The effect of educational expenditure on economic growth in Nigeria

Inhalt

CHAPTER ONE
INTRODUCTION
1.1 Background to the study
1.2 Statement of the Problem
1.3 Research Question
1.4 Objectives of the Study
1.5 HYPOTHESIS OF THE STUDY
1.6 SCOPE OF THE STUDY
1.7 JUSTIFICATION OF THE STUDY

CHAPTER TWO
LITETRATURE REVIEW
2.0 INTRODUCTION
2.1 CONCEPTUAL LITERATURE REVIEW
2.1. I. Education
2.1. II. Economic Growth
2.1.1 Theoretical Literature Review
2.1.2 Neo- classical growth theory
2.1.3 Endogenous growth model
2.1.4 Growth driven by human capital accumulation
2.1.5 Human capital and technological change
2.2 EMPIRICAL LITERATURE
2.3 GAPS IN THE LITETRATURE

CHAPTER THREE
METHODOLOGY
3.1 THEORETICAL FRAMEWORK
3.1.1 Education and Endogenous Growth
3.2 MODEL SPECIFICATION
3.3 VARIABLE DESCRIPTION AND EXPECTED SIGN
3.4 SOURCES AND METHOD OF DATA COLLECTION
3.5 METHOD OF DATA ANALYSIS
3.6 DATA ACCURACY AND RELIABILITY
3.7 THE JUSTIFICATION OF THE METHOD
3.8 CAUSALITY TEST

CHAPTER FOUR
4.0 DATA PRESENTATION, ANALYSIS AND DISCUSSION OF RESULTS
4.1 INTRODUCTION
4.1.1 Descriptive Statistics
4.1.2 Correlation Matrix
4.2 TIME SERIES PROPERTIES OF THE VARIABLES
4.2.1 Unit Root Test
4.2.2 The effect of educational expenditure on economic growth in Nigeria
4.2.3 The Long-Run Relationship between Educational Expenditure and Economic Growth
4.2.4 The Causality between Educational Expenditure and Economic Growth
4.3 DISCUSSION OF FINDINGS
4.3.1 The Effect of Educational Expenditure on Economic Growth in Nigeria
4.3.2 The Long-Run Relationship between Educational Expenditure and Economic Growth
4.3.3 The Causal Relationship between Educational Expenditure and Economic Growth in Nigeria

CHAPTER FIVE
5.0 SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 INTRODUCTION
5.2 SUMMARY OF MAJOR FINDINGS
5.3 RECOMMENDATION
5.4 CONCLUSION

REFERENCE

APPENDIX

CHAPTER ONE

INTRODUCTION

1.1 Background to the study

Education plays a key role in human capital development. It raises the productivity and efficiency of individuals and thus produces skilled manpower that is capable of leading the economy towards the path of sustainable economic growth or development (Zaman, 2008). Nigeria today has the highest level of out of school children round the world, this indicates that the government has paid little attention to the importance of education to economic growth of a nation.

The world development report (2007) revealed the way knowledge influences development of a nation. The report observes critically the acquisition of knowledge and information is becoming increasingly important to economic growth as science and engineering findings proliferate and take on ever-greater importance in production of goods and services. To Obaji (2006), the responsibility of producing highly quality manpower and specialized goods is that of the nation's tertiary educational institutions. It was stated that in the past well trained manpower emanated from tertiary institutions round the country and they were well sought after both locally and internationally. In the past, Nigerian graduates were hot-cakes abroad as they were requested and absorbed to work for competent organizations, but the case today is different as half-baked graduates come out from the tertiary intuitions in search of jobs instead of creating jobs.

In Nigeria the most important macroeconomic objective remains how to achieve accelerated economic growth and reduce poverty and increase wealth. To do this sound objectives, with certain variables which have the ability to boost growth has been identified. All the contributory factors of economic growth and increased productivity, human capital stands out as a major catalyst (Adamu, 2003). In this light direct investment in human capital through the provision of standard education is key of economic growth and improved productivity in developing countries like Nigeria. The human capital development indices in Nigeria do not reflect a substantial expenditure on education. For instance, the national budget revealed the small percent of fund budgeted for education in Nigeria, this is why Sanusi (2003) opined that the effect of low investment in education on the competitiveness of Nigerian labour force in the production of goods and services, bearing in mind the fact that low level of skills and knowledge will certainly reduce the quantity and quality of individual output.

