Public Debt Spiral in Nigeria: Can a Structural Gap Result From Pervasive Corruption?

Fisayo Fagbemi; Olufemi Solomon Olatunde

doi:10.46281/aijssr.v4i2.330

Fisayo Fagbemi Independent Researcher, Nigeria
Olufemi Solomon Olatunde Independent Researcher, Nigeria

DOI: https://doi.org/10.46281/aijssr.v4i2.330

Keywords: Public debt, Corruption, Fiscal crisis, ARDL, Nigeria.

Abstract

It is increasingly recognized that good understanding on the corruption-related causes and remedies of the modern fiscal crisis would bolster informed decisions and key governance standards. Many of the governance weaknesses have been exacerbated by ingrained fiscal indiscipline and lack of effective bureaucratic provisions. These concerns necessitate ongoing research efforts aimed at galvanizing the best compilation of perspectives on the role of public institutions in debt accumulation process. Hence, this study examines the long run and short run effect of corruption on public debt in Nigeria over the period of 1996 to 2017 using ARDL bound test to cointegration analysis. Empirical evidence reveals that both corruption index and control of corruption have an insignificant adverse effect on public debt in the long run, but with a significant influence in the short run. Considering the long-term implication, current anti-corruption efforts might be ineffective in enhancing strategic monitoring and sustainable fiscal standards. Nonetheless, it is emphasized that effective corruption control measures could mitigate spiralling incidence of government debt. Further findings indicate that there exists bi-directional causality between corruption index and public debt, whereas none is found between control of corruption and public debt. The study suggests that strong corruption-based control mechanisms are fundamentals to decreasing fiscal deficits and debt reduction. Overall, a significant insight distills from the study is that the goal of attaining global financial stability and fiscal sustainability through sound regulatory framework has embodied the provisions that enhance corruption-reducing measures and institutional standards to curb persistent debt accumulation.

References

Adewale, S. B. (2011). The crowding-out effects of corruption in Nigeria: An empirical study. Journal of Business Management and Economics, 2(2): 059-068.

Arusha C., & friedrich S. (2013). How Does Corruption Affect Public Debt? Working Paper No. 1322 December 2013.

Arusha C., Ratbek D., & Friedrich S. (2017). How Does Corruption Affect Public Debt? World Development, 90: 115-127.

Bailey, S.J. (2004). Structural Gaps in Public Finance: Strategic Public Finance. 179-180.

Benfratello, L., Del Monte, A. & Pennacchio, L. (2018). Corruption and public debt: a cross-country analysis. Applied Economics Letters, 25(5), 340-344, DOI: 10.1080/13504851.2017.1321831.

Buehn, A. & Schneider, F. (2009). Shadow Economies and Corruption All Over the World: Revised Estimates for 120 Countries. Economics: The Open-Access, Open-Assessment E-Journal, 1 (2007-9): 1–53 (Version 2). http://dx.doi.org/10.5018/economics-ejournal.ja.2007-9.

Butler, A., Fauver, L. and Mortal, S. (2009). Corruption, Municipal Connections, and Municipal Finance. Review of Financial Studies, 22(7): 2873– 2905.

Cooraya, A., Dzhumashev, R. & Schneider, F. (2017). How Does Corruption Affect Public Debt? An Empirical Analysis. World development, Vol 90: 115-127, https://doi.org/10.1016/j.worlddev.2016.08.020

Delavallade, C. (2006). Corruption and Distribution of Public Spending in Developing Countries. Journal of Economics and Finance, 30 (2): 222 – 39.

Depken, C. A. & LaFountain, C.L. (2006). Fiscal Consequences of Public Corruption: Empirical Evidence from State Bond Ratings, Public Choice, 126 (1–2): 75 – 85.

Dzhumashev, R. (2014a). Corruption and growth: The role of governance, public spending, and economic development. Economic Modelling, 37, issue C, 202-215.

Dzhumashev, R., (2014b). The two-way relationship between government spending and corruption and its effects on economic growth. Contemporary Economic Policy, 32, 403-419.

Engle, R.F. & Granger, C.J. (1987). Cointegration and error-correction-representation, estimation and testing. Econometrica, 55, pp. 251–278.

Friedman, E., Johnson, S. & Kaufmann, D. & Zoido-Lobaton, P., (2000). Dodging the grabbing hand: the determinants of unofficial activity in 69 countries. Journal of Public Economics, Elsevier, 76(3): 459-493.

Grechyna, D. (2012). Public Corruption and Public Debt: Some Empirical Evidence. http://papers.ssrn.com/s013/papers.cfm?abstract_id=2052974 [accessed November 20, 2016].

Gupta, S., De Mello, L. & Sharan, R. (2001). Corruption and Military Spending, European. Journal of Political Economy. 17: 749 –77.

Hall, R.E. & Charles I. Jones, C.I. (1999). Why Do Some Countries Produce So Much More Output per Worker than Others? Quarterly Journal of Economics, 114 (1): 83 – 116.

Haug, A. (2002). Temporal Aggregation and the Power of Cointegration Tests: A Monte Carlo Study. Oxford Bulletin of Economics and Statistics 64, 399-412.

