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Public Spending and Private Investment: Testing the Crowding-Out Hypothesis in Nigeria (1981–2020)

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  • Tiamiyu, Kehinde

Abstract

This study verified the crowding-out hypothesis in the Nigerian economy for the period 1981 to 2020. This was done in a bid to refute or otherwise the age-old claim in economic literature that government budget deficits trigger both aggregate demand and interest rates, thereby crowding out private investment. The analysis was done with the aid of the ARDL technique, given the fact that there was an admixture of stationary and nonstationary series in the model, as found out in the ADF unit root test. This study confirms the presence of the crowding-out effect in both the short run and the long run. Irrespective of the model considered, whether in the short run or long run, GDP has been a strong fundamental driver of private investment in Nigeria. Both the short-run and long-run estimates are statistically significant at the 1% level, suggesting that investment typically exceeds savings when income grows in Nigeria. In other words, private investment in Nigeria is income-driven. This result is in line with Duesenberry’s financial theory of investment. Although a positive relationship between government capital expenditure and private investment in Nigeria was confirmed in both the short run and the long run, capital expenditure is not yet a significant determinant of private investment growth. This suggests that Nigeria has not yet achieved a breakthrough in infrastructure development, particularly in critical sectors such as transportation and communication, which are essential for attracting private investment. Furthermore, the findings reiterate that most private investments in Nigeria are income-induced rather than autonomous. Consequently, the government is strongly advised to provide more incentives to indigenous manufacturers and businesses, invest heavily in infrastructure to secure Nigeria's economic future, and create a more conducive macroeconomic environment for businesses. In addition, government spending should be directed towards stimulating the productive sectors of the economy, rather than supporting consumptive activities.

Suggested Citation

  • Tiamiyu, Kehinde, 2025. "Public Spending and Private Investment: Testing the Crowding-Out Hypothesis in Nigeria (1981–2020)," MPRA Paper 129249, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:129249
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    References listed on IDEAS

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    3. Dreger, Christian & Reimers, Hans-Eggert, 2016. "Does public investment stimulate private investment? Evidence for the euro area," Economic Modelling, Elsevier, vol. 58(C), pages 154-158.
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    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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