I welcome the opportunity to deliver this year’s “Clement Isong Annual Memorial Lecture”. I consider this lecture to be very important in view of the immense contributions that Chief (Dr.) Clement Isong, (of blessed memory) made to the development of our nation through, among others, his position as the pioneer indigenous Governor of the Central Bank of Nigeria and later, as the Governor of Cross River State.
At this juncture of the development of our country, I believe that it is important to have a thorough understanding of how fiscal policy can hinder or enhance the growth process of a country as well as its impact on poverty and wealth creation. This, I believe would help to provide an appropriate framework for assessing the undertakings of the present administration, especially in the fiscal area.
In this regard, the main message of this lecture is that the most effective and durable economic framework for poverty eradication is one in which the macroeconomic condition is stable and rapid and sustained real GDP growth occurs. This is not to diminish, however, the useful contributions that direct policy interventions can make towards reducing the poverty rate, as well as increasing wealth-creating opportunities.
This lecture focuses on: * explaining the transmission mechanisms through which fiscal policy can affect economic growth, wealth creation and poverty reduction; * describing the adverse impact on fiscal policy on the Nigerian economy in the past, especially during the 1970s and early 1990s oil booms; * more recent and envisaged fiscal reforms and their associated impact on the economy; and * presenting key government initiatives that are aimed at addressing poverty and increasing wealth creation.
CHANNELS THROUGH WHICH FISCAL POLICY CAN AFFECT ECONOMIC GROWTH DEVELOPMENT AND POVERTY
A. ANALYTICAL FRAMEWORK
Fiscal policy can foster growth and human development through a number of channels. Macroeconomic instability is particularly damaging to the poor, as their earnings are not indexed to inflation and they have limited opportunities to invest in assets that provide a hedge against inflation. The macroeconomic stability associated with prudent fiscal policy yields greater benefits, including higher rates of investment and educational attainment, as expected rates of return can better be achieved in an environment of low inflation.
Prudent fiscal policy can help enhance factor productivity, leading to higher growth and consequently poverty reduction. This concept is better illustrated with an aggregate production function in the form:
Y = AVai, – – – – – (1) where Y is aggregate output, Vi indicates factor input, a indicates the elasticity of output for input i, and A is an index of total productivity. Growth of real output is captured by the combined components of increased factor productivity (A) and increased availability of factors of production (Vi). Factor productivity expressed in the index A also reflects externalities imposed on the private sector by the government……