1

CHAPTER TWO
LITERATURE REVIEW

2.1 CONCEPTUAL REVIEW

2.1.1 Concept of Public Debt

Public debt has been described as one of the major indicators of the macroeconomic

variables which forms the image of countries in the international markets. Generally, it is one of

the determinants of foreign direct investment flows. Prudent management of public debt

increases economic growth and stability via resources mobilization with low borrowing cost and

limited financial risk exposure (Christabell, 2013).

Public debt can be described as the total debts of a country, which include debts of

governments at all levels such as local, state and national governments, thereby showing how

many public expenditures are financed through borrowing instead of taxation (Makau, 2008 cited

in Christabell, 2013). Public debt is one of the approaches used in financing government

projects, even though the approach is not the only way the government can change its operations

as she can also create money to monetize its debts, and by creating money to finance government

operations, the need to pay interest may be removed.

According to Kibul (1997), the fundamental factor that causes public debt to rise is over-

reliance on external borrowings to augment capital formation in the nation‘s economy. If the

interest payment is high, the deficit on the current account will also be high thereby resulting in

the huge debt burden. Isaac and Rosa (2016), postulated that sub-national government acquire

debt mainly to finance public investment projects that complement the private

investments to translate into improved economic growth from which the contracted debt

becomes sustainable and no risk for their finances. Nassir and Wani (2016), opined that a debt
 2

implies an obligation to pay money, deliver goods, or render service under an express or implied

agreement. Hence, they described public debt as the total debts of the nation.

2.1.2 Concept of Poverty

There is no general consensus on the definition of poverty largely because the

phenomenon affects many spheres of human condition such as physical, moral and

psychological. This has given rise to several definition of poverty base on perspectives of

researchers, which is a pure relative measure. From this definition, it follows that different kinds

of resources and not just earnings, need to be examined (example, inherited as well as

accumulated wealth are also of key importance).

Adam Smith defined poverty as the inability to purchase necessities required by nature or

custom (Smith, 1776). In the present times, through the greater part of world, a creditable day-

labour would be ashamed to appear in public without a smart phone, the want of which would be

supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall

into without extreme bad conduct

United Nations (1995) defined poverty as "lack of income and productive resources to

ensure sustainable livelihoods; hunger and malnutrition; ill health; limited or lack of access to

education and other basic services; increased morbidity and mortality from illness; homelessness

and inadequate housing; unsafe environments and social discrimination and exclusion. It is also

characterised by lack of participation in decision making and in civil, social and cultural, these

definition means inadequate income to acquire the basic necessities of life which is good health,

education, house, food, etc. and also inability to participate in decision making which lead to

discrimination
 3

World Bank (2004), offers a more detailed definition of poverty rate adaptable to

different country conditions, poverty is defined as pronounced deprivation in well-being,

comprising many dimensions. It includes low incomes and the inability to acquire the basic

goods and services necessary for survival with dignity. Poverty encompasses low levels of health

and education, poor access to clean water and sanitation, inadequate physical security, lack of

(political) voice, and insufficient capacity and opportunity to better one’s life. Irrespective of the

perspective from which poverty is defined, it can be generally categorized into three namely;

absolute poverty, relative poverty, and subjective poverty. These definition shows that

individuals with physical deprivation are deprived from having a formal education, unable to

express themselves in public or participate in social, economic or political activities. Irrespective

of the perspective from which poverty is defined, it can be generally categories into three

namely; absolute poverty, relative poverty, and subjective poverty.

Absolute Poverty

According to Balogun (1999) absolute poverty has to do with basic human needs

measured by resources required to maintain physical efficiency. Individual, family or groups are

considered to be in absolute poverty when they are unable to afford the resources particularly net

income to obtain the types of diets needed to enjoy some fixed minimum standard of living. This

minimum standard of living considers some amount of goods and services essential and those

who are unable to obtain them are said to be poor. Such goods and services include food,

clothing, housing, education, health care, water and sanitation. People considered to be in

absolute poverty are determined through a yardstick known as poverty line. Absolute poverty has

to do with basic human requirements condition characterized by severe deprivation of basic

 4

human needs, including food, safe drinking water, sanitation facilities, health, shelter, education

and information.

