PUBLIC EDUCATION EXPENDITURE AND ECONOMIC GROWTH IN NIGERIA

ABSTRACT

Theoretical and empirical evidences support the prime role of public education expenditure in rapid and persistent economic growth. However, available statistics in Nigeria does not seem to support this view. An average of 5.72 per cent of public expenditure was spent on education between 1970 and 2010. During the same period, economic growth was not only inconsistent, but averaged 0.6 per cent. Public education expenditure, no doubt promotes educational attainment which could be regarded as a proximate target. It could also have a direct effect on economic growth through the multiplier effect of government spending. These relationships are seldom captured by empirical studies especially those based on Nigerian data. Also issues such as endogeneity problem associated with growth empirics are often overlooked. This is evident in the specification of empirical models and consequently the lack of consensus in the results obtained. In a nutshell, the channel through which public education expenditure affects economic growth is not yet well understood. This study examines the direct and indirect effects of both public recurrent and capital expenditure on education and economic growth in Nigeria from 1970 to 2010.The Instrumental Variable Two Stage Least Squares (IV2SLS) estimation technique which ensures both unbiased and consistent coefficient estimates is employed. The result reveals that public education expenditure has both direct and indirect effects on economic growth. The indirect channel has been more relevant for economic growth in Nigeria. Thus, total public education expenditure can promote economic growth without necessarily first improving education attainment.. The study also reveals that public recurrent education expenditure (pree) and public capital education expenditure (pcee) have different effects on economic growth. The regression results suggest that capital expenditure has greater effect on education (proxied by secondary school education) while recurrent expenditure has greater effect on economic growth. However, to maximize the benefits from public education expenditure, strategies that ensure greater efficiency of public education expenditure were suggested.

CHAPTER ONE

INTRODUCTION

1.1         BACKGROUND TO THE STUDY

The foremost macroeconomic objective of governments in virtually all countries is the achievement of rapid and sustainable economic growth with price stability. Consequently, the ultimate aim of macroeconomic policy is to increase the material welfare of the community (Iyoha 2002, Vaish 2002). The achievement of economic growth leads to greater economic prosperity. Increasing overall prosperity improves the lives of those able to partake in the system. People are better able to provide for their needs and fulfil their wants, without the use of force. This rising prosperity is empirically linked to higher overall levels of human happiness and betterment. Conversely, without economic growth, economies stagnate and nations are unable to provide for the well-being of their citizens. Economic failure historically causes a loss of trust and social upheaval, frequent and ugly triggers of social conflicts. It behoves one to recognize this and do what is possible to remedy it (Zipfel, 2004).

An examination of available data show that Africa‘s gross national income (GNI) per capita declined by almost 10 per cent between 1980 and 2004 (African Development Bank 2006; 37). Specifically, Nigeria‘s GNI per capita declined from US$652 in 1980 to US$390 in 2004. Ironically, some countries in Asia such as, the Republic of Korea, Singapore, Taiwan and Thailand (the Asian Tigers) tripled their per capita income within the same period (Maddison, 2001). The poor performance in Africa could be attributed to the slow or negative growth rate in the member countries (Easterly 2001, and Artadi and Sala-i-Martin 2003).

At an average economic growth rate of 0.602 per cent (between 1970 and 2010), it will take Nigeria more than a century to double its 1970 per capita income. However, available statistics show that Republic of Korea, Singapore, Malaysia, and United States of America (USA), as at 2007, have already increased their per capita income by 7.6, 6.7, 5.0, and 2.1 folds respectively (see United Nations Statistical Division). This does not come as a surprise considering the average economic growth rate of these countries during the period under review.

There is a rich literature (theoretical and empirical) on the determinants of long run economic growth, which include natural, economic, political, sociological and geographical factors (Solow 1956, Lucas 1988, Barro 1990, Aghion and Howitt 1992, Sala-i-Martin 1997, Maddison 2001, Rogers 2003, Zipfel 2004, and Harberger 2005). A review of existing literature shows a continuous extension of the factors that determine economic growth. This is due partly to the inability of existing theories to explain growth (or lack of growth) patterns. The shortcomings of the exogenous growth theory (such as its inability to account for observed growth and lack of convergence among countries) led to the development of the endogenous growth theory. Subsequently, other factors such as institutions, poor infrastructure, imperfect capital and goods markets and geography, amongst others have been identified to have significant impact on the growth slowdown of developing countries. However, in recent times there has been a heated debate on the efficacy of both the exogenous and endogenous growth theories in the explanation of growth process in the world.

