Impact of Defense Expenditure on Nigeria’s Economy 1986-2019
Chapter One
Objective of the study
The objective of this study is to examine the direction of the causal effect between defense expenditure and economic growth in Nigeria from 1977-2006. The choice of this period is underscore by the fact that considerable part of the period under discussion fall under Nigeria military rule couple with the involvement of Nigeria state in heavy international military peace keeping in some Africa countries; these developments influenced the amount expended on defense.
CHAPTER TWO
LITERATURE REVIEW
THEORETICAL FRAMEWORK
There has been towering controversy over the role of the state in the regulation of the economic system. While the Classical and the Neo classical Economists do not see any reason why government should intervene in the economy, Keynesian school of thought advocates the use of fiscal instruments to stimulate economic activities in time of recessions. The Classicists are of the opinion that the market forces will automatically bring the economy to long run equilibrium through adjustment in the labor market, while Keynesian argued that market mechanism regulation of the economy will fail to propel the economy back to equilibrium in the face of any maladjustment due to the rigidities inherent in the labor market. Thus, Keynesian prescribed expansionary fiscal policies to avoid long recessions.
Because of the effects of crowding out phenomena, there is the tendency for public goods to be substituted for private goods; this will create a gap in the private spending on some economic activities like education, health, transportation and other goods and services. The Classical and the Neo-classical schools found fiscal policy to be ineffective. In the same vein, the pressure of the public sector to increase their spending may compel them to source for financial resources in the credit market. This will result into higher interest rate which may hamper private investment.
However, the introduction of new growth theories (Romer 1986, Lucas 1988) suggests that there exist both temporary effect from government intervention during the transition to equilibrium; and a possible long term effect from government spending on growth. This submission is against the thesis of neoclassical growth model as formulated by Solow (1956) which did not prescribe the channels through which government spending may influence long run economic growth.
There are many ways that government activities can affect economic growth. The action may be beneficial and at the same time be detrimental. The positive side of government action can result in:
(i)The supply of pure public goods which may constitute a sizeable component of aggregate demand
(ii)The use of fiscal instrument like income taxes and transfer payments which can lead to more equitable redistribution of income
(iii)Government often acts as facilitator in the markets with asymmetric and imperfect information (Poot, 2000.)
The action of the state may also impede economic growth. This is possible as a result of competition between the less efficient public sector and the private sector in the credit market which may jack up interest rate thereby dislocating private investment and eventually hampering economic growth. Also, taxes imposed by the state can equally distort market prices and effective resources allocation.
Wagner‟s (1980) law suggested a different direction of causality between government spending and economic growth. Wagner argued that as the economy improves or expand, government spending tends to expand relative to national income. This thesis was built on the hypothesis that:
(i)Public functions can substitute for private activities
(ii)Government intervention is required to manage and finance natural monopolies
(iii)Expansion in the economy will lead to improvement in cultural and welfare expenditures
In summary, expanding state spending is seen as the product of economic development and not vice– versa.
CHAPTER THREE
METHODOLOGY
THE ECONOMETRIC MODEL
The econometric model used for this study is the supply model based on the aggregate production function approach. The model is based on the production function proposed in Feder (1983) when looking at how exports affects economic growth and then extended by Biswas and Ram (1986) to include a defense expenditure variable.
Given a two sector economy with a defense M production functions as
M = m(Lm , Km ) 1
and a civilian G production function
G = G(LG , KG , M ) 2
when the inputs Lm, LG, Km, KG are labor and capital share allocated to the defense and civilian sectors productivity respectively. The inclusion of M in 2 allows for an externality effect for the defense sector to the civilian sector. This externality effect can either be in form of a positive marginal product for defense in (2) or as a relative factor productivity differential for labor and capital in both sectors. The aggregate labor and capital supplies are
L = Lm + LG………………………………………………….. 3
K = Km + kG……………………………………………4
and Q is total national income or output
Q = M + G 5
Taking the total differential of (5) and dividing by Q gives
dQ/Q= ¶GdL/¶LQ+ ¶Gdk/¶KQ+¶G¶G/¶MQ
Equation 7 is the simple form of the Feder Ram model and shows how economic growth depends on labor and capital growth and defense all weighted by their relative shares in output. The partial derivatives, F are then found as estimated coefficients.
Thus the estimated equation for the study derived from the Feder – Ram model is
Y= a0+ a1 +inL+ a2 inK +a3indef+ e
CHAPTER FOUR
ESTIMATION AND ANALYSIS OF RESULTS
UNIT ROOT
TABLE 1 UNIT ROOT TESTS RESULT
CHAPTER FIVE
SUMMARY AND CONCLUSION
This study provides an empirical relationship between the real Nigerian defense spending and the real output by employing Feder – Ram supply side production function model. The study employed the unit root test of ADF and PP and found that the variables are stationary at first difference. Until recently, most economists examining the relationship between defense and growth assumed that the direction of causality was from defense spending to economic performance. In an initial attempt to examine this assumption, Joerding conducted a Granger causality test for 57 developing countries and concluded that previous studies which assumed the causality direction to be from defense to growth were Haired. Using Nigerian data from 1980 – 2006, our results suggest that, for this country, causality runs from economic growth to defense spending and not the other way around as had been suggested by Benoit (1973, 1978) and concluded by authors writing on Nigeria (Olaniyi
,1993). A lag structure of two years was found to be the correct specification in the model. For Nigeria, this suggests that at its level of economic development, a policy of increasing the defense budget to promote economic growth might be inappropriate. Instead, our finding suggested that to promote economic growth, these same funds might be better used at the margin in other government program such as investment in infrastructure.
REFERENCES
- Atesoglu H.S and M.J Muller (1990)”Defence Spending and Economic Growth”. Defence Economics 2(1) 89-100
- Alexander W.R.J (1990) “The Impact of Defence Spending on Economic Growth: A Multi- Sectoral Approach to Defence Spending and Economic Growth with Evidence From Developed Economies”. Defence Economics 2(1) 39-55.
- Barro R.J and Xavier Salai Martin (1995) Economic Growth. New York Mc graw Hill Benoit Emile (1973) Defence and Economic Growth in Developing Countries. Lexington: Lexington Books.
- —————–(1978) “Growth and Defence in Developing Countries” Economic Development and Cultural Change 26(2) 271-80.
- Bird R.M (1971) “Wagner’s Law: A Pooled Time Series and Cross Section Comparison” National Tax Journal 38 209-218.
- Dakurah H; S. Davies and R. Sampath (2001) “Defence Spending and Economic Growth In Developing Countries: A Causality Analysis” Journal of Policy Modelling 23 (6) 651-658
