It is generally agreed that economic development implies sustained increases in income per capita coupled with positive structural changes (political, cultural and social etc) within an economy over a long period of time. It follows that economic growth may not result in economic development. For development to occur, there must be visible positive changes to income distribution, quality and quantity of education, access to basic needs, modern technology, changes in political structures.
It is often argued that investment stimulates growth; within a market economy, private sector investment remaining the engine of growth with the public sector providing the enabling environment. In the classical sense, the enabling environment may mean providing law and order to allow the free market to thrive. In recent times, the public sector has been know to go beyond provision of law and order. The public sector for the most part regulates, intervenes in the system in order to allow the market to function properly. Government puts in place appropriate fiscal, monetary and exchange rate policies to ensure the function of the system. These political action are crucial if the private sector is to play its role properly. Theoretical, the private sector investments remain the engine of growth. Through capital accumulation, the private sector can ensure the reproduction and sustainability of a market system.
However, the controversy centers on the public sector vis - a –vis public sector investment. In a simple Keynesian framework, high levels of government consumption are likely to increase employment, profitability and investment via multiplier effects on aggregate demand. There are those who maintain that government consumption will “crowd out” private investment by dampening any economic stimulus in the short run and in the long – run by reduction capital accumulation. Either way, the link is between levels of government spending and economic activity rather than factor productivity.
There is no general agreement regarding the relationship between government spending and economic growth. Researchers have arrived at different results. Using a sample of 96 developing countries, Landau (1983) inferred that big government, measured by the share of government consumption expenditures in gross national product (GNP) or gross domestic product (GDP), reduced the growth of per capita incomes. Landau (1986) reaffirmed his earlier findings by examining other set of variable influencing economic growth; these variable included per capita income, the structure of production, population and global economic conditions.
Some scholars have concluded that a larger government revenue in GNP enhances economic growth in poor developing countries (Rubinson, 1997; Ram, 1986; Grossman, 1988). Diamond (1989) using a sample of 42 developing counters found that social expenditure made a significant impact on growth in the short - run while capital expenditures exerted a negative influence on growth in Nigeria.
The controversy over the growth effects of government investments is partly due to our incomplete understanding of the growth process and the determinants of economic expansion. Within the endegenous growth theory, government investment in human capital formation can stimulate growth. It is, therefore, always necessary to adopt an empirical approach in investigating the available evidence on the public investment growth .
Government capital expenditure impact positively on technological change. Developing countries like Nigeria have benefited from research and development expenditures on new agricultural techniques , it is only the government that has invested large sums of money on seed varieties and other aspects of the green revolution programme.
The influence of the efficiency of the use of resource on the growth rate is not easy to quantify. The conventional reason for government under investment is the break down of the market system implying a case of under investment in public goods. These public goods may be perceived as necessary inputs to the private sector production process. For example, internal security and public order is a necessary condition for a healthy investment environment and could be seen as one of the variables influencing the environment thesis.
Another issue is the of intermediate imports which is now viewed as factor of production especially in an economy that is foreign - exchange constrained. A more generalized growth model will incorporate exports as an engine of growth. Increased demand for importable influences the expansion of domestic production. The export demand linkage reflects the “cyclical “effect of growth on real output (Khan and Villanueva, 1991).
There exist significant relationship between public investment and private investment. Those that emphasize the financing side of expenditure draw attention to investment crowding - out effects of government expenditure. When it is assumed that private investment has higher productivity than public investment, a negative effect on growth is deduced. Those that stress the expenditure side show the private investment crowd - in effects of public expenditure since these will tend to enhance the absorptive capacity of the economy and the profitability of private investment.
Some scholars have hypothesized that the response of private investor depends on the stage of the cycle, the availability of financing and the level of public investment. While the effect of the stage of the cycle appears uncertain, that of available finance seems less ambiguous.
Indeed, because the total amount of financing is limited and the price mechanism is not allowed to operate smoothly, it would seem legitimate to hypothesize that the private investor in a developing country is restricted by the level available bank financing (Blejer Khan, 1984, p. 386).
However, the nature of capital markets in developing economies limits the financing of private investment to the use of retained profits, bank credit and foreign borrowing.
Investment if it uses scarce physical and financing resources that would otherwise be available to private investors. Alternatively, the same scenario will occur if the public sector produces marketable output that competes with private output. In addition, the financing of public sector investment either through taxes, debt issuance or inflation will reduce the resources available to the priate sector and hence dampen private sector activities (Chibber and Dailami)
Khan and Reinhart (1990) tested empirically the relative productivity of private and public investment for a cross - section of developing counties. Their results showed that private investment had a large direct effect on growth than of public investment. They also reaffirmed the indirect effects of public investment on growth through raising profitability of private investment and the absorption capacity of the economy.
It is generally agreed that public investment can be complimentary to private investment. Blejer and Khan (1984) found that public investment which has some bearing on infrastructure and the provision of public goods was complimentary to private investment. The necessity of pubic investment given the peculiarities of developing countries like Nigeria does not negate importance of a market economy propelled by private investment.
We have argued elsewhere that most systems need both market and state interventionist state ought to strengthen the market institutions in order to influence the behaviour of economic agents effective Ekpo (1997). It is within this context that we examine the contribution of private and public investment to economic development in Nigeria
Subscribe to access this work and thousands more