The United Nations Educational, Scientific and Cultural Organization (UNESCO) classification of 1967 as adapted by Hallak (1969), conceptualized educational expenditure by nature as comprising of recurrent, capital and debt service. According to Alfred Marshall, “the most valuable of all capital is that invested in human beings” (Becker, 1994). Schultz (1961), Becker (1975) and Mincer (1970) were famous in their view of human capital “as investments made on human persons in form of education, training, and health among others which in turn boost the productive capacity of the individual for economic development”. In the view of Schumpeter (1934), economic growth means a gradual and steady change in the long run which comes about by the gradual increase in investment and savings.

Samuelson and Nordhaus (2002) described economic growth as the expansion of a country’s potential gross domestic product (GDP) or national output or the outward shift of a country’s production possibility curve. Jhingan (2003) defined growth as a quantitative sustained increase in a country’s per capita output or income accompanied by expansion in its labor force, consumption, capital and volume of trade. According to Todaro and Smith (2011) the sources of economic progress can be traced to a variety of factors. By and large, investment that improve the quality of existing physical and human resources, increases the quality of these same productive resources through invention, innovation and technological progress have been and will continue to be the primary factor in stimulating economic growth in any society. Titus, Obele and Oyaba (2003) opined that national development may be difficult without the deployment of qualitative and quantitative resources into the educational sub-sector. Also, that government funding to education has been unstable, unpredictable and was only a fraction of the nation's budget. It was further noted that education is a growing sector in Nigeria, and that there is a correlation between education and national development.

According to the United Nations Development program (UNDP 2005), gaps in opportunity for education remains large. It noted that in an increasingly knowledge-based global economy, about 115million 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.

1.2 Statement of the Problem

Most empirical studies have encouraged the endogenous growth theory which says that public policy is instrumental to the development of economic growth rate (Lucas 1988; barro and sala-I martins 2004). Previous studies on the effect of public expenditure on the growth centered on the aggregate values of government expenditure measures (Hallak, 1969). Other studies looks at the effect of 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). Also current researches have focused on the effect of public education expenditure on economic growth.

Generally, most studies on the relationship between public education expenditure and economic growth have adopted a partial approach. The expected positive influence of education expenditure have on the economy can be said to be elusive especially in a highly corrupt economies like Nigeria. In this case, only a few studies such as Jung and Therbecke, (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 Nigeria, public education expenditure to total government expenditure between 1970 and 2010 is 5.72%. It ranged between 0.51 and 10.8% during the period under review (CBN Statistical Bulletin, 2008). Furthermore 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 Question

The issues raised above have brought about the following questions below, which would be addressed at the course of the study:

i. Is there causal relationship between educational expenditure and economic growth in Nigeria?
ii. What is the effect of educational expenditure on economic growth in Nigeria?
iii. Is there a long- run relationship between educational expenditure and economic growth in Nigeria?

1.4 Objectives of the Study

The main objective of the study is to examine the impact of education expenditure and the growth of the Nigerian economy. To observe if Nigeria is having a positive or negative growth in its economy, influenced by the expenditure made by the government in its educational sector.

Below are the specific objectives:

i. To examine the causal relationship between educational expenditure and economic growth in Nigeria.
ii. Estimate the effect of educational expenditure on economic growth in Nigeria.
iii. To examine the long-run relationship that exist between educational expenditure and economic growth.

1.5 HYPOTHESIS OF THE STUDY

H01: There is no causal relationship between educational expenditure and economic growth in Nigeria

H02: There is no significant effect between the educational expenditure and economic growth in Nigeria

H03: There is no long-run relationship between educational expenditure and economic growth

1.6 SCOPE OF THE STUDY

Basically, there are three tiers of education in Nigeria- primary, secondary and tertiary. The main focus of this study will be on the tertiary school education (1981-2019), because it is the level of education required to ensure industrialization that will result 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 capital and recurrent public expenditure 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 JUSTIFICATION OF THE STUDY.

