EMPIRICAL ANALYSIS OF FEDERAL GOVERNMENT EXPENDITURE POLICY ON AGRICULTURE IN NIGERIA

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EMPIRICAL ANALYSIS OF FEDERAL GOVERNMENT EXPENDITURE POLICY ON AGRICULTURE IN NIGERIA

ABSTRACT

The study assessed the trend, structure, composition, determinants and effectiveness of Federal Government agricultural expenditure policies and the implications of these policies from 1960-98.The study covered the Nigerian nation and used federal level time series data to achieve the set down objectives. The primary analytical method consisted of descriptive analysis, appropriate pictorial diagrams, line and pie charts. Stationarity, co – integration /error correction model (ecm) and granger causality approaches were also employed to verify the characteristics of the data, ascertain the existence of causality/determinants of agricultural expenditure and long run relationship, while the Tin Bergen Model was employed to determine the effectiveness of Federal Government agricultural expenditure policies. The study revealed that the real Federal Government expenditures on agriculture increased enormously since 1970, from N152.0 m to a peak of N 2,473.0m in 1980 due to the oil boom. The proportion of the Federal Government expenditure on GDP fluctuated during the study period, rising from 0.1 per cent in 1960 to a peak of 3.4 per cent in 1987, followed by gradual decline to 0.4 per cent in 1998, implying a decline in agricultural growth. The recurrent capital expenditure ratio stood at 33: 67 in the last decade of the study period, compared to a ratio of 88:11 obtained from 1960-67. The dwindling proportion of recurrent expenditure, particularly overheads, had grave consequences for the sustenance of the numerous agricultural projects on board. The structure of expenditure was generally weakened, with undue emphasis on investments in inefficient parastatals, which prior to SAP engaged in direct production. The crop sub-sector was observed to have crowded other sub sectors such as livestock, fisheries and forestry. The mean civilian total expenditure put at N664.90m was about 1.5 times the average under the military regimes, even though the t-test of significance carried out on these means revealed that they were not significantly different from each other. Expenditure volume during the 1970-85 was about twenty three and two times those of the immediate preceding and proceeding periods, respectively. The Coefficient of Variation (COV) analysis showed that expenditures were more stable and less volatile during the first era (1960-69). The review of expenditure relative to selected sectors of the economy showed that the mean defence and administration expenditures were four times and two times those of agricultural expenditures. The share of agricultural expenditure in total expenditure was an average of three per cent compared to ten per cent, nine per cent, six per cent and two per cent for defence, administration, education and health respectively. The Product Moment Correlation analysis indicated a positive correlation, implying that these expenditures tended to move in the same direction and went to confirm the use of the “across – the – board addition/cut expenditure technique” which had been a disincentive to sectoral peculiar expenditure needs. The causality tests indicated that the real government agricultural expenditure in Nigeria had been largely determined by the level of public financial resources in the Country, while the ecm revealed that there was no long term neutrality of change between agricultural expenditures and the tested determinants. The policy effectiveness elasticity further showed that public expenditure policy on agriculture was generally ineffective, contributing a marginal increase of 0.03 per cent to agricultural output from every 10 per cent increase in agricultural expenditure.