In an attempt to unravel the factors behind the tragedy of economic growth in Africa, Artadi and Sala-i-Martin (2003) identified the following as significant factors: expensive investment goods, low levels of education, poor health, adverse geography, closed economies, too much public expenditure and too many military conflicts. They contended that if the values of these determinants in Africa had been those of the Organization for Economic Co-operation and Development (OECD) countries, the economic performance of Africa would have been better than was experienced.

In a similar vein, available statistics show the median per capita income growth in developing countries (which include all African countries) to be zero between 1980 and 1998 in spite of numerous policy reforms aimed at economic growth. Hence, Easterly (2001) classifies the period as a lost decades for developing countries. He opined that in accordance with the standard growth regression model, Africa should have experienced a growth in per capita income above 2.5 per cent (which is the average growth rate of per capita income between 1960 and 1979). Easterly suspects factors like increase in world interest rate, the increased debt burden of developing countries, the growth slowdown of the industrialised world, and skill-biased technical change to be responsible for the stagnation in developing countries.

The need for this study is best captured by Handelman (2006) who noted that the challenges facing the less developed countries of Africa, Asia, Latin America, the Caribbean, and the Middle East today appear daunting. They include political, economic and social challenges, which are capable of provoking warfare, internal violence, and massive human suffering. According to Handelman, these challenges are not peculiar to less developed countries only. They are also found in industrialized economies. However the scope and persistence of the developing world‘s political, economic and social challenges pose a concern for both domestic governments and the world at large. In concluding their article on The Economic Tragedy of the XXth Century: Growth in Africa, Artadi and Sala-i-Martin (2003) stated that ―Africa‘s growth performance was the largest economic disaster of the 20th century. We can prevent it from being the largest disaster of the next century. In other to prevent the repeat of the economic disaster of the past, the history and experiences of advanced countries is very relevant.

Studies have shown that investments in human capital are essential for sustaining economic growth over time (see section 2.2.2.) The law of diminishing returns suggest that investments in physical capital and land eventually fail to result in economic growth. Yet, countries such as the United State, Japan, and many European nations have sustained economic growth over the past century. Thus, much of the growth in per capita income and economic productivity have been attributed to heavy investment in capacity building of workers and a better educated labour force. Data on economic output and human capital across countries from 2000 to 2005 shows a positive correlation between the level of economic output and human capital – measured by the combined indexes of education and health in Human Development Index. (See Human Development Report 2009).

According to the United Nations Development Programme (UNDP 2005;24), gaps in opportunity for education remains large. It noted that in an increasingly knowledge-based global economy, about 115 million children worldwide are denied the most basic primary education. Most of these children are in Sub Saharan Africa (SSA) and South Asia. Moreover, while the primary enrolment gap may be closing, the gap between rich and poor countries measured in terms of average years of education is widening. This is before taking into account differences in educational quality. Undoubtedly, these inequalities of today are the global social and economic inequalities of tomorrow.

The role of human capital in achieving sustainable economic growth and the responsibility of the public sector in this regards has been recognized by Weisbrod (1962:106). According to Weisbrod, ―investment in future productivity is occurring increasingly outside the private market and in intangible forms. Our traditional conception of investment as a private market phenomenon and only as tangible plant, machinery and equipment must give way to a broader concept which allows not only for government investment but also for intangible investment in the quality of human capital‖. He also maintained that more attention should be paid to the adequacy of the level of expenditure on people. This idea was recently encapsulated in a model of economic growth. Thus, the role of human capital in the adoption and improvement of technology has been demonstrated by endogenous growth theorists such as Romer (1986, 1990), Lucas (1988), and Becker, Murphy & Tamura, (1990). Another class of models known as the ―AK type, replaced the assumption of diminishing marginal productivity of capital with the non-diminishing marginal productivity of the accumulable factor of production to achieve positive and sustainable steady state growth rate in the economy. These include Jones and Manueli (1990) and Rebelo (1991).

