GOVERNMENT EXPENDITURE, INFLATION RATE AND ECONOMIC DEVELOPMENT IN SUB-SAHARAN AFRICAN COUNTRIES (1980- 2022)

CHAPTER ONE

INTRODUCTION

1.1background Of The Study

The role of government in economic growth is an issue of debate since the time of Adam Smith. Recent wave of privatization in many developing and developed countries is based on perceptions that, "for sustainable development and efficient output, the role of government in economic policies should be reduced" (Agarwal, 2019). Economists are of two different views about the role of government in economic activities. According to the neo- classical economists, reducing the role of private sector by crowding-out effect is important because it reduces the inflation in the economy; increase in public debt, increases the interest rate which reduces inflation in the economy as well as output. The new-Keynesians present the multiplier effect in response and argue that the increase in government expenditure will increase demand and thus increase economic growth. The vision of ensuring sustainable economic development and reduction of mass poverty is enshrined, in one way or another, in the government’s development strategy documents of virtually all developing economies. In this respect, economic growth, which is the annual rate of increase in a nation’s real GDP, is taken as main objective for overcoming persistent poverty and offering hope for the possible improvement of society (Agarwal, 2019).

Faced with the financial crisis and global economic recessions, governments have rediscovered the importance of public finance. They use it to rescue the bankrupt banks, and to create more economic activity to hold back recession. Tens of millions of workers are in jobs today and would be unemployed without that economic boost from public spending. But now there is a backlash demanding that the deficits used to create the stimulus must be cut back by cutting public spending on a grand scale. The backlash comes not only from governments, but from international institutions, led by the International Monetary Fund (IMF) and World Bank (WB), which are insisting that public services are now ‘unaffordable’, and that healthcare, education and pensions in particular should be dependent on the market (World Bank 2020).

Government expenditure has remained one of the most important macroeconomic management tool for the controlling of the level of demand and money supply in an economy. If well managed, it can put an economy on the path of sustainable growth and development. Government in any society performs two major/main functions namely: protection and provision of basic infrastructure/amenities (Shabana, Mohd, & Nazia, 2017). The protection function of the government consists of the creation of the rule of law and enforcement of rights which help minimize risk of criminality and external aggression. Under the provision of basic infrastructure/amenities, the function includes the provision of good health facilities, education, power, agriculture, and transportation, build bridges, road etc. performing both functions, the government is required to spend huge amount of resources, especially in nations where the level of these infrastructure/amenities is low especially in Sub-Saharan Africa. The Nigeria government operates a cash budget system where expenditure proposal are anchored on projected revenue. To meet this projected revenue, Government has three policy options; to borrow, to tax or both. Any of those options chosen has direct implication on the economic growth (Shabana, Mohd, & Nazia, 2017).

Government spending on public infrastructure can impact directly and indirectly on the macro economy. In line with this, Saidu, & Ibrahim, (2019) believe that a strong positive relationship exists between the level of output and capital expenditure by government. While Brülhart, Jametti, and Schmidheiny (2012) as seen in Saidu, & Ibrahim, (2019); identified three specific types of government spending that can lead to economic growth hence they are considered as productive: spending on Education, highways and safety. These spending categories are said to directly affect economic development and so also does the inflation rates of economies.

A review of the information provided by empirical research demonstrates that Sub-Saharan Africa has been characterised by poor economic performance. This is seen in their growing inflation rates, low production growth, rising unemployment rates, and heavy dependency on imports, amongst other things (National Bureau of Statistics 2019). African governments, notably those in the West African sub-region, have launched a number of economic policy changes and unified initiatives in an effort to address the bad economic circumstances that have persisted throughout the continent. The implementation of regional economic and monetary integration throughout the area is one of the policy solutions that may be used in this context (Phiri, 2019).

Prudent government spending, through an efficient allocation of its resources to the different sectors of the economy and the efficient control of inflation, can be veritable tool for stimulating demand and better productivity. This boom serves as a driver for eradicating poverty, inequality within society productive capacity of the economy and steady economic growth. However, the pattern of government expenditure and taxation in Sub Saharan Africa over the years has not achieve this aim as it is largely driven by crude oil revenue, which is reflected in the generated revenue (Akanbi, 2014) hence the need for this study.

