THE IMPACT OF DEFENCE EXPENDITURE ON ECONOMIC GROWTH IN NIGERIA 1970 – 2008: A SIMULATION APPROACH

THE IMPACT OF DEFENCE EXPENDITURE ON ECONOMIC GROWTH IN NIGERIA 1970 – 2008: A SIMULATION APPROACH

Abstract:

This study was undertaken to examine the existing link between defence outlays and economic growth in Nigeria with a view to recommending the appropriate expenditure reform to be embarked upon. This is because, in Nigeria, like other developing nations the productiveness of defence expenditure has not been seriously considered. Some cuts in some components of public expenditure can result in unacceptable economic and social costs. Therefore, a large scale empirical analysis of the relationship between defence expenditure and economic growth is imperative. Available evidence from literature has shown that the impact of defence expenditure on economic growth is mixed or inconclusive. But, there was consensus that defence sector engulf large amount of economic resources in the presence of agitation for a reduction, thus implying that other sectors are stifle of the limited resources. The rapid expansion of the public sector, in particular, defence sector, in the face of limited access to revenue generation has created fiscal deficits. Defence expenditure is increasing owing to the changing nature of crisis, the need to modernize the military sector as well as the urge to provide a working and conducive environment for the growth of the Nigerian economy. Thus, this study was an attempt to investigate the macroeconomic impact of defence expenditure on economic growth in Nigeria using a simulation approach. Previous studies have made some remarkable efforts in this direction but were limited in terms of macroeconomic wide model and simulation experiment. This study was an attempt to close this gap. The study collates data from a secondary source and investigated defence expenditure and economic growth nexus, some key economic sectors and variables such as oil and gas, agriculture, manufacture and social service sectors and gross fixed capital formation, total private consumption, domestic credit, import of capital goods, import of consumer goods, oil export, non oil export, exchange rate, oil and gas revenue, non oil and gas revenue, recurrent defence expenditure, capital defence expenditure, budget deficit finance and gross domestic product were investigated by employing the two stage least square method of system estimation. A macroeconomic wide model was developed in five blocks namely, output employment block, income expenditure block, monetary block, import export block and fiscal block, consisting of 18 endogenous equations. The building of these blocks showed macroeconomic variables that are interdependent which makes it convenient for the application of two stage least square technique. The analysis of the estimated macroeconometric model showed that defence expenditure had a significant positive impact on output of oil and gas, agriculture and social services sectors, but a negative effect on manufacture output. Obviously, the case of security of life and property cannot be ignored in any society and defence expenditure has a significant impact on production and economic growth. Also, defence expenditure had a significant positive effect on public investment, oil export, non oil export and economic growth in Nigeria. Prior to the ex post simulation experiment, the macroeconomic model was solved and the Theil inefficient coefficient criteria for assessing the goodness of fit for a macroeconomic model was carried out. The simulation experiment showed that the endogenous variables tracked closely their historical path as the actual values are close to their baseline simulation which was an indication of the ability of the model to forecast and replicate most critical turning points of the historical data. A counterfactual policy simulation of increase in aggregate defence expenditure by 10% 15%, 20% and 25% was conducted. The result of the counterfactual policy simulation showed that the effect of defence expenditure on the endogenous variables was similar. For example, oil and gas output, agricultural output, output of social service and economic growth were significantly positive. Whereas, manufacture output remained negative. Owing to the significant positive effect of defence expenditure on economic growth, this study recommends the need for innovations in defence research and development in technology, construction and electronics which will spill over to the civil society. Thus, an increase in defence spending will add to economic growth.

THE IMPACT OF DEFENCE EXPENDITURE ON ECONOMIC GROWTH IN NIGERIA 1970 – 2008: A SIMULATION APPROACH

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