The outcome of this will serve as a guide to policy makers in the ministries of finance, education and the national planning commission as well as other relevant department and agencies interested in the development of the education sector in particular economy. It will also serve as useful reference for future researchers in the field. The adoption of policy options emanating from inaccurate findings could render government intervention, especially in the education sector inefficient. It will therefore take 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.

This study is divided into five chapters. Chapter one looks at the background of the study, statement of the problems, objectives of the study, and the scope of the study. Chapter two looks at the conceptual literature, theoretical review, empirical review and the gaps in the literature. Chapter three focuses on the theoretical framework, sources and method of data collection, method of data collection. Chapter four looks at the analysis of data, result of the study and the test of the hypotheses. The final chapter five examines the summary of findings, contribution to knowledge, recommendations and the suggestions for further studies.

CHAPTER TWO

LITETRATURE REVIEW

2.0 INTRODUCTION

This chapter embodies the literature of this study, which would look at a comprehensive summary of previous research on this research. Theoretical literature: this contains the review on theories that will apply to the study. The closing chapter is empirical literature which will review the various work of research done by other researchers.

2.1 CONCEPTUAL LITERATURE REVIEW

2.1. I. Education

Todaro and Stephen, (1982) states that there is no particular definition of education, this is because it means variety of things to different people, culture and society. Ukeje (2002), sees education as a process, a product and a discipline. As a process, education is a set of activities which entails handing down the ideas, values and norms of the society across generation. As a product, education is measured by the qualities and traits displayed by the educated person. The aims of Education in Nigeria as stated in the Nigerian National Policy on Education (2004), include “the desire that Nigeria should be a free, just and democratic society; a land full of opportunities for all citizens; able to generate a great and dynamic economy; and growing into a united strong and self-reliant nation”. Furthermore, there is a consensus of opinion too if the educational system is made functional, positive changes which can accelerate national development in the country will emerge. Thus, ensuring and maintaining a high educational standard is paramount in achieving educational objectives.

Olaofe (2005), state that the major reason for the declining standard of education in Nigeria is the learning environment. He describes the situation thus: educational community demands, adequate educational facilities and conducive education environment- education with a ratio of one textbook to twelve students, dilapidated school classrooms and lecture halls, education without the basic teaching, learning facilities, and teachers who themselves are not better than the children they teach, is a complete mockery of sound education system. Thus, to solve the problem of declining standard of education, the major problems associated with the learning environment has to be resolved.

2.1. II. Economic Growth

According to Haller (2012), economic growth is the process of increasing the sizes of national economies, the macro-economic indications, especially the GDP per capita, in an ascendant but not necessarily linear direction, with positive effects on the economic-social sector, while development shows us how growth impacts on the society by increasing the standard of life. To him economic growth can be positive, zero or negative. Positive economic growth is recorded when the annual average rhythms of the macro-indicators are higher than the average rhythms of growth of the population. When the annual average rhythms of growth of the macroeconomic indicators, particularly GDP, are equal to those of the population growth, we can speak of zero economic growth. Negative economic growth appears when the rhythms of population growth are higher than those of the macro-economic indicators.

From the various definitions and views given on education and economic growth, the above definitions fails to highlight the main importance of education to the society, for example Todaro and Stephens, (1982) sees education as a process, a product and a discipline, in which the study fails to state the main point of education, as his definition does not see education as a tool of nations growth via human development. The present study defined education as a tool that brings about full human development (in formal and informal education) that in-turn brings about full economic transformation in a society. And on the other-hand economic growth can be seen as total or total transformation of economic activity in a society. It can also be defined as the increase of goods and services in an economy, for example it can be measured with the help of the GDP, and Nigeria’s current GDP rate advanced 2.28 percent annually.

Finally educational expenditure is simply expenditure on education by the government. Expenditure could be either on the tertiary, secondary or primary school level. These expenditures are simply done to improve educational system in the country.

2.1.1 Theoretical Literature Review

The German economist Adolph Wagner (1835-1917). Writing in the 1880‟s Wagner noted that there are inherent tendencies for the activities of governments (for instance, in Nigeria we have the federal, state and local governments) to continually increase, over time, both intensively and extensively.

