Government Expenditure and Economic Growth: An Empirical Analysis of the Armey Curve in Nigeria

Olaleye, Samuel Olasode
Edun, Femi
Bello, Hassan Taiwo
Taiwo, Shakirudeen Babatunde
Publication date: 
JEL codes: 
E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook.
This paper discusses the theoretical and empirical basis for the existence of an optimal size of government as depicted by Armey Curve, which is an inverted U curve, where the size of government is on the horizontal axis and economic growth rate is on the vertical axis. The geometric nature of government expenditure in Nigeria, and the absence or little effect it had on the economy, put to question the importance of government expenditure in the country. Also, with the shifts in economic trend in the country from a government dominated economy to more private driven market economy, makes the need to determine the size of government in the economy in order to facilitates effective working of the economy. As a result of these, this study is very important, and also the study stated that, empirical analysis, the optimum size of government, e.g. the share of overall government spending that maximizes economic growth, is 11% of GDP (at a 95% confidence level) based on data from the Central Bank of Nigeria Statistical Bulletin 2012. Therefore, government and its policy makers need to ensure that her involve in the working is within the range of 11%. As it at this level that her spending in the economy can effectively propel aggregate demand and supply which will leads positive effects on other macroeconomic variables. In addition, the empirical result shows an evidence for the existence of the Armey Curve analysis in Nigeria. However, due to model and data limitations, it is probable that the results are understated, and the “true” optimum government level is even bigger than the existing empirical study indicates, as there are determinants of economic growth in the country. As a result of this, the study only covers between 1983 and 2012 (30 years), such there is a need for more comprehensive study in this regard.
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