CHAPTER TWO
2.0 LITERATURE REVIEW
This chapter two
of this work is divided into theoretical and empirical literature. Theoretical
literature has the various economic theories is saying about government
spending while the empirical literature tries to capture the opinion of the
various contemporary research in the same subject matter.
2.1 THEORETICAL LITERATURE
Economic policy
makers are divided as to whether government expenditure helps or hinders
economic growth. JOHN MAYNARD KEYNES argues that government spending
particularly increase government expenditure boosts economic growth by
injecting purchasing power into the economy. The opposite view maintains that
government consumption crowds out private investment, dampers economic stimulus
in the short-run and reduces capital accumulation in the long-run. The nation
and impact of government expenditure however, depends on its form. In (1994)
outlines some important says in which government can increase growth. These
include provision of public goods and infrastructures, social service and
targeted intervention (such as export subsidies). On the
other hand, government taxation may induce miscalculation of resources public
goods may be provided inefficiently. The public sector may engage in excessive
or unproductive expenditure and government indeed distortion may have disseminative
effect.
ANYATO, (1996) government expenditure is
the total in cash terms of the federal, state and the local government spending
including transfer to the parastatals and the three levels of the government.
In as much as public highly desirable,
it however, takes from of allocation, stabilisation of resources (Musgrave and
Musgave, 1989). The allocation of
function becomes necessary so as to provide both private and in particular
social goods in appropriate mix with available resources. The provision of
social and physical infrastructure through public investment and expenditure on
some goods and services theoretical can directly improve productivity in the
private sector through a more efficient allocation of resources due to the
special characteristics of social goods (Spill over and externalities,
non-excludability) they will be provided at all or where they are produced the
output will be inadequate and outrageously expensive of left in the hands of
private individuals. Other
benefit of government expenditures includes the correction of market failures
and then preservation property rights through legislation and the provision of
security services.
Government
intervention using the instrument of public expenditure and fiscal policy
tools. Theories argue that large expenditure in GDP reduces economic growth
consistent with the pro-markets view that the growth in the government
constrains the overall economic growth.
More recently,
the role of government expenditure as the output promoting control variables
that has been highlighted in the framework of the endogenous growth literature
pioneered in seminal paper by ROMER (1986) and LUCAS (1998). Endogenous growth
models postulate that the economy’soutputis conditioned not only on the level
of physical labour stock (as it was in growth model, 1995) but also no
additional production factors which may enter the production function with
constant return to scale alone.
If this is the
case, return on investment of such production factor need not diminish as the
stock of the later increases and growth differences among nation may persist
indefinitely in the rate of accumulation of specific production factor differs
from country to country. A number of variables have been proposed to exhibit
constant return to scale along with spending on public
infrastructure being one of them (ASCHAUER 1989). Government Expenditure may
increase growth performance by promoting human capital accumulation (MANKIN ET
AL, 1992).
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