oil and the agricultural sectors despite several strategies embarked upon by government which were aimed at improving industrial production and capacity utilization of the sector. Most studies in Nigeria had focused on the effect of total public expenditure on the manufacturing sector and economic growth with conflicting findings. For instance, while some conclude that government expenditure has a positive effect on manufacturing output (Mwafaq, 2011; Muritala and Taiwo, 2011; Sikiru and Umaru, 2011; and Peter and Simeon, 2012), others found that government expenditure has not been effective in the area of promoting manufacturing sector development and sustainable economic growth in Nigeria (Nurudeen and Usman, 2010; Ighodaro and Okiakhi, 2010; Omitogun and Ayinla, 2007). The controversy might stem from non-disaggregation of government expenditure to know the component that contributes more significantly to economic growth through its contribution to manufacturing sector development. Only a few had examined the effect of government expenditure on manufacturing output in Nigeria. The work will therefore investigate the impact of government expenditure on manufacturing sector of Nigeria by looking at the Short and Long run effects in order to provide better insight on prudent and efficient allocation of public funds so as to bring about economic growth and development via manufacturing sector development.

1.3 AIMS AND OBJECTIVES OF THE STUDY

The major aim of the study is to examine the impact of government expenditure on manufacturing sector of Nigeria.  Other specific objectives of the study include;

1. To analyze the trend between government capital expenditure and manufacturing sector output.
2. To examine the role of manufacturing sector in an economy.
3. To examine the impact of government expenditure on manufacturing sector in Nigeria
4. To examine the major constraints confronting manufacturing firms in Nigeria.
5. To examine the relationship between capital expenditure and manufacturing sector in Nigeria.
6. To examine ways various government policies can be used to redress the persistent decline in the manufacturing sector

RESEARCH QUESTIONS

1. How is the trend between government capital expenditure and manufacturing sector output?
2. What are the roles of manufacturing sector in Nigerian economy?
3. What is the impact of government expenditure on manufacturing sector in Nigeria?
4. What are the major constraints confronting manufacturing firms in Nigeria?
5. What is the relationship between capital expenditure and manufacturing sector in Nigeria?
6. What are the ways various government policies can be used to redress the persistent decline in the manufacturing sector?

RESEARCH HYPOTHESES

Hypothesis 1

1. : There is no significant impact of government expenditure on manufacturing sector in Nigeria.
2. : There is a significant impact of government expenditure on manufacturing sector in Nigeria.

Hypothesis 2

1. : There is no significant relationship between government expenditure and manufacturing sector in Nigeria.
2. : There is a significant relationship between government expenditure and manufacturing sector in Nigeria.

1.6 SIGNIFICANCE OF THE STUDY

This study will contribute immensely in aiding the government, policy makers, economic planners and the academia generally. It will provide an insight and understanding to the
government on how to be prudent in spending public funds that would bring about economic growth and development. It is also of immense help in providing an insight and knowledge to the general public, policy makers, economic planners, and manufacturing sector regulatory authorities on the impact of government expenditure on manufacturing sector in Nigeria. To the academia, the findings of the study will contribute to the available literature on the current scenario of manufacturing sector in Nigeria and its level of contribution to the GDP. The findings of this research will assist monetary authorities in assessing the performance of the fiscal policy tools in Nigeria particularly in terms of their impact on the output of manufacturing sector. This work is also of immense benefit to the policy makers and economic planners in terms of using its findings in formulating and implementing appropriate policy measures towards accelerating economic growth through the manufacturing sector. The study would also be of immense benefit to students, researchers and scholars who are interested in developing further studies on the subject matter.

1.7 SCOPE AND LIMITATION OF THE STUDY

The study is restricted to the impact of government expenditure on manufacturing sector of Nigeria, a case study of manufacturing firms in Abia state.

1. LIMITATION OF THE STUDY

Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview)

Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1. DEFINITION OF TERMS

Government Expenditure: It refers to the purchase of goods and services, which include public consumption and public investment, and transfer payments consisting of income transfers (pensions, social benefits) and capital transfer.

Economic Growth: This is a gradual but steady change in an economy and it comes about by the increase in savings and population. The growth in economic welfare is a measure of economic growth.