CORRUPTION AND ECONOMIC GROWTH IN NIGERIA

Abstract

Corruption constitutes one of the major obstacles to economic growth. It misdirects capital expenditure, shortens factor productivity efficiency and distorts consumers' tastes for goods and services. In Nigeria, the average annual growth rate of capital expenditure which was 35% in 1985-1989, increased sharply to 37% and 50% during 1990-1994 and 1995-1999 and declined steadily to 19% in 2005-2010. Over the same periods, productivity growth stood at 10% in 1985-1989, declined to 3% and 2% in 2005-2009 and 2010-2011 respectively. Consumers' tastes for goods and services declined sharply from 10% to -17%. While there are studies on corruption-growth relationship, little attention has been devoted to productivity growth channel through which corruption affects economic growth in Nigeria. This study, therefore, investigated the effects of corruption on economic growth through productivity growth and ascertained its determinants in the country.

A Barro-type endogenous growth model provided the theoretical framework. The model comprised direct effect of corruption on productivity growth and indirect effect of corruption on economic growth. The key variables considered for the direct effect were trade openness, national system of innovation, law and order, and corruption. Fitted productivity growth, capital expenditure and consumers' tastes represented the indirect effect variables. Corruption perception index of transparency international was used to measure corruption while real gross domestic product represented economic growth. Co-integration and Error Correction Mechanism (ECM) provided the estimation technique for the model. The co-integration technique was used to capture long-run impact of corruption on economic growth, while the ECM was employed to measure the short-run dynamics of corruption. A survey of determinants of corruption in public and private sectors was undertaken as an additional contribution to the established factors influencing corruption. The secondary data were obtained from Central Bank of Nigeria's Statistical Bulletin and National Bureau of Statistics Annual Abstract for the period 1980 to 2011. All estimated coefficients were evaluated at 5% level of significance.

The coefficients of trade openness (0.35) exerted a positive and significant impact on productivity growth, while national system of innovation (-0.03), law and order (-0.01) and corruption (-0.20) negatively affected productivity growth. This implied that law and order affected productivity growth negatively. The components of the innovation system were under performing which indicated stunted productivity growth. Corruption estimate showed the expected negative sign, which implied reduced productivity growth due to corruption. Fitted productivity growth (-0.41) and capital expenditure (-0.75) affected economic growth negatively. Capital expenditure was vulnerable to corruption due to large-scale capital investment. Consumers' tastes for goods and services (0.34) positively impacted on economic growth. The key determinants of corruption included low wage rate and poor working condition (46.0%),weak government institution (10.0%), ineffective legal system (21.0%), and ostentatious living (5.0%). Corruption hindered economic growth through its adverse effects on productivity growth and capital expenditure while consumers’ tastes influenced growth positively. Capital expenditure should be directed to growth enhancing projects.

Keywords: Nigerian economy, Corruption, Barro-type growth model, Co-integration analysis Word count: 499