The Role of Economic Policy in the Diversification of Nigeria’s Economy
Chapter One
Objectives Of The Study
The broad objective of the study is to ascertain the role of economic policy in the diversity of Nigeria’s economics. The study has the following specific objectives:
To determine the impact of government expenditure on manufacturing sector output in Nigeria.
To ascertain the effect of tax revenue on manufacturing sector output in Nigeria.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
Conceptual Review
Peter and Simeon (2011) define fiscal policy as the process of government management of the economy through the manipulation of its income and expenditure and to achieve certain desired macroeconomic objectives. Central Bank of Nigeria (2011) defined fiscal policy as the use of government expenditure and revenue collection through tax and amount of government spending to influence the economy. Samuelson and Nordhaus (2002) defined fiscal policy as a government’s program with respect to the purchase of goods and services and spending on the transfer of payments, and as well the amount and type of taxes.
In finance, fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy. The two main instruments of fiscal policy are government taxation and expenditure. Changes in the level and composition of taxation and government spending can affect aggregate demand and the level of economic activity; the pattern of resource allocation; and the distribution of income (David, 2005; Mark and Asmaa, 2009; Chirag, 2010). This implies that Fiscal policy refers to use of the government budget to influence economic activities.
Geoff (2012) contended that fiscal policy involves the use of government spending, taxation and borrowing to affect the level and growth of aggregate demand, output and jobs creation. It is the government spending policies that influence macroeconomic conditions. These policies affect tax rates, interest rates and government spending, in an effort to control the economy. Fiscal policy is the means by which a government adjusts its levels of spending in order to monitor and influence a nation’s economy.
Various researchers have submitted that fiscal policy goals include the following: increasing employment opportunities; attaining full employment; stabilization of domestic prices; promoting economic growth and development through industrialization; achieving equity in income redistribution; achieving stable exchange rate; and increasing the rate of investment in the country (Anyanwu (2004); Omitogun and Ayinla (2007); Abeng (2009); CBN (2010) and Ogbole, Sonny and Isaac (2011)). Again, Afam (2012) maintained that fiscal policy is the aspect of government policy dealing with the raising of revenue through taxation and other sources and deciding on the level and pattern of expenditure for the aim of influencing economic activities.
Judging from the above definitions, fiscal policy can be seen as the government policy used to achieve full employment, stability of price level, sustainable economic growth and external balance and its instrument is the main instrument used in achieving macroeconomic targets. Nigeria for the past decades has maintained large fiscal policy measures in other to influence economic growth and activities. But the pertinent question is: has fiscal policy instrument stabilized the growth rate of manufacturing sector through its contribution to GDP?
The general aim of the study is to investigate how fiscal policy affect manufacturing sector and to further examine how these policy relate to manufacturing sector output and performance. Also, the effects of fiscal policy on capacity utilization are discussed.
Impact of Fiscal Policy on Manufacturing Sector Output
In recent time, various authors have suggested in the literature that fiscal policy has an important role in the growth of Nigerian economy through manufacturing sector output and that high growth rates are found in the economy where the manufacturing sector share in GDP is increasing. Unfortunately, the impact of fiscal policy using productive government consumption expenditure on manufacturing sector output in Nigeria present indiscriminate result, as shown in the figure 1 below.
CHAPTER THREE
RESEARCH METHODOLOGY
This section describes the model specified for the problem, the variables used and their definition. It also describes the different test that is to be carried out. This test refers to the diagnostic test such as; autocorrelation test, stationarity test, co-integration test, e.t.c. It also talks about the hypothesis test, method of data analysis and sources of data.
Data analysis
The data collected were analyzed and interpreted using relevant statistical formulations. The analysis of the data was based on the objectives. The essence of using statistical formulations is that the previous works reviewed were based on empirical analysis and we cannot ascertain the impacts of fiscal policy on manufacturing sector with hearsay. Objective one and two was tested with the use of error correction model, graph and co- integration test. The results of the analysis were used to assess the impact of fiscal policy on the manufacturing sector in Nigeria as depict in appendix.