1.2 Statement Of The Problem

The relationship between inflation rate, government expenditure and economic growth has continued to generate a series of controversies. While some researchers conclude that the effect of inflation rate, government expenditure on economic growth is negative and insignificant, others indicate that the effect is positive and significant (Segun, & Adelowokan, 2015). Government expenditure on investment and productive activities is expected to contribute positively to economic growth, while government consumption spending is expected to be growth retarding. This instrument of fiscal policy promotes economic growth in the sense that public investment contributes to capital accumulation. Other importance of government expenditure includes the provision of those facilities that are not fully covered by the market economy such as health and education. That is, human capital promotes positive benefits associated with economic growth, but the financial source for public expenditure which is taxation, reduces the benefits of the taxpayers and as such reduces the benefits associated with economic growth (Maingi, 2017).

Nigeria as a Sub Saharan african country is currently experiencing an economic downturn due to dwindling oil revenue, upon which the country relies for its sustenance. The gross domestic product of Nigeria shows a declining trend of -2.06% and -1.5% for 2016 and 2015, respectively, due to falling oil revenue (Trading Economics, 2016). Despite the dwindling revenue, the need for the creation of enabling and secure environment for human and business to operate is on the increase, this has led to increased spending on infrastructure, security and health with a view to achieving steady infrastructure development, security and create conducive environment for capitalist to operate. However, those huge spendings have not translated into achievement of steady economic growth in Nigeria as shown by the dwindling growth rate in the Gross Domestic Product of 2015 and 2016 (Trading Economics, 2016) thus this study seeks to assess government expenditures, inflation rate and economic development in Sub - Sharan African Countries between 1980- 2022.

1.3 Objectives Of The Study

The primary objective of this study is to examine government expenditures, inflation rate and economic development in Sub - Sharan African Countries between 1980- 2022. Specific objectives of this study are:

To determine whether there is a relationship between government expenditure and economic development in Sub - Sharan African Countries between 1980- 2022.

To determine whether there is a relationship between inflation rate and economic development in Sub - Sharan African Countries between 1980- 2022.

To find out the effects of government expenditures on the economic development in West Africa between 1980 - 2022.

1.4 Research Questions

The following research questions will be answered in this study:

Is there a relationship between government expenditure and economic development in Sub - Sharan African Countries between 1980- 2022?

Is there a relationship between inflation rate and economic development in Sub - Sharan African Countries between 1980- 2022?

What are the effects of government expenditures on the economic development in West Africa between 1980 - 2022?

1.5 Research Hypotheses

To determine the effectiveness of this study, the following research null hypotheses will be formulated to guide the study and it will be tested at 0.05% levels of significance.:

H01: There is no relationship between government expenditures and economic development in Sub - Sharan African Countries between 1980- 2022.

H02: There is no relationship between inflation rate and economic development in Sub - Sharan African Countries between 1980- 2022.

1.6 Significance Of The Study

The study is significant in the following ways. First, due to dissagregation of data, the study provides more understanding of the relationship between components of government spending, inflation rates and economic growth as compared to empirical studies that used an aggregate government expenditure measures. Second, it enables us to compare regression results across individual measures and across groups.

Thirdly, this study attempted to shade more light on the causal relationship between government expenditure inflation rates and economc growth. The results of the study may help in deciding on how the resources should be shifted from the less productive to the more productive sectors of the economy so as to boost economic growth. Fourthly, one of the major advantages of this study was that it incorporated the most recent data and employed both descriptive analysis and more advanced econometric technique (panel data estimation) to study the effect of government expenditure on economic growth. Finally, the study will add to the body of existing knowledge and pave way for further study in the area.

1.7 Scope Of The Study

In a whole, this study focuses on government Expenditures, Inflation Rate and Economic Development in Sub - Sharan African Countries between 1980- 2022. Specifically, this study focuses on determining whether there is a relationship between government expenditure and economic development in Sub - Sharan African Countries between 1980- 2022, determining whether there is a relationship between inflation rate and economic development in Sub - Sharan African Countries among others. The study will cover a period of 42years from the year 1980 to 20022

1.8 Definition Of Terms

Inflation: In economics, inflation is a general rise in the price level of an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services.

Consumption Expenditure: The recurrent expenditure contains expenditures by the sectors covering day to day normal services by the ministry, in terms of wages and salaries, operation and maintenance.

Disaggregated Data: The separation of an aggregate body of data into its component parts to uncover patterns, trends and other important information.

Sub - Sharan African Countries: Sub-Saharan Africa is, geographically, the area and regions of the continent of Africa that lie south of the Sahara. These include Central Africa, East Africa, Southern Africa, and West Africa.

Economic development: In the economics study of the public sector, economic and social development is the process by which the economic well-being and quality of life of a nation, region, local community, or an individual are improved according to targeted goals and objectives.