These increases in state activities necessitate increase in government expenditure. In the light of the above, a functional relationship was postulated to exist between the growth rates recorded by an economy and the growth rates of activities performed by government to such an extent that the government sector grows faster than the general economy. That is, that there is a long run tendency for government expenditure to rise as per capita income increases. He observed a tendency for government expenditure to increase directly with the level of industrial output and therefore called for increased allowance for “social consideration” in the conduct of industry with anticipation of continuous expansion of the public sector. Wagner explained the development of public expenditure in its various categories such as expenditure on law and other (police services), justice, education, health and welfare services, recreation and culture, information, among others to the development of the economy and its derivatives, also relevant are the changes in these expenditure categories mirrored by their income elasticity’s of demand. Wagner and Musgrave have shown these services are income elasticity. That is, public expenditure revealed that changes in the income elasticity of demand for public goods in the ranges of per capita income. They submitted that at when the level of per capita income is low, demand for public services tends to be very low, because such income is committed to satisfying main needs and that when per capita income starts to rise, the demand for services supplied by the public sector such as education, health, and transport starts to rise, thereby forcing government to increase expenditure on them. While, when the level of per capita income is high, the rate of public sector growth tends to fall because the more basic wants are satisfied.

(a) Growth Theories

As reported by Ezirim (2005) “this theory, economic growth as reflected in real per capita income growth, urbanization, and increased enlightenment on the part of the electorate, naturally results in enlargement of the public sector. Logically, therefore, reduction in public sector growth would need a decrease of economic growth”. Therefore, an increased in the activity of government and corresponding increase in government expenditure is an inevitable consequence of growth of the economy. Wagner (1883) stressed on the growth of the economy as the fundamental determinant of growth of the public sector. As noted by Ezirim (2005), future expectations of concerted development of modern industrial economy would draw out rising political anxiety for societal development and/or fairness will lead to a rise social thought in the behavior of industry. Thus, it is anticipated that a nonstop expansion of the government sector and its expenditure would occur.

Finally the Solow Model of Long-Run Growth; Professor R.M Solow builds his model of economic growth as an alternative to the Harrold-Domar line of thought without its crucial assumption of fixed proportions in production. Solow postulates a continuous production function linking output to the inputs of capital and labour which are substitutable.

Solow shows in his model that with technical variable coefficient there would be a tendency for capital-labour ratio to adjust itself through time in the direction of equilibrium ratio. If the initial ratio of capital to labour is more, capital and output would grow slowly than labour force and vice versa. Solow’s analysis is convergent to equilibrium path (steady state) to start with any capital-labour ratio.

Another growth theory was formulated by John Hicks (1936), he brought about the IS-LM model. IS-LM which stands for investment-Savings and “liquidity preference- money supply. (LM) is a Keynesian macroeconomic model that shows how the market for economic goods, (IS) interacts with the loanable funds of the market (LM). The IS curve depicts the set of all levels of interest rates and output (GDP) at which investment (I) equals total saving (S). At a lower interest rate, investment is higher, which translates into more total output (GDP).

(B) Expenditure Theories

Secondly the Peacock Wiseman hypothesis (1890); Peacock and Jack Wiseman advanced the study of the growth of public expenditure through Peacock and Wiseman hypothesis. By their study of public expenditure at the Great Britain during the period 1890 to 1955.

Peacock and Wiseman focused on the pattern of public expenditure and stated that public expenditure does not follow smooth or continuous trend but the increase in public expenditure takes place in jerks or steps. They gave three (3) separate concepts to justify the hypothesis, they are;

Displacement effect, Inspection effect, Concentration effect.

Rostow-Musgrave Theory of Public Expenditure Growth Rostow presented a political theory of the stages of growth and the role of public finance in the process, whereas Musgrave (1969, 1971 and 1974) provided a macroeconomic viewpoint of public expenditure policy for industrialization and development. According to this theory, in the early stages of economic growth and development, investment made by public sector as an amount of total investment is found to be high. That is, Rostow and Musgrave, argued submitted that the rate of growth of public expenditure will be very high during the early stages of economic development. The public sector therefore is seen to provide a social overhead capital in the form of expenditure on education, health, nutrition, roads, electricity, water supply, etc. this public investment, it is argued is necessary to gear up the economy into the middle stages of socio-economic development (i.e., social overhead capital provided by the public sector is necessary to launch the economy from the traditional stage to the take off stage of economic development). Rostow argued that once the economy reaches the mature stage, the mix of public expenditure will shift from expenditures on infrastructures to increasing expenditure on education, health and welfare services. This theory presented approaches to the role of public sector.