Johansen, S. & Juselius, K. (1990). Maximum likelihood estimation and inference on cointegration with application to the demand for money. Oxford Bulletin of Economics and Statistics, 52, pp. 169 – 210.

Johansen, S. (1991). Estimation and hypothesis testing of co-integration vectors in Gaussian vector autoregressive models. Econometrica, 59, pp. 1551 – 1580.

Johnson, S. Kaufmann, D. and Shleifer, A. (1997). The Unofficial Economy in Transition. Brookings Papers on Economic Activity, 28 (2): 159 – 240.

Kaufmann, D. (2010). Can Corruption Adversely Affect Public Finances in Industrialized Countries? Brookings Institution, April 19. https://www. brookings.edu/opinions/can-corruption-adversely-affect-public-finances-inindustrialized- countries/ [accessed November 20, 2016].

Kaufmann, D., Kraay, A., & Mastruzzi. M. (2010). The Worldwide Governance Indicators: Methodology and Analytical Issues. Available online: www.govindicators.org (accessed on 19 April 2016).

Kraay, A., Zoido-Lobaton, P. and Kaufmann, D. (1999). Governance Matters. Policy Research Working Paper no. 2196, World Bank. http://elibrary.worldbank. org/doi/book/10.1596/1813-9450-2196 [accessed November 20, 2016].

Kumar, M.S & Woo, J. (2010). Public Debt and Growth. IMF Working Papers, No. 10/174, International Monetary Fund.

Leadership Nigeria Newspaper (2018). Nigeria’s Rising Debt Profile.

Liu, C. (2017). Corruption and State and Local Government Debt Expansion. Public Administration Review, 77 (5): 681–690.

Liu, C. and Mikesell, J.L. (2014). The Impact of Public Officials’ Corruption on the Size and Allocation of U.S. State Spending. Public Administration Review, 74 (3): 346 – 59.

Luigi, B., Alfredo, D. M. & Luca, P. (2018). Corruption and public debt: a cross-country analysis. Applied Economics Letters, Taylor & Francis Journals, 25(5): 340-344.

Mauro, P. (1995). Corruption and Growth, Quarterly Journal of Economics, 110 (3): 681 – 712.

Mauro, P. (1998). Corruption and the Composition of Government Expenditure. Journal of Public Economics, 69 (2): 263 – 79.

Narayan, P. (2005): The Saving and Investment Nexus for China: Evidence from Co-integration Tests. Applied Economics, 37: 1979-1990.

Njangang N. H. (2018). Impact of Corruption on Public Debt: Evidence from Sub-Saharan African Countries. American Journal of Economics, 8 (1): 14-17, doi: 10.5923/j.economics.20180801.03.

Obadan, M. (2002). Corruption, Public Investment and Growth in Nigeria: Some Stylist Facts. NESG Economic Indicators, 2(2).

Obialor, C.F. & Ugochukwu, O.H. (2017). Corruption and Effective Public Service Performance in Nigeria. International Journal of Advanced Studies in Economics and Public Sector Management, 5 (3).

Ojukwu, C.C. & Shopeju, J.O. (2010). Elite corruption and the culture of primitive accumulation in 21st Century Nigeria.

Osunyikanmi, P.O. (2007). Development Implication of Nigeria’s Economic Crisis. Journal of Development Perspective, 2(1): 34-59.

Pani, M. (1996). Corruption and public debt: can a financial crisis result from dishonest political control? Giornale degli Economisti e Annali di Economia Nuova Serie, 55(1): 117-132, https://www.jstor.org/stable/23247932.

Pesaran, H. & Shin, Y. (1997): An Autoregressive Distributed Lag Modeling Approach to Co-integration Analysis, Cambridge, England.

Pesaran, M. H., Shin, Y. & Smith, R.J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16, 289-326.

Reinhart, C. M, Reinhart, V.R. & Rogoff, K.S. (2012). Public debt overhangs: Advanced economy episodes since 1800. Journal of Economic Perspectives, 26(3): 6986.

Rose-Ackerman, S. (1997). The Pursuit of Absolute Integrity: How Corruption Control Makes Government Ineffective. Journal of Policy Analysis and Management, 16 (4): 661 – 64.

Schneider, F., Buehn, A., & Montenegro, C.E. (2010). Shadow economies all over the world: new estimates for 162 countries from 1999 to 2007 (English). Policy Research working paper; no. WPS 5356. Washington, DC: World Bank.

Shleifer, A. and Vishny, R. (1993). Corruption. Quarterly Journal of Economics, 108 (3): 599 – 617.

Smith, M.S. (1994): Second language learning: theoretical foundations. London: Longman. 235 pp

Tanzi, V. (1998). Corruption and the Budget: Problems and Solutions. In Economics of Corruption. Edited by Arvind K. Jain, 111– 28. Norwell, MA: Kluwer Academic.

Tanzi, V. and Davoodi, H.R. (1997). Corruption, Public Investment, and Growth. Working Paper no. 97/139, International Monetary Fund. https://www.imf.org/external/pubs/ft/wp/wp97139.pdf [accessed November 20, 2016].

Wei, Y. W. (2001). Negative Alchemy? Corruption, Composition of Capital Flows, and Currency Crises. NBER Working Paper No. 8187, DOI: 10.3386/w8187.