CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction
This chapter examines existing literature on the relationship between public spending and
private investment. It discusses relevant theoretical frameworks, reviews empirical studies
from Nigeria and other countries, and identifies gaps the present research seeks to address.
The review provides a foundation for understanding the mechanisms through which
government expenditure influences private sector investment behavior.
2.2 Conceptual Framework
Public spending can be broadly categorized into capital and recurrent expenditure. Capital
expenditure involves long-term investments in infrastructure, health, education, and
technology, while recurrent expenditure covers operational costs like salaries, subsidies,
and interest payments. The effect of public spending on private investment depends on how
these funds are allocated and managed.
In the Nigerian context, capital projects such as the Lagos-Ibadan railway and the Second
Niger Bridge are examples of public investments aimed at stimulating economic activities.
However, inefficiencies, corruption, and delays often affect their impact. Recurrent
expenditures, including salaries for over two million civil servants and recurrent subsidy
payments (e.g., the N4 trillion paid in fuel subsidies in 2022), can place significant pressure
on public finances (BudgIT, 2022).
2.3 Theoretical Literature
2.3.1 Classical and Neoclassical Theories
The classical school argues that public spending should be minimized to allow the market to
allocate resources efficiently. In contrast, neoclassical theory posits that government
borrowing to finance excessive spending leads to higher interest rates, which can crowd out
private investment.
2.3.2 Keynesian Theory
The Keynesian view supports increased government spending during periods of economic
downturn. According to this theory, capital expenditure on infrastructure can crowd in
private investment by lowering costs and increasing aggregate demand. For example,
Keynesian analysis would support Nigeria’s Economic Sustainability Plan (ESP) during the
COVID-19 pandemic as a way to boost investment.
2.3.3 Endogenous Growth Theory
This theory suggests that government spending on education, health, and infrastructure
promotes human capital development and productivity, thereby encouraging private
investment. Nigeria’s National Social Investment Program (NSIP) and TETFund initiatives
align with this perspective.
2.4 Empirical Literature Review
2.4.1 Evidence from Developed Economies
Empirical studies in developed economies show mixed results. For instance, Aschauer
(1989) found that public infrastructure investment significantly boosts private sector
productivity in the United States. However, Barro (1990) observed that excessive
government consumption may reduce growth potential.
2.4.2 Evidence from Developing Economies
In Sub-Saharan Africa, public spending has been both a catalyst and a barrier to private
investment. In Kenya, Ndung’u and Ngugi (2002) reported a positive relationship between
infrastructure spending and private investment. In contrast, studies in Ghana and Zambia
show that poorly managed public investments crowd out private sector activities due to
rising debt levels.
2.4.3 Evidence from Nigeria
Numerous studies have explored this relationship in Nigeria. Akpan (2005) found that
capital expenditure has a positive and significant impact on private investment. Similarly,
Oyinlola and Adenikinju (2005) reported that productive public spending on infrastructure
improves private sector participation.
Conversely, Omitogun and Ayinla (2007) noted that recurrent expenditure, particularly
subsidies and overheads, negatively affects private investment. In a more recent study,
Adegbite and Ayadi (2021) discovered that fiscal uncertainty and budget delays in Nigeria
reduce the effectiveness of public investment in stimulating private sector activities.
Regional disparities also influence outcomes. For instance, while Lagos and Ogun states
benefit from consistent infrastructure upgrades and industrial zone development, northern
states like Borno and Yobe have suffered due to insecurity and limited capital investments,
discouraging private investors (World Bank, 2022).
2.5 Gaps in the Literature
Most studies focus on either capital or recurrent spending without analyzing both
simultaneously. Moreover, few studies capture long-run dynamics using recent data beyond
2020. Many also overlook state-level public spending trends, which can significantly affect
localized private investment patterns.
This study fills these gaps by:
- Examining the differential impacts of capital and recurrent expenditures.
- Covering a broader time frame (1986–2023).
- Including state-level case studies such as the Lekki Free Trade Zone in Lagos, the failed
Tinapa Resort in Cross River, and agricultural intervention programs in Kaduna.
2.6 Theoretical Framework for the Study
This study adopts a blended Keynesian-endogenous growth framework. Public spending,
especially capital investment, is assumed to stimulate private investment through the
development of infrastructure and human capital. However, when government expenditure
becomes excessive or misdirected, it may lead to macroeconomic instability, debt overhang,
and eventual crowding out of private investors.
2.7 Conclusion
This chapter has reviewed key concepts, theoretical foundations, and empirical studies on
the relationship between public spending and private investment. It highlights the potential
for both crowding-in and crowding-out effects depending on the structure and management
of public expenditure. Gaps in the literature have been identified, paving the way for the
methodology and analysis in subsequent chapters.
Definition of Terms (Chapter Two)
- Fiscal Policy: Government policy relating to taxation and spending to influence economic
activity.
- Capital Expenditure: Long-term public investment in infrastructure and development
projects.
- Recurrent Expenditure: Government spending on day-to-day operations, including salaries
and interest payments.
- Private Investment: Expenditure by private firms or individuals on capital goods.
- Crowding In: When public spending enhances private sector investment.
- Crowding Out: When public sector borrowing or spending discourages private investment.
- Infrastructure: Basic physical systems like roads, power, and water supply that support
economic activities.
