International Journal of Science and Research (IJSR) ISSN (Online): 2319-7064 Index Copernicus Value (2013): 6.14 | Impact Factor (2013): 4.438 Volume 4 Issue 6, June 2015 www.ijsr.net Licensed Under Creative Commons Attribution CC BY Capital Expenditure at Disaggregated level and Economic Growth in Nigeria: An Empirical Analysis Gabriel Chukwu Nkechukwu 1 , Johnson Ifeanyi Okoh 2 1 Department of Banking and Finance, Chukwuemeka Odumegwu Ojukwu University, Igbariam Campus 2 Department of Banking and Finance, Delta State Polytechnic, Ogwashi-Uku, Nigeria Abstract: The main objective of this paper is to examine the partial and joint effects of disaggregated capital expenditures on economic growth in Nigeria. The study is perceived on the causal effect between government expenditure and economic growth. Annual time- series data coverage 1981-2013 for capital expenditure on education, health, agriculture and road construction were analyzed using ordinary least square multiple regression model to predict economic growth. The Data were obtained from the Central Bank of Nigeria Statistical Bulletin. Cointegration and VECMs were applied in estimating the data to test the long-run and short-run effect of the variables on the economic growth. Granger-causality tests were conducted to ascertain the cause-effect of the variables. Results indicate there exists long-run positive relationship between economic growth and capital expenditure on education and road; while there is long- run negative relationship between economic growth and capital expenditures on agriculture and health. Results also indicate there is unidirectional causal effect running from economic growth to capital expenditure on agriculture and road construction; while at the same time a unidirectional causal effect runs from capital expenditures on education and health to economic growth. The adjusted R 2 is 33% indicating that greater proportion of the issues in economic growth is not explained by capital expenditure in Nigeria. Recommendation is that government should review its monitoring mechanism to ensure adequate and prudent management of funds. Keywords: Capital expenditure, economic growth, multiple regression model and Nigeria. 1. Introduction The issue of the relationship between government expenditure and economic growth has been discussed extensively. Oyinlola and Akinnibosun (2013) have carefully traced back theoretical foundation of this relationship to the days of such scholars like Wagner (1883) and Keynes (1936). While Wagner (1883) suggests that economic growth leads to government expenditure, Keynes (1936) posited that economic growth is caused by government expenditures. Generally, most governments all over the world embark on public expenditure to stimulate the economy. They believe the economy cannot grow unless with government intervention and government expenditures are instrument for controlling the economy. Scholars have argued that public expenditures on socio-economic and physical infrastructure enhance economic growth. Okoro (2013), for instance, has argued that government expenditure on education and health increases the productivity of labour and by extension increases the growth of national output. Again, expenditures on infrastructure like roads, communications, and power reduce production costs which in turn increase private sector investment and profitability, and by extension enhance economic growth (Okoro, 2013). Adam Smith in his Wealth of Nation posited that government should restrict its spending on defense, maintenance of peace and order and public development work; any other things beyond these are calculated to be unjust and waste. Without government intervention in the provision of infrastructure the economy would be experiencing negative growth. Therefore, government expenditures are vital instruments for stimulating the economic growth of a nation. Although public expenditure has growth enhancing potential, there are certain government expenditures that are growth retarding. Maku (2000) argues that certain government expenditure items such as transport, electricity, telecommunications, water, health and education can retard economic growth. Case studies indicate that public expenditure drives tend to be financed by borrowing or taxing the citizens. By so doing resources which would have been used for productive purposes are diverted to unproductive sector (unproductive in the sense that government officials tend to misuse the funds). In this way the spending on these items could retard instead of enhancing growth. Many scholars continue argue that spending on social and community services do not contribute to the growth of the economy; they favour spending on economic services. Again, there are diverse views regarding the effect of capital expenditure on economic services on economic growth, and capital expenditure on social and community services on economic growth. Some scholars are in favour of capital expenditure on economic services drives‟ tendency to enhance economic growth, while some others favour capital expenditure on social and community services drives as growth-booster of the economy. Many government policy makers believe that social and community services, especially human capital in the form of education and health, contribute a lot to economic development and growth. Consequently, for many countries in which this is perceived, there has been increased investment on human capital. Despite the huge investment, however, quality of education and health care services are far below the world standard in many of these countries, especially developing countries. Paper ID: 02061502 729