An Appraisal Of The Effectiveness Of Macroeconomic Policies In Promoting Economic Growth In Nigeria

Project and Seminar Material for Economics

Abstract

Chapter One

Introduction

1.1 Background to the Study

It has been historically evidenced that market mechanism does not ensure general equilibrium and stability in the economy. As a result, macroeconomic problems-business cycles, inflation, deflation, stagflation and unemployment continue to arise time and again. Therefore, government is forced to adopt policy measures to redress the problems as and when they arise. If governments are to intervene in the economy, there still remains the problem of selecting the appropriate instruments of achieving the targets they set for themselves.

Macroeconomics, which was introduced by Ragnar Frisch in 1933 during the period of great depression globally, applies to the study of relations between broad economic aggregates. It refers to the study of the performance of the national economy as well as the policies used to improve that performance. Policy on the other hand, according to the Oxford Advanced Learner’s Dictionary means plan action agreed or chosen by a political party, business etc.

Macroeconomic polices therefore, can be defined as government actions designed to affect the performance of the economy as a whole. It can also be defined as a programme of action undertaken to control, regulate and manipulate macroeconomic variables to achieve the macroeconomic goals of the society. In the words of Brooks and Evans, “Macroeconomic policy can be thought of as an attempt by the authorities to achieve particular target levels of certain major economic aggregates”. A macroeconomic policy is, infact an instrument of policing the economy (if one may use that phrase) to achieve certain economic goals.

As regards the scope of macroeconomic policy, it encompasses all major economic variables. Macroeconomic variables include both real and monetary variable. Real variables include, Gross National Product (GNP), Total Employment, Aggregate Expenditure, Saving and Investment Government Expenditure as well as tax and Non-Tax Revenue, Exports and Imports and the balance of Payment, Monetary Variables include supply of money, demand for money, supply of credit, bank deposit as well as interest rate. Accordingly, there are two kinds of tools or measure to control and regulate the macroeconomic variables namely; monetary measure and fiscal measure.

Some economist believes that “The need for macroeconomic policy arises because the economic system does not adjust appropriately to the shocks to which it is constantly subjected”. However, the role of macroeconomic policy did not remain confined to controlling business cycles, it was extended far beyond.

Before and after Nigeria got her independence in 1960, the Nigerian economy can be characterized as an economy that has witnessed a variety of macro economic policies, not all have however, succeeded in achieving the laid down objectives of the macroeconomic polices. In the past few years, the Nigerian economy has witnessed serious macroeconomic problems, characterized by slow down in economic activities, low capacity utilization, growing unemployment, heavy debt burden, accelerated inflation, intensified exchange rate depreciation, as well as high and perverted regime of interest rates.

1.2 Statement of Problems

The motive of any development effort is to bring about improvement in the standard of living of the people. It is to this end that macroeconomic objectives are directed. Therefore, it follows that there is a functional and significant relationship between macroeconomic policies and stated objectives. The economy of developing countries like Nigeria is characterized by a lot of economic problems such as high rate of inflation, unemployment, unfovourable balance of payment and many others. Over the years, many instrument of macroeconomic policy have been employed to check these backward phenomena. Hence, this study aims towards evaluating effectiveness of these macroeconomic policies in achieving predetermined target.

1.3 Significance of the Study

It is hoped that this research work will be practically and theoretically significant as it will contribute to and move the frontiers of knowledge. There is no doubt that this study will benefit quite a number of people.

In -the first instance, the research work will be extremely important to students in their academic pursuit. Secondly, experts and policy makers will find it a good and useful companion in their effort to formulate policies. Furthermore, this research work will equally be germane to the state, in that it will enhance effective and efficient formulation and implementation of policies with a view to achieving macroeconomic objectives.