The general equation for ECM and Co-integration test is
Yt = β0 + β1X1t+…+βnxnt + Ut and ∆yt = β1 + β2∆X1t + … + βn∆Xnt +δut-1 +εt. Yt is the dependent variable, β0 is the intercept term, β1
is the regression coefficient, Xt is a set of explanatory variables and µt is the error term. We therefore re-specify the model above to capture the objective of our study.
MOP = F(GEXP, GTR). Where MOP is manufacturing sector output, GEXP is government expenditure and GTR is government tax revenue.
METHOD OF DATA COLLECTION
The model will be estimated by the use of ordinary least square (OLS) technique of the classical regression model. The choice of the model and the technique is justified by the BLUE properties of its estimation. E View 3.1 is used in the estimation of parameters of the model.
CHAPTER FOUR
ANALYSIS OF DATA AND PRESENTATION OF RESULTS
INTRODUCTION
This section covers the analysis of data and presentation of results, the hypothesis tested and the findings of the study were also discussed.
CHAPTER FIVE
CONCLUSION AND RECOMMENDATION
CONCLUSION
The study focuses on the impact of economic policy on the manufacturing sector in Nigeria. Manufacturing sector is seen as an engine of growth in the developmental processes of the
economy. The study adopts graph, co-integration and error correction model on a time series data from 1990 to 2010. The study regressed fiscal policy proxied by productive government consumption expenditure and government revenue on manufacturing sector output. The regression result reveals that about 94.10% of the systematic variation in the dependent variable is explained by the two independent variables such as Government Expenditure (GEXP) and Government Revenue (GR). The F-staistic is significant at the 5% level showing that there is a linear relationship between the MOP and the two independent variables. The result revealed that government expenditure have positive and significant effect on manufacturing sector output in Nigeria, while government revenue have negative and significant impact on manufacturing sector output in Nigeria based on the magnitude and the level of significance of the coefficient and p-value. The result also reveals that there is long- run relationship between fiscal policy and manufacturing sector output, as evidenced by the co-integration.
The researcher concluded that the success of fiscal policy in promoting manufacturing sector depends on the level of public revenue available, the direction of public expenditure and its implementation.
RECOMMENDATIONS
On the basis of the findings of the study, the following recommendations are proffered towards enhancing impact of fiscal policy on manufacturing sector in Nigeria.
- Expansionary policies on fiscal policy measures should be encouraged as they play vital role for the growth of the manufacturing sector output in Nigeria.
- There is need to redirect fiscal policy measures towards making Nigeria a producer nation through manufacturing sector which in turn would lead to economic growth and development.
- Government economic policies should be on diversification of the economy to enhance the performance of manufacturing sector, so as to create more employment opportunities, because it may be a more effective way of reducing the level of unemployment and increasing the growth of the economy.
- Fiscal policy should be given more priority attention towards the manufacturing sector by increasing the level of budget implementation, which will enhance aggregate spending in the economy.
- Consistent government implementation will contribute to the increase performance of manufacturing sector.
REFERENCES
- Abeng, A. N. (2009). The Nigerian Economy and Current Economic Reforms. Ibadan: Olorunnishola Publishers. 345P
- Adebayo, R. I. (2011). Zakat and Poverty Alleviation: A lesson for the Fiscal Policy Makers in Nigeria. Journal of Islamic Economics, Banking and Finance, 7(4): 26-41.
- Adebiyi, M. A. (2011). Inflation Targeting: Can we establish a stable and predictable relationship between Inflation and Monetary Policy Instrument in Nigeria and Ghana? CBN Working Paper Series.
- Adebiyi, M. A. and Babtope, O. B. (2004). Institutional Framework, Interest Rate Policy and the Financing of the Nigerian Manufacturing Sub-Sector. SAGA Publication Paper Forum, South Africa.
- Afam, A. M. (2012). Banking Sector Reforms and the Manufacturing Sector: The Manufacturing Association of Nigeria Perspective. Central Bank of Nigeria Publication.
- Ajayi, O. D. (2011). The collapse of Nigeria’s manufacturing sector. The Voice News Magazine. Retrieved online at www.the voicenewsmagazine.com on 15/06/2012
- Anyanwu, C. M. (2004). Productivity in the Nigerian Manufacturing Industry. Central Bank of Nigeria Research Department Publication. 450P