Education has been identified as the most vital instruments in the process of economic growth and development. However, one issue that has not been adequately addressed is its provision in the required quantity and quality. For instance, while secondary school gross enrolment ratio in 2007 stood at 101 percent for high income countries, the value was 38 percent for low income countries (LDCs). Even at that, Nigeria‘s value stood at 32 percent which was six percent lower than the average for LDCs (World Development Indicator 2011). The nature of education, the prevailing economic system and government priority are factors that could influence its level in any economy.

Furthermore, though education is generally believed to play a crucial role in the process of economic growth, its relative importance and transmission mechanism remain unclear. In view of the above, this study sets out to evaluate the effects of public education expenditure in educational output and economic growth in Nigeria.

1.2 STATEMENT OF THE RESEARCH PROBLEM

Studies on the relationship between public education expenditure and economic growth present mixed results (see section 2.2.4.2). Most empirical studies have supported the endogenous growth theory which stipulates that public policy is instrumental to improvement in economic growth rate (Lucas 1988; Barro and Sala-i-Martins 2004). Initial studies on the effect of public expenditure on growth centred on the aggregate values of government expenditure measures. Subsequent studies addressed the effects of the components of government expenditure in terms of functional and economic divides. Most of these studies found public expenditure on education to be most significant (Poot, 1999; Odedokun, 2001). Consequently, recent researches have focused on the effect of public education expenditure on economic growth. Just like total government expenditure, the functional components also have their economic components (that is recurrent and capital expenditure); which serve different purposes. However, very few studies have considered this issue (see Oluwatobi and Ogunrinola 2011).

Generally, most studies on the relationship between public education expenditure and economic growth have adopted a partial approach. While some evaluate the effect of public education expenditure on economic growth, others analyze the effect of education on economic growth: thus, ignoring the link between education expenditure and education. The expected positive influence of education expenditure on the level of education may be elusive especially in highly corrupt economies. In this case, only the direct effect of public education expenditure will be felt. Few studies such as Jung and Thorbecke, (2001) and Baldacci, Clements, Gupta and Cui, (2004) which examined the relationship among public education expenditure, educational attainment and economic growth in a concise manner adopted the aggregate values of education spending. In addition, Jung and Thorbecke adopted a neoclassical multisector computable general equilibrium (CGE) approach, while Baldacci et al used a panel data regression model. These studies failed to test for endogeneity. In Nigeria, average public education expenditure to total government expenditure between 1970 and 2010 is 5.72 per cent. It ranged between 0.51 and 10.8 per cent during the period under review (CBN Statistical Bulletin, 2008). On the contrary, average economic growth rate for the period (1970 – 2010) was 0.6 percent. This ranged between -15.4 per cent (in 1981) and 30.5 per cent (in 2004) during the period under review. At this growth rate, it would take more than a century for Nigeria to double its 1970 per capita income.

The statistics presented above indicates that the investment in education has not produced the desired level of human capital and economic growth in Nigeria

1.3 RESEARCH QUESTIONS

The issues raised above have provoked series of questions which this study attempts to provide answers.

1. How effective is public education expenditure in promoting education and economic growth?
2. What is  the  nature  of  the  relationship  between  public  education expenditure      and economic growth?

• Do public recurrent and capital education expenditure have the same effect on education and economic growth?

1. To what extent does the endogenous growth theory explain growth trend in Nigeria?
2. Through what channel has public education expenditure influenced economic growth in Nigeria?

1.4 OBJECTIVES OF THE STUDY

The main objective of the study is to evaluate the relationship between public education expenditure and economic growth in Nigeria.

Specific objectives of the study are to;

1. Estimate the effect of public education expenditure on educational output in Nigeria.
2. Estimate the effect of public education expenditure on economic growth in Nigeria.

• Evaluate the effect of education on economic growth in Nigeria.

1. Examine the relative effectiveness of recurrent and capital expenditures on education in Nigeria
2. Estimate the effect of both recurrent and capital education expenditures on economic growth in Nigeria.

1.5 HYPOTHESES OF THE STUDY

The following hypotheses were tested in this study.