In recent years research has been done by economist and researchers alike on the relationship between public expenditure on education and the growth of the economy, it is said that both go hand in hand. That is public expenditure on education cannot be fully discussed without the positive growth it brings to the economy.

Annual rate of production is designated as Y (t)

Savings is constant as ‘S’

Stock of capital is K (t)

Net investment dk/dt

Since identity:

Abbildung in dieser Leseprobe nicht enthalten

Since output is produced with capital and labour, technological possibilities are represented by the production function:

Abbildung in dieser Leseprobe nicht enthalten

That shows constant returns to scale, thus inserting equation (2.2) to (2.1)

Abbildung in dieser Leseprobe nicht enthalten

In equation (3.3), L represents total employment. Since population is growing exogenously.

In recent years public spending on education and economic growth has caught the attention of economist and researchers alike. O’Neill (1995) reports in his findings that convergence in education levels have resulted in a reduction in income dispersion. Sylvester (2000) explores the transition mechanism that might link the income inequality and economic growth. He found out public education expenditure are positively associated with future economic growth. Barro (2001) examines a panel of data of around 100 countries observed from 1965 to 1995 and finds that growth is positively related to the starting level of average years of school attainment of adult males at the secondary and higher levels.

From the few theories stated above it can be said that educational expenditure is positively related to the growth of an economy. Educational expenditure is simply defined as the capital expenditure of the government on the educational sector to boost the quality of its citizens. While economic growth can be termed an increase in the amount of goods and services produced per head of the population over a period of time.

2.1.2 Neo- classical growth theory

Solow (1956) developed a model that revolutionized the understanding of growth theory. Solow recognized that the input of physical capital and labour, did not encapsulate all the information relevant to the understanding the size, strength, and growth of a particular economy. Building on pioneering work that enquired into the effect of technological progress on an economy, Solow understood that a significant portion of the economic output is dependent on the rate of technological progress of the economy being studied.

Solow added technology to the production function equation. However, he added it as a variable that existed exogenously from the neoclassical model’s production function equation (Cortright, 2001). This exogenous technology variable was meant to account for any discrepancies between what certain levels of capital and labour would indicate as the output and actual output, especially in cross-country comparisons. More importantly, it provided a vehicle for explaining the rate of growth over time.

There is, however, a major weakness to Solow’s model. By keeping technology outside of the equation, Solow’s model could not explain “why” or “how”, or from where technological progress came from (Cortright. 2001). The model therefore lacks quite a bit of explanatory power. However, this drawback was quickly recognized and many studies have researched and theorized different ways to account for technology and technological progress.

An important implication of Solow’s work was the theory of income convergence (Barro, 2001). Convergence is based on the diminishing returns to capital were first recognized by Malthus and Ricardo. The theory of convergence states that cross-country economic differences will shrink over time due to diminishing returns to capital. However, this is a gross simplification of the economic realities and differences between most countries. Economic convergence is not true in an absolute sense. But it is accepted as being conditionally correct. Essentially, convergence is an important effect; however its effects only apply when all other variables are held constant (Barro and Sala-I-Martin, 1992, 1995, Mankiw, Romer, and Weil 1992, Mccallum, 2003).

While Solow’s model made great headway in the quest for understanding economic growth, it did not have adequate explanatory power to account for output and to predict growth. The obvious shortcoming is that the long-run per capita growth rate is determined entirely by an element – the rate of technological progress – that is outside the model. The long-run growt rate also depends on the growth rate of population, another element that is exogenous to the standard theory. Thus, economists continued their work into alternative and more refined ways to account for economic output and growth over time.

It should be noted that the foregoing discussion does not imply that the neoclassical analysis was unproductive. On the contrary, it played a major and essential role in the development of dynamic general equilibrium analysis, the basis for much today’s economic theory. It is only as a theory of growth that it is here being criticized.

