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

Author

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  • Samuel Olasode Olaleye
  • Femi Edun
  • Hassan Taiwo Bello
  • Shakirudeen Babatunde Taiwo

Abstract

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.

Suggested Citation

  • Samuel Olasode Olaleye & Femi Edun & Hassan Taiwo Bello & Shakirudeen Babatunde Taiwo, 2014. "Government Expenditure and Economic Growth: An Empirical Analysis of the Armey Curve in Nigeria," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 17(51), pages 47-66, March.
    • Handle: RePEc:rej:journl:v:17:y:2014:i:51:p:47-66
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    References listed on IDEAS

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    1. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 70(1), pages 65-94.
    2. Kormendi, Roger C & Meguire, Philip G, 1995. "Government Debt, Government Spending, and Private-Sector Behavior: Reply," American Economic Review, American Economic Association, vol. 85(5), pages 1357-1361, December.
    3. Magazzino, Cosimo & Forte, Francesco, 2010. "Optimal size of government and economic growth in EU-27," MPRA Paper 26669, University Library of Munich, Germany.
    4. António Afonso & Ludger Schuknecht & Vito Tanzi, 2005. "Public sector efficiency: An international comparison," Public Choice, Springer, vol. 123(3), pages 321-347, June.
    5. Francesco Forte & Cosimo Magazzino, 2011. "Optimal Size Government and Economic Growth in EU Countries," Economia politica, Società editrice il Mulino, issue 3, pages 295-322.
    6. Edmund J. Sheehey, 1993. "The Effect of Government Size on Economic Growth," Eastern Economic Journal, Eastern Economic Association, vol. 19(3), pages 321-328, Summer.
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    Cited by:

    1. Uchechi Shirley Anaduaka & Vivian Ikwuoma Nnetu & Stephen Ekene Aguegboh & David Iheke Okorie, 2016. "Relative Maxima of the Public Sector: A Comparative Study of Nigeria and Ghana," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 6(11), pages 575-589, November.
    2. Alimi, R. Santos, 2018. "Growth effect of government expenditures in West African countries: A nonlinear framework," MPRA Paper 99108, University Library of Munich, Germany, revised Mar 2019.
    3. Maureen Were & Lorah Madete, 2022. "The link between public debt and public investment in Tanzania," WIDER Working Paper Series wp-2022-155, World Institute for Development Economic Research (UNU-WIDER).
    4. Alimi, R. Santos, 2014. "Does Optimal Government Size Exist for Developing Economies? The Case of Nigeria," MPRA Paper 56073, University Library of Munich, Germany.

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    More about this item

    Keywords

    government expenditure; economic growth; Armey curve; aggregate demand; aggregate supply;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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