Relative Poverty.

In words of Donnell (1997), those who are relatively poor have their resources far lower

than those possessed by average individual or household to the extent that, they are in effect

excluded from ordinary living pattern, custom and activities. This means that even if the

household or the person is able to meet his basic necessities of life, he or she could still be

comparatively poor. Relative poverty is situation where an individual's or household's income is

less than the average income of the population in the society being considered. This means that

the individual or household has goods and services which are lower than those persons in the

society.

Subjective Poverty.

Vaidyanathan (2002). The subjective poverty which is expressed in range of nonmaterial

and intangible qualities is based on respondent perception of their standard of living. This feeling

whether one is poor or not depends on individual societies and base on a minimum standard of

living in a particular society below which one is categorized as poor.

The various concept of poverty discussed above reveal that absolute poverty deals with

those who find it difficult to live a meaningful decent life due to financial constraints. In the

context of this study the concept of absolute poverty will be used as the working because the

poor in Nigeria are more concerned with obtaining the basic necessities of life (which is a

concern of absolute poverty) than meeting up with the living standards of the nonpoor (a concern

of relative poverty). Thus, absolute poverty is described as a situation where an individual,

 5

household, or group is constraints by inadequate income to meet it basic necessities of life, such

as food, shelter, education, healthcare, etc.

2.2 THEORETICAL REVIEW

2.2.1 Keynesian Theory of public Debt

This theory is fundamentally linked to the doctrine of Keynes (1936) and it is based on

the assumption that state intervention in the economy is necessary due to the realities of market

failure. The Keynesian doctrine alters the very liberal assumptions and principles of the

Classical theory. In response to the challenges of those times, especially the great depression

the Keynesian doctrine attaches great importance to the state, whose interventions in economy

is considered helpful in complementing the activities of the free market and correcting its

imperfections (Bilan, 2016). The Keynesians view of public debt deviated from the classical

assumptions as they perceive public borrowing as growth-enhancing due the expected

turnaround associated with its investment in productive activities.

More broadly, Keynesians are of the view that public borrowing tends offer opportunities for

growth as government is more committed to more value adding activities including public

works and assume the task of countering disturbing economic and social phenomena.

This is believed to add value to borrowed funds as ways of intervention to correct

imbalances and keep the economy on the path of growth. Keynes theory offered basis for state

intervention in accelerating the pace of economic growth, in time of sluggish growth. Bernheim

(1989), observed that many traditional Keynesians are of the view that public borrowings need

not crowd out private investment as the increased aggregate demand enhances the profitability of

private investments.
 6

2.2.2 Ricardo and Malthus theory of public debt

This theory was postulated by David (1818) and Malthus’ (1820) on public debt. Ricardo

argued for redemption and government restriction in the view of Malthus was against wiping off

public debts arguing that doing so would depress aggregate demand in the end. The two scholars

differences were based on the application of say’s law. Malthus despite being a close friend of

Ricardo was his opponent on policy issues. He was an agrarian and opposed ‘poor laws’ of

Ricardo in favour of ‘Corn laws’. He was against redemption of public debts and taxation as a

government economic intervention (Malthus, 1820).

Debts redemption implied that there would be more revenues in the economy, which can

now be transformed into capital thus stimulating the economy. On the other hand, if there were

no redemption funds collected from the public would be transferred abroad therefore

contributing negatively. In order to liquidate national debt there is need for great sacrifices but

many people end up migrating in order to evade the tax burden. The government has a role to

play in the economy. This is done through government fiscal policies to safeguard the poor

consumers from exploitation and tax overburden (Malthus, 1820).

Ricardo (1818), advocated for debt redemption due to his concern for capital growth and

existing economic prosperity. He noted that if we allowed a free market system, resources would

be redistributed in the economy thus growth. Any additional capital would therefore imply an

increase in demand and supply improving the economy’s GDP prosperity. He observed that

investment is preceded by saving which increases our investment capital. Increase in investments

will improve the productivity therefore increasing the purchasing power thus firms will be able

to buy more factor inputs. Ricardo politically argued that