1. There is no significant difference between the estimated effect of aggregate public education expenditure and those of its components.
2. Public education expenditure has no significant effect on in Nigeria
3. Education has no significant effect on economic growth in Nigeria
4. Public education expenditure has no significant effect on economic growth in Nigeria.

1.6 SCOPE OF THE STUDY

The study is based on data from Nigeria between 1970 and 2010. Public education expenditure could be measured in various ways –ratio of education expenditure to total government expenditure; ratio of education expenditure to gross domestic product; per capita expenditure on education; total absolute value of budgetary allocation to education; and proportion of education expenditure devoted to the three levels of education. Although emphasis was on a modified version of the ratio of education expenditure to total government expenditure, the first two measures were also employed to test for the robustness of the model.

Basically, there are three tiers of education in Nigeria – primary, secondary and tertiary. The study focused on secondary school education because it is the level of education required to ensure industrialization which results in sustained economic growth (O‘ Callaghan, 2002). Both the quantity and quality of education have been found to be instrumental in enhancing economic growth. However, due to insufficient data, the study is restricted to the quantity of education. Also, the different measures of education include enrolment rate, completion rate and average years of schooling. This study adopts enrolment rate. Other measures were not considered due to the dearth of data.

1.7 SIGNIFICANCE OF THE STUDY

Growth models offer useful predictions that aid policy decisions. Misspecification of a regression model will lead to biased coefficient estimates, which will invariably lead to misleading policy recommendations. The adoption of policy options emanating from inaccurate findings could render government intervention, especially in the education sector inefficient. It takes a good understanding of the relationship among investment in education, its outcome, and economic growth to design an appropriate policy measure that will enhance the adequate supply of education in an economy. Thus, a representative model that takes into consideration the inter-relationship among public education expenditure, education attainment and economic growth will ensure appropriate allocation and use of public funds.

The outcome of this study will serve as a guide to policy makers in the Ministries of Finance, Education and the National Planning Commission as well as other relevant government department and agencies interested in the development of the education sector in particular and the economy in general. It will also serve as a useful reference for future researchers in this field.

1.8 DEFINITION OF TERMS

1. Public Education Expenditure (PEE)

This refers to federal government expenditure on education. The two measures adopted in this study are ratio of government expenditure on education to total government expenditure; and ratio of government expenditure on education to gross domestic product (GDP). Derivatives of these variables are, Public Recurrent Expenditure on Education (PREE) and Public Capital Expenditure on Education (PCEE).

1. Outcome

Outcome as used in this study refers to educational attainment. Two major indicators used in the literature are enrolment rate and average years of schooling. Budgetary outlay is regarded as input. Its output includes schools, materials, and number of teaching and non-teaching staff employed. Thus, the Outcome of PEE is different from the outcome of education which is economic growth as depicted in Table 1.1 below..

It is important to note that the efficiency of PEE determines its output. Although the output of PEE determines its outcome, it does not guarantee it. Reason is that the influence of other factors such as the opportunity cost of education may outweigh the effect of the provision of schools and other materials. In view of this using education as a proxy for PEE may not be appropriate.

Another education variable is the number of schools, teachers and materials (STM). This could be regarded as an input whose output is enrolment. Assuming regular attendance, completion and quality, the consequences of enrolment (which constitutes an outcome) include literacy and numerate skills (for primary education), adaptation to current technology (for secondary education), and the creation and dissemination of knowledge (for tertiary education).

Table 1.1 Relationship between input, output and Outcome of Education

Variables

Source; Author‘s design

1.9 OUTLINE OF THE STUDY

The study is divided into five chapters. Following this introductory chapter, chapter two is devoted to a review of theoretical, empirical and methodological literature relating to the issue of public investment and economic growth. Two endogenous growth models which form the backbone of this study are outlined in chapter three. The chapter also contains the research design for the study. Other issues addressed are the method of estimation as well as the definition of variables and sources of data. Chapter four presents a trend analysis of the main variables in the study. Following the trend analysis are the regression results for the study and discussion. Based on the major findings from the analysis of regression results, some policy implications were presented. Chapter five concludes the paper with summary and recommendation for further studies.