1.4 Aim and Objectives of the Study

In the literature of macroeconomic theory, some serious prepositions have been made as to the effectiveness or otherwise of macroeconomic policy especially in the developing countries like Nigeria. In view of this, the aim of this study is to assess the effectiveness of macroeconomic policy in promoting economic growth in Nigeria. The objectives are;

To highlight the extent to which money supply affect the Gross Domestic Product (GDP)
To asses the macroeconomic policies put in place in Nigerian economy from 1993-2007; to see if it has any positive or negative effects on the Nigerian economy.
To evaluate the effect of major macroeconomic variable on the Gross Domestic Product (GDP).

1.5 Research Methodology

This consists of the following:

1.5.1 Sources of Data

This research work is limited to secondary source of data. The secondary data shall be obtained basically from Central Bank of Nigeria (CBN) various publications, National Bureau of Statistic (NBS) and other relevant publication for a period of fifteen (15) years (that is 1993-2007).

1.5.2 Method of Data Analysis

After the data needed must have obtained, it shall be analyzed via the use of statistical and econometric methodology such as simple regression, multiple regression and variance analysis. The study will also go further to conduct the test of significant standard error and F-test

1.5.3 Model Specification

In a linear multiple regression model, the dependent or explained variable (Y) is related to a number of independent or explanatory variables; X1,X2,X3…….. Xn by the following expression

Yt = βo + β1X1 + β2X2 + µ … βnXn where βo is the intercept and βl,β2,β3……… βnare unknown parameters called the population regression, coefficient and µ is the random or stochastic variable

Using linear regression model, the functional relationship between gross domestic product (GDP) Government expenditure and money supply is estimated as follows;

GDP= F(MOS, Govt. Exp)

Where GDP is the dependent variable

MOS = Money Supply

MODEL

GDP = F(Government Expenditure, Money Supply)
GDP = βo +β1X1 + β2X2 + Ut

1.6 Statement of Hypothesis

Ho: Money Supply and Government Expenditure does not have significant effect on the gross domestic product (GDP).

H1: Money Supply and Government Expenditure has a significant effect on gross domestic product (GDP).

1.7 Scope / Limitation of the Study

The study will cover macroeconomic policies in Nigeria for a period of fifteen years, starting from 1993 to 2007.

The limitation of this study are those conceptual problems which the research work would encounter. These include time and inadequacy of funds for the research.

Another limitation is that of inadequate and inaccurate database in less developed countries in which Nigeria is not an exception. However, the research will make efficient use of available time and data at his disposal towards the realization of the goals of the study

1.8 Chapterization of the Study

This study will be divided into five chapters.

In the first chapter, which is the introduction, various objectives intended to be achieved in carrying out this research work will be looked at. In addition, the research hypothesis as well as the scope and limitation of the study will be stated among other things.

Chapter two, which is the literature review examine the two macroeconomic policies (monetary policy and fiscal policy) in detail, as well as its impacts in promoting economic growth in Nigeria.

In Chapter three, which is the structural composition, the macroeconomic policy as it affect Nigeria will be discuss.

Chapter four contains data analysis. The data to be analyzed will be obtained from secondary data majorly from the CBN publication. These data will be analyzed through the use of the statistical Package for Social Science (SPSS) with the use of econometrics technique, specifically, regression analysis.

The summary, conclusion and recommendation will be presented in chapter five.

