Fiscal policy: institutional quality and the quest for growth of manufacturing sector in Nigeria

Abstract

Different rationales have been adduced for Nigeria’s poor economic performance. The major problem has been the economy’s constant reliance on the wealth from the crude oil earning without any meaningful economic diversification to accelerate the growth of the manufacturing sector. The productivity of this sector has dwindled over time in spite of government’s intervention through fiscal policy and institutional quality reforms. It is against this backdrop that this study employed cointegration and error correction methodology to examine the effect of fiscal policy (total government expenditure on the manufacturing sector and company income tax), institutional quality (economic freedom index and fiscal freedom index) and exchange rate on Nigeria’s manufacturing sector using data from 1995 to 2020. The residual co-integration result revealed that Nigeria’s manufacturing sectors are  cointegrated with the explanatory variables. The findings from regression results show that fiscal policy contributed significantly to the growth of Nigeria’s manufacturing sector while institutional quality has no robust effect on the growth of Nigeria’s manufacturing sector productivity because of poor institutional structure in the Nigerian economy. Therefore, the study recommended that the Nigerian government needs to fine-tune its fiscal responsibility by increasing its expenditure to the manufacturing sector. As well, government should encourage and intensify efforts at entrenching fiscal freedom by putting in place functional agencies that would monitor the implementation of tax incentives meant for deserving manufacturing firms. Lastly, the Nigerian government should improve the overall institutional quality in the country, promote favourable institutional environment and anti-corruption laws should be applied strappingly so that illegal manufacturing industrial business could be curtailed.