2.1.3 Endogenous growth model

The Solow growth model (1956) did not take cognizance technology in the growth process of an economy as much as it recognized the input of human capital and labour in the economy, Romer (1986) and Lucas (1988) attempted to ‘endogenize’ the source of growth, so that the rate of growth would be determined within the model. The scholars of this present time introduced new theories of technological discovery and adaptation that accounted for spillover effects, that is, the entirety of benefits from technological discovery can never be fully understood since one discovery can cause benefits in other areas that are not always understood or even recognized (Cortright, 2001, Barro 2001). This theory allowed economists to argue that technology causes increasing returns to scale. Instead of capital being limited by diminishing returns to scale, capital can be utilized in ever more efficient manners. Not only does this counterbalance the diminishing returns to scale, technology effectively offsets diminishing returns and allows theoretically limitless growth possibilities. The new economic theory discoveries allowed economists to better understand and explain the ‘how’ of growth. The endogenous growth literature has produced two distinct approaches on how to incorporate human capital into models of economic growth (Schütt,2003).The first, which is due to Lucas (1988), regards the accumulation of human capital as the engine of growth. The second approach emphasizes the role of the human capital stock in the process of innovation and adoption of new technologies (Romer, 1990).

2.1.4 Growth driven by human capital accumulation

In the model formulated by Lucas (1988), human capital enters into the production function in the way in which technology does in the Solow model, that is, in labour-augmenting form. The economy consists of identical individuals (or representative agents) who are maximizing life-time utility. Agents have control over two variables: the level of consumption, and the allocation of time between work and skill acquisition. The first variable determines the accumulation of physical capital, while the second variable affects an agent‘s future productivity. The model assumes technology to be constant. Population growth is taken as exogenous.

The linearity assumption in the Lucas model implies that the growth rate of human capital is independent of its level. In other words, no matter how much human capital has been accumulated, a given effort always produces the same percentage increase. Romer has offered a possible explanation why this may be plausible. The acquisition of skills may in fact facilitate or prepare learning (Romer, 2001: 134). He states that in primary school, children are taught basic knowledge (such as literacy) which may not improve their ability to contribute to production by very much. Instead, it may be a prerequisite for the acquisition of productivity-enhancing skills throughout the rest of their education and their professional career. Since there are no diminishing returns to the acquisition of skills, human capital can grow without bound, thereby generating endogenous growth. The properties of the steady state in the Lucas model depend on whether there are external effects of human capital.

2.1.5 Human capital and technological change

Another category of endogenous growth models maintains the assumption underlying the Solow model that technological progress is at the heart of Economic growth. However, by no longer leaving technological change un-moulded, these theories acknowledge that a large portion of inventions is the result of purposeful research and development (R&D) activities carried out in reaction to economic incentives. This changes the role for human capital, which enters into these models as a catalyst of technological progress rather than as an independent source of sustained growth.

Nelson and Phelps (1966) were the first to contend that people‘s educational attainment may have a significant influence on their ability to adapt to change and introduce new technologies. Accordingly, a higher level of human capital would speed up the process of technological diffusion in the economy. This would enable countries lagging behind the world technology frontier to catch up faster with the technological leader. However, in the model developed by Nelson and Phelps, the evolution of the best-practice level of technology is left exogenous, so that human capital only plays a role in helping countries narrow the gap to the technological frontier. Romer (1990) has extended this concept beyond the adoption of existing technologies to the creation of new ones, starting from the observation that R&D activities require highly skilled labour as the single most important input. A major implication of both of these approaches is that technological progress, and thus growth, depends on the stock of human capital (as opposed to its accumulation). In the Romer model, a one-time increase of the stock of human capital is sufficient to augment the rate of economic growth forever.

Nelson and Phelps (1966) were the first to contend that people’s educational attainment may have a significant influence on their ability to adapt to change and introduce new technologies. Accordingly, a higher level of human capital would speed up the process of technological diffusion in the economy. This would enable countries lagging behind the world technology frontier to catch up faster with the technological leader. However, in the model developed by Nelson and phelps, the evolution of the best-practice level of technology is left exogenous, so that human capital only plays a role in helping countries narrow the gap to the technological frontier. Romer (1990) has extended this concept beyond the adoption of existing technologies to the creation of new ones, starting from the observation that R&D activities require highly skilled labour as the single important input. A major implication of both of these approaches is that technological progress, and thus growth, depends on the stock of human capital (as opposed to its accumulation). In the Romer model, a onetime increase of stock of human capital is sufficient to augment the rate of economic growth forever.