Chapter Five

Summary, Conclusion and Recommendation

5.1 Summary

This research work tries to investigate the effectiveness of macroeconomic policy in promoting economic growth in Nigeria. Macroeconomic policies, which is defined as government actions designed to affect the performance of the economy as a whole. Data used in this research (GDP, government expenditure, money supply) was mainly secondary, specifically from the Central Bank of Nigeria (CBN). These data were analysed using econometric technique. After the data analysis, it was discovered that money supply has a positive relationship with the GDP while the government expenditure is universally related with GDP. Also, the monetary and fiscal policies were compared. At the end of the research, conclusions were drawn and reasonable recommendations were given. The empirical model is developed in the light of recent developments in them methodology of econometric modeling and the analysis of time series with stochastic non-stationary components Starting with an analysis of the short run OLS and then the unit root properties of the relevant series, the results clearly show that the tests fail to reject the null hypothesis that these variables are non- stationary and they are, indeed, integrated at various orders. Given the non-stationary of the series, the Johansen co-integration equations were estimated. The evidence shows that GDP co-integrates with both GEX and BMS. On the basis of this information, a parsimonious error correction model was developed which was shown to be well-specified relative to its own information set. Adopting co-integration and error correction modeling strategy, the relationship between Nigeria’s GDP and macroeconomic policy (i.e both fiscal and monetary policy) were analyzed through a series of reduction from over-parameterized model interrelating GDP, GOV.EXP, MOS and error correction term. The estimated results suggest that monetary rather than fiscal policy exert positive impact on economic growth in Nigeria. The conclusion, therefore, is that the emphasis on fiscal action of the government has led to a greater distortion in the Nigerian economy. However, the combination and coordination of both monetary and fiscal policy are highly recommended for the Nigerian economy.

5.2 Conclusion and Recommendation

By itself, macroeconomic stability does not guarantee high rates of economic growth. Key institutional and structural measures are required in order to engender sustainable high rates of economic growth. These include Monetary and fiscal policies, openness of governance, regulatory reform, financial sector reform, privatization, public service reform, inclusive growth programmes and institutional fight against corruption (Brian, Brown, Devarajan, & Izquierdo, 2001). The result of this investigation into the nexus of the macroeconomic policies with economic growth is mixed and supports this position. The management of the five key macroeconomic variables is an arduous task even in developed economy. This is made more difficult because the Nigerian economy is largely dependent on crude oil for its foreign earnings. This reliance renders some of its fiscal and monetary policies prostrate to the vagaries of international trade and oil politics. The country experiences stagflation, a condition of simultaneous increases in both inflation and unemployment.

Evidently, the achievement of sustainable economic growth through fiscal policy in Nigeria has remained a mirage. Despite the substantial increases in government expenditure over the years, the rate of economic growth has been very low and sluggish. The poor performance of fiscal policy has been ostensibly blamed on the problems of policy inconsistencies, high level of corruption, wasteful spending, poor policy implementation and lack of feedback mechanism for implemented policies (Omitogun and Ayinla, 2007). This study revealed that the effect of monetary policy on economic growth in Nigeria is much stronger than that of fiscal policy. This study therefore, recommends monetary policy for the purpose of economic stabilization.

Fiscal policy should give priority attention to capital and public investments by making them of higher proportion in gross government expenditure, thereby creating more jobs and enhancing the quality of public spending and the attainment of sustainable growth and development. To put the Nigerian economy along the path of sustainable growth and development, the government must put a stop to the unproductive foreign borrowing, wasteful spending and uncontrolled money supply and embark upon specific policies aimed at achieving increased and sustained productivity in all sectors of the economy. In general, until macroeconomic policies are effectively implemented and particularly geared towards enhancing the overall productivity of the economy only then can their potential beneficial effects be appreciably felt in the country (Omitogun and Ayinla, 2007).

Emphasis should be on the development of basic infrastructure (example. transportation, energy and communication). Human capital development should be a priority. Government fiscal policy should refocus and redirect government expenditure towards production of goods and services so as to enhance GDP growth (Ogbole, et al, 2011).

Government economic policies should focus on diversification of the economy to enhance the performance of the non-oil sector, so as to create more jobs in this sector. The government should avoid unnecessary borrowings and ensure that existing debts are properly serviced as at when due. The government should ensure that policy inconsistency are minimized and policy reversals are properly checked for both short and long run effects on the economy. Government should fight the problem of corruption because without a reduction of the level of corruption in the country, fiscal policy components will not achieve the required level of economic growth in Nigeria.
There is need for an improvement in government expenditure on health, education and economic services, as components of productive expenditure, to boost economic growth. What Nigeria needs is a fiscal policy rule, which would commit the government to a certain level of conduct in fiscal and budgetary management.

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