TABLE OF CONTENTS

Title Page i

Certification ii

Dedication iii

Acknowledgement iv

Abstract v

Table of Contents vi

List of Tables viii

List of Figures x

Lists of Appendices xi

CHAPTER ONE: INTRODUCTION

1.1 Background Information 1

1.2 Problem Statement 2

1.3 Objectives of Study 3

1.4 Research Hypothesis 4

1.5 Justification of the Study 4

1.6 Limitations of study 5

CHAPTER TWO: LITERATURE REVIEW

2.1 Theoretical Issues and Empirical Evidence 6

2.1.1 Public policy 6

2.1.2 Goal of public policy 7

2.1.3 Theories of public expenditure 8

2.1.4 Classification of government expenditure 10

2.1.5 Objectives and roles of government expenditure 11

2.1.6 Government expenditure on agriculture 13

2.1.7 Determinants of government expenditure 15

2.1.8 Agriculture expenditure policies in other countries 16

2.1.9 Effectiveness of government expenditure policies 17

2.1.10 Limitations of previous studies on government expenditure policy

On agriculture 18

2.1.11 Previous works on causality test 19

2.1.12 Policy reaction approach to identifying determinants of

Government expenditure on agriculture 22

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Scope of Study 24

3.2 Sources of Data 24

3.3 Description of Study Area 24

3.4 Analytical Framework 29

3.4.1 Model specification 29

CHAPTER FOUR: RESULTS AND DISCUSSION

4.1 Trend, Structure and Composition of Federal Government

Agricultural Expenditure in Nigeria (1960 – 1998) 34

4.1.1 Absolute federal government agriculture expenditure growth 34

4.1.2 Agricultural expenditure in relation to total expenditure 37

4.1.3 Agricultural expenditure growth in relation to GDP/GNP 40

4.1.4 Structure of federal government agriculture expenditure 42

4.1.5 Composition of federal government expenditure in Nigeria 1960-1998 44

4.2 Federal Agricultural Expenditures Under Civilian/Military Administrations

and Along Philosophical Eras. 54

4.2.1 Federal government agricultural expenditures under civilian

and military administrations 54

4.2.2 Federal government expenditure on agriculture along philosophical eras 62

4.3 Comparison of Federal Government Agricultural Expenditures with

Those of Selected Sectors of the Economy 66

4.4 Causes of Public Expenditure Spending in Nigeria. 70

4.4.1 Empirical estimate and analysis 70

4.4.2 Effectiveness of Federal Government Expenditure Policy on

Agriculture in Nigeria (1960 – 98) 84

CHAPTER FIVE: SUMMARY, CONCLUSION AND ECOMMENDATIONS

5.1 Summary 87

5.2 Conclusion 89

5.3 Recommendations 90

REFERENCES 92

APPENDIX 98

Tables Pages

CHAPTER ONE

INTRODUCTION

1.1 Background Information

Agricultural expenditure policies in Nigeria have undergone many changes since independence in 1960. These changes were mainly a reflection of changes in government philosophy to agricultural development, while the philosophical changes were in themselves, often brought by changes in government.

Between 1960 and 1998, the country witnessed six military regimes and three civilian eras (spanning 29 and 10 years, respectively), which implemented varied policy measures in line with the priority of the government. A review of the Federal Government agricultural expenditures by the type of government showed that the average real annual agricultural expenditure on total expenditure was higher under the civilian regimes, averaging about 3.82% compared to the 2.94% under the military regimes. The annual average real civilian government agricultural expenditure was also about 1.5 times that of the military, while the percentage of agriculture’s contribution to GDP average about 47.10% under the civilian regime compared to 38.90% under the military. The total Federal Government agricultural expenditure figure, which reached peak of N2,473 million in 1980, fell to N286.0 million in 1984, after the military came to power.

In a broad sense, however, Federal Government expenditure policy on agricultural development had undergone three major phases, the first, which was the period of decentralized approach to agricultural development, was from 1960 to about 1969. The second from 1970 to 1985, witnessed increased Federal Government participation, while the third, which is still unfolding, from 1986 to the present time is the era of economic reforms (Olayemi and Dittoh, 1995).

A comparison of real Federal Government (FGN) expenditures on agriculture by philosophical orientation revealed that the average real Federal Government expenditure on agriculture of N867.06m recorded during the 1970 – 85 era was higher than the N398.0m and N37.3m obtained under the reform and decentralized era respectively. Also, the annual growth of real government expenditure on agriculture was higher (50%) under the era of increased Federal participation compared to the 16.67% observed for the 1960 – 1969 period and the 11.43% recorded during the 1986 – 1998. Ironically however, the percentage contribution of agriculture to GDP was higher during the decentralized era, averaging about 57.67% compared to 36.25% and 34.04% recorded in the last two periods.

In spite of all these efforts and huge budgetary allocations, the overall agricultural situation deteriorated creating a wide gap between the supply and demand for food. Revenue from agricultural export dwindled (See Appendix 1) and government was faced with mounting food import bills. At the same time, industries increasingly resorted to imports of agricultural raw materials, thus putting lot of stress on foreign exchange. Ojo and Akanji (1996) also noted that the results were inadequate, not only in relation to the committed financial resources, but also with regard to the nation’s minimum needs of agricultural products. Thus, raising questions as to the level, structure, determinants and effectiveness of government expenditure policy on agriculture.

1.2 Problem Statement

The ultimate objective of any public policy on agriculture is to increase total production and enhance agricultural growth. Specifically, both the agricultural credit policy and government direct spending are generally geared towards making farmers more productive and efficient through the provision of the appropriate facilities.

An analysis of the real public sector spending for agricultural development indicates that substantial increases have been recorded. From N373.0 m during the 1960-69 fiscal periods, real Federal Government expenditures (recurrent and capital) rose by about 26 folds N9,672.0m between 1980 and 1989, thus reflecting the broad pattern of Federal Government intervention in agricultural development.

In spite of the increased resource flow to the sector, however, total agricultural production stagnated and eventually declined in the pre-SAP era, while moderate growth was witnessed in the wake of the SAP induced reforms (Ukpong, 1993). Vincent (1981) also affirmed that in spite of the increased flow of funds to the agricultural sector, supplies of agricultural production for consumption, the manufacturing industry and exports also declined with adverse effects on the country’s inflow and outflow of foreign exchange. Also, the results in the market place and on the tables of consumers have been worrisome. Food prices have been rising persistently over the years with the average price of garri, a major staple food, rising to about N63.3/kg in December, 2007, compared to N5.80/kg in August, 1992 (APMEU, 1993; NFRA, 2008). The World Bank (1996) also argued that even though social and economic indicators had been improving somewhat, it remained far below acceptable levels and below levels that should have been expected on the basis of previous high expenditures. It, however, noted that key programmes related to poverty reduction, health care, education, transport and agriculture received lower funding than administration and security.

