Fiscal Policy and Private Investment in Nigeria: A Linear and Nonlinear Analysis

(ProQuest: ... denotes formulae omitted.)IntroductionThe downtrend in public investment, including extensive privatization and the drive toward a smaller economic role of the state in the past two or three decades, has led to the need for the emergence of alternative ways to finance investment. Investment fueled by the private sector is recognized as the catalyst for attaining the twin goals of broad-based sustainable economic development and poverty alleviation, as investment allows for entrepreneurship and employment creation opportunities that increase incomes for the poor and rich alike (Tobias and Mambo, 2007).The analyses of a majority of countries show that the governments over the years have embarked on diverse macroeconomic policy options to steer the economy on the path of growth and development. One of the policy options readily employed is fiscal policy (Medee and Nenbee, 2011). Also, the debate on the relevance and nature of government intervention to stimulate the economy has again underscored the macroeconomic effects of the fiscal policy. The power of fiscal policy as an instrument for influencing private investment was acknowledged in the works of Hermes and Lensink (2001), Kustepeli (2005), Jongwanich and Kohpaiboon (2008), Hadiwibowo (2010), Afonso and Jalles (2011), Sineviciene and Vasiliauskaite (2012), Menjo and Kotut (2012), and Malik (2013).Most of the theoretical (and empirical) literature looks at the relationship between fiscal policy and economic growth. Yet, this literature is also important for evaluating the relationship between fiscal policy and private investment (Hermes and Lensink, 2001). The literature suggests that one of the main channels through which fiscal policy has an influence on growth is via its impact on private investment (Kustepeli, 2005; and Mallick, 2013). The literature is roughly divided into three strands. The first lines of research are those that focus on the spending side of fiscal policy and its impact on private investment. Example of studies that used this line of approach includes those that indicate that state investment can crowd in private investment (Moshi and Kilindo, 1999; Asante, 2000; Hermes and Lensink, 2001; Jongwanich and Kohpaiboon, 2008; and Marattin and Salotti, 2010). The following studies however, show that the state spending can crowd out private investment (Ghali, 1998; Hermes and Lensink, 2001; Alesina et al., 2002; Karagol, 2004; Badawi, 2005; Mitra, 2006; Afonso and Sousa, 2009; Karagoz, 2010; and Mallick, 2013). Studies by Greene and Villanueva (1991), Ramirez (1996), Chakraborty (2007), and Hunt (2012) show that rather than public investment exerting a universally crowding-out or crowding-in effect on private investment, the two maintained a complementary relationship.Another strand in the literature includes those that study the impact of fiscal taxation (revenue side of fiscal policy) on private investment. While Vergara (2010) maintained that reduction in tax rate increases the rate of investment, Honohan (2001) presents evidence that reduction in tax and other tax incentives for investment can only have a minor effect on investment, as the reduction in the tax rate was offset by the elimination of investment incentives.Then there is another strand of literature that has specifically studied the impact of fiscal policy on private investment. Hadiwibowo (2010), Menjo and Kotut (2012), Sineviciene and Vasiliauskaite (2012) and Sineviciene (2013) indicate that fiscal policy has a direct impact on investment and investment plays a major role in determining the economic growth. Hermes and Lensink (2001) and Malik (2013) examine the linear as well as the nonlinear impact of fiscal policy variables on private investment and the results show that in most of the cases there exists a nonlinear relationship with significant threshold level for different fiscal policy instruments to encourage private investment. …