Economic growth theorist since Adam Smith have discussed a number of issues involving the different means and manners to stimulate and sustain economic growth. However, the fundamental model has remained the same. The different theories are more of opinions on a theme than fundamental disagreements, at the least on factors; land, labour and capital (generally constructed as physical capital). The disagreements occurred on resolving what the most efficient uses were and arrangements of these three factors and by who they should be controlled (Zipfel, 2004, Romer, 2007). The main focus of this section is to highlight the thinking of modern economist on the process of economic growth. The starting point is a consideration of the neoclassical growth model and ‘new’, or endogenous, growth theory. Contemporary growth theories as well as those that explain the effect of public finance on economic growth are also examined.

2.2 EMPIRICAL LITERATURE

There are lots of studies on the relationship between educational expenditure and economic growth. In this section we will be looking at a number of them.

Dauda (2009), carried out empirical investigation on the relationship between investment in education and economic growth in Nigeria, using annual time series data from 1977 to 2007. The paper employs Johansen co-integration technique and error correction methodology. Empirical results indicate that there is, indeed a long-run relationship between investment in education and economic growth. All the variables used including gross fixed capital formation and educational capital are statistically significant (except labour force) in the Nigerian economy. The findings have a strong implication on educational policy in Nigeria. The study seems to suggest that a concerted effort should be made by policy makers to encourage increase in educational investment in order to accelerate growth which would engender economic development.

Anaand and Ravallion‟s (1993) examined empirical results indicated that there was no significant relationship between education outcomes and public spending on education. Using UNESCO data and focusing on primary school education.

Al-Samarrai (2002) examined the relationships between school resources (public spending on primary education, spending per pupil, pupil-teacher ratio) and educational performance (primary gross and net enrolment rates, primary survival and completion rates). The cross-country analysis shows that the link between educational access and performance and public education spending is weak. Besides, Al-Samarrai suggests that the levels of household spending, the effectiveness of the public expenditure management system and the composition of public education spending are important factors explaining the weak link. Several factors have been adduced for the weak relationship between public education expenditure and education attainment.

Musila and Balassi (2004) applied co-integration technique to investigate the relationship between government education expenditure per worker and economic growth in Uganda during the period 1965-1999. Their results show that education expenditure per worker has a positive and significant impact on economic growth both in the long run and short run. In this study, average level of education per worker was used as a proxy for education expenditure. This was based on the assumption that the average level of education per worker is directly proportional to the average expenditure on education per worker. This assumption may not hold in situations where expenditure on education is not used efficiently. Based on data from Nigeria between 1977 and 2007, and using the same analytical technique as Musila and Balassi, Dauda (2009) also found a positive and significant long run relationship between investment in education and economic growth. This study did not only assume direct proportionality between the level of education and average expenditure on education per worker, it also glossed over the issue of endogeneity between education and economic growth. The use of total public education expenditure in its aggregate form precludes that it could be observed that studies on the effectiveness of public education expenditure either relate it to its outcome (such as enrolment rate, literacy rate, completion rate, and average years of schooling), or to economic growth. There is no doubt that as a component of aggregate government expenditure, education expenditure (in line with the Keynesian theory) could have a direct effect on economic growth. It is also true that public investment in education promotes education attainment, which in turn affects economic growth – indirect effect. Furthermore, Bils and Klenow (2000) noted that most studies tend to establish correlation between education and economic growth, but not the direction of causation. Neglecting these issues could lead to misspecification of empirical growth models. Both recurrent and capital expenditure have the same effect on education and economic growth.

Leclercq (2005) and Hanushek (2006) present a survey of the empirical studies that examine the relationship between educational spending and outcomes in developed and developing countries. The main conclusion from this literature supports Gupta, Verhoeven and Tiongson‟s (1999) findings since the results have shown the ambiguous impact of school resources factors on education outcome. This ambiguity, however, seems to be valid for rich nations only because, as attested by Wöβmann (2001), resources may render positive effects at very low endowment levels prevailing in many developing countries.

