IMPACT GOVERNMENT EXPENDITURE HAS PRIVATE INVESTMENT IN NIGERIA

The interest of economists in the relationship between government spending and private investment is motivated mainly by the controversy over the crowding out or crowding in effect of government spending on private investment. With the renewed interest in the role of the private sector as an engine of economic growth, the examination of this relationship is given further impetus. The idea of a private sector led economic growth in Nigeria is therefore traceable to the observed success of the major industrialized countries; which attributed to the resilience of their organized private sector.

As a result of the poor performance of the economy over the period in which government played the leading role in the economy, there was a change in the expected role of the government. To this end, market oriented structural reform programmes such as privatization; deregulation and liberalization were adopted to ensure a reduction in the role of government in the economy. The guiding principle in this redefined role of government was that government should concentrate its resources in areas that compliments rather than crowd-out private sector investment, thereby creating an enabling environment for the private sector investment. 

To address the inefficiencies in public expenditure management in Nigeria, the federal government introduced wide range of policies and institutional reforms, geared towards privatizing the economy, particularly since 1986 when the structural adjustment program (SAP) was introduced. The national economic empowerment and development strategy (NEEDS) was launched for the period (2004-2007) in Nigeria which emphasized on the evolution of a private sector led market oriented economy with competition as a driving force. The key elements of this strategy include privatization, deregulation, liberalization and reducing the influence and involvement of government in the economy.

The Nigerian economy is a mixed system in which the government and the private sector co-exist. The two could play complimentary roles to enhance economic growth. Thus, it is in line with this that the use of government expenditure to enhance private investment is being advocated.

However, as Aschaver (1989a) noted, the precise effect of government expenditure on private investment depends on the type of government expenditure being considered. Certain categories of government expenditure crowd out private investment while others complement or crowd-in private investment. This study therefore used a time series data set on Nigeria for the period 1975-2009 to examine the impact of federal government expenditure on private investment in the economy.

The failure of the government to achieve rapid and sustained economic growth of the Nigerian economy spurred the debate on whether the government or the private sector should spearhead the nation’s economic growth process. In the five decades of her post-independent era, the government dominated the economic activities of the country with tremendous increases in its expenditure. For example, federal government expenditure as a percentage of GDP increased by 220.6% between 1975 and 2005. (CBN, Statistical Bulletin, 2009).

 In Nigeria, private investment has been persistently low, recording less than 6% growth rate since 1970 (Chibber and Palwa, 1994). It was identified that this low performance of private investment is a factor responsible for the low growth rate of Nigeria’s

Gross Domestic Product (GDP). The ratio of domestic investment to GDP in 2005 was only 21 percent. (World Bank; World Development Indicators).

Private sector operators argued that the factors which militate against their contributions to the economy include high cost of doing business, unstable macroeconomic policies, infrastructural bottlenecks, faltering consumer spending, lack of capital investment and stifling effect of multiplicity of taxes. The very low productivity/uncompetitivenes of the private sector is therefore as a result of the hostile business environment.