Inspite of the FGN’s investment in the agricultural sector over the years, Czech Conroy Natural Resources Institute (2003) noted that the sector had been dominated by poor, smallholder, peasant farmers and had performed below expectations. According to AfDB (2006), the sector employed about 70 percent of the estimated 140 million people, 80 per cent of the rural population and contributed about 32 per cent of GDP. AfDB (2006) further revealed that Nigeria ranked 125th in the 2005 Human Development Index, with basic indicators that placed the country among the 26 poorest countries in the world. The Bank further affirmed that two out of every three Nigerians (66 percent) lived in extreme poverty as measured by the International Standard of one dollar a day as of 2004. Poverty in Nigeria was also observed to be concentrated in rural areas, where about 64 per cent lived below the poverty line compared to 35 per cent in the urban areas.

Against this backdrop, this research raised pertinent questions such as:

What had been Nigeria’s history of government expenditure on agriculture?

What type of government or philosophical orientation affected the share of annual budgets allocated to agriculture?

What factors had determined the amount of government expenditures on Nigeria’s agricultural sector over the study period?

What were the effects of government expenditure on Nigeria’s agricultural output?

1.3 Objectives of study

The broad objective of this study was to assess the trend, structure, composition, determinants and effectiveness of Federal Government expenditure policies and the implications of these policies to agriculture from 1960 – 1998.

In line with the above broad objective, the study specifically:

examined the trend, structure and composition of Federal Government expenditure on agriculture in Nigeria;

compared agricultural expenditures during civilian and military regimes and along philosophical era;

compared Federal Government expenditure on agriculture with those of selected sectors of the economy;

determined the causes of public agricultural spending in Nigeria;

assessed the effectiveness of Federal Government expenditure policy on Agriculture in Nigeria; and

drew policy recommendations based on research findings.

1.4 Research Hypotheses

The null hypotheses tested were:

growth rates of real public federal expenditure on agriculture under military regimes and civilian administrations were not different;

federal government expenditure on selected sectors of the economy had no relationship with government agricultural expenditure;

determinants of agricultural expenditures had no relationship and effect on agricultural spending; and

agricultural expenditure policies relating to Federal Government direct spending had not been effective in achieving increased agricultural productivity.

1.5 Justification of Study

Over the years, financial resources flowing into the agricultural sector had been increasing. Specifically, Ukpong and Malgwi (1991) revealed that Government’s allocation for capital expenditure on agriculture rose from N5.6 million in 1970 to N267.1 million in 1991. Ironically however, growth in agricultural output had lagged behind financial and other inputs in the sector.

Inspite of the seriousness of the aforementioned development to the ultimate policy objective of attaining sustainable food security in Nigeria, this research suffers from inadequate information and shortage of relevant studies in the country.

Generally, most of the available studies have focused on Federal Government policies in respect of agricultural finance. Others, such as Ojukwu (1984) and Okorie (1985) concentrated mainly on the implications of government budgetary allocations and economic growth. Elias (1981) on the other hand, observed that existing studies on government expenditure policy tended to focus on macro economy rather than the agricultural sector. Though, Fosu (1994) worked on public agricultural expenditure policy in Ghana, very limited studies on this subject may have been undertaken in Nigeria. Mbanefo (1993) for instance, concentrated on the policy orientation of SAP to the achievement of fiscal balance criteria for public expenditure allocation and public investment debt servicing.

Regrettably, too, researchers who have narrowed their studies to these aspects have been faced with numerous problems. Schuh (1981) and Rausser (1982) argued that the determinants of agricultural policy decisions were largely unknown, while attempt by Elias (1985) to exogenise government agricultural expenditure was thwarted by collinearity problems inherent in his model.

Fosu (1994) further noted that researches relating to the economic policies affecting agriculture had centered on normative or prescriptive issues rather than positive analysis; expenditures were to be understood and future expenditure trends predicted.

It is therefore hoped that this study will provide an insight into the determinants and effectiveness of government expenditure policy in agriculture in Nigeria, with a view to ensuring logical basis for government expenditure on agriculture and improving the effectiveness of policy efforts on agriculture.

1.6 Limitation of Study

Generally, access to detailed agricultural sector expenditure data was problematic. Breakdowns of expenditures by function and components were also not easy to come by, while information on the impact of agricultural expenditure was inadequate. It was also difficult to assess the huge amount of agricultural expenditures that arose from extra budgetary spending.

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