Aigbedion and Anyanwu (2015), on the impact of public education expenditure on inclusive growth in Nigeria. The study used time series data and the study used econometrics tools (unit root test, causality test, co-integration analysis and error correction model analysis) to estimate the data. From the findings, government education expenditure has a strong and positive impact and relationship with inclusive growth in Nigeria. The study also revealed that government education expenditure for inclusive growth in Nigeria. The study failed to state which level of education used in its research, weather it was primary, secondary or tertiary level of education. This assumption may not hold in situations where expenditure on education is not used efficiently. Based on data from Nigeria between 1977 and 2007, and using the same analytical technique as Musila and Balassi, Dauda (2009) also found a positive and significant long run relationship between investment in education and economic growth. This study did not only assume direct proportionality between the level of education and average expenditure on education per worker, it also glossed over the issue of endogeneity between education and economic growth. The use of total public education expenditure in its aggregate form precludes that both recurrent and capital expenditure have the same effect on education and economic growth.

Gupta, Verhoeven and Tiongson (1999) applied both ordinary least squares (OLS) and two stage least squares (2SLS) estimation techniques to a sample of 50 developing and transition countries. Their result shows that education spending has a positive and significant effect on secondary school enrolment. Also, a five percentage point increase in public education expenditure increases gross secondary enrolment by one percentage point.

McMahon (1999) finds a negative and significant relationship between per pupil expenditures and the primary gross enrolment rate, and a positive and significant impact of total education expenditure as a proportion of GNP. The results of the McMahon study suggest that increasing primary education expenditure while holding per pupil expenditures constant, has a positive and significant impact on the primary gross enrolment rate.

Nurudeen and Usman (2018) examined expenditure on education by the Nigerian government and its implication on the national economy. It was discovered that there was no correlation between expenditure on education and growth in the Nigerian economy. The paper however, made a recommendation for huge investment at all levels of educational sector in order to achieve a desirable increase in productivity through quality and skillful labour force that would guarantee sustainable economic growth.

Anand and Ravallion‟s (1993) empirical results indicated that there was no significant relationship between education outcomes and public spending on education. Using UNESCO data and focusing on primary school education.

Al-Samarrai (2002) examined the relationships between school resources (public spending on primary education, spending per pupil, pupil-teacher ratio) and educational performance (primary gross and net enrolment rates, primary survival and completion rates). The cross-country analysis shows that the link between educational access and performance and public education spending is weak. Besides, Al-Samarrai suggests that the levels of household spending, the effectiveness of the public expenditure management system and the composition of public education spending are important factors explaining the weak link. Al–Samarrai (2002) attributed it to poor data, omitted variables and inefficient resource utilization.

Ojo and Oshikoya (1995) in their study found that literacy rate is positively related to per capita output growth, using other indices such as school enrolment, they found out that the sign of the coefficients were the coefficients were theoretically plausible also in the Zimbabwean economy.

Mcmahon (1999) finds a negative and significant relationship between per pupil expenditures and the primary gross enrolment rate, and a positive and significant impact of total education expenditure as a proportion of GNP. The result of the Mcmahon study suggest that increasing primary education expenditure while holding per pupil expenditures constant, has a positive and significant impact on the primary gross enrolment rate.

Musila and Balassi (2004) applied cointegration technique to investigate the relationship between government education expenditure per worker and economic growth in Uganda during the period 1965-1999. Their results show that education expenditure per worker has a positive and significant impact on economic growth both in the long run and short run. In this study, average level of education per worker was used as a proxy for education expenditure. This was based on the assumption that the average level of education per worker is directly proportional to the average expenditure on education per worker. This assumption may not hold in situations where expenditure on education is not used efficiently. Based on data from Nigeria between 1977 and 2007, and using the same analytical technique as Musila and Balassi, Dauda (2009) also found a positive and significant long run relationship between investment in education and economic growth. This study did not only assume direct proportionality between the level of education and average expenditure on education per worker, it also glossed over the issue of endogeneity between education and economic growth. The use of total public education expenditure in its aggregate form precludes that both recurrent and capital expenditure have the same effect on education and economic growth.

Adamu (2003) determined the impact of the human capital formation on economic growth in Nigeria between 1970 and 2000 using co-integration and error correction mechanisms. The result indicated that investment in human capital in the form of education and training can lead to economic growth because of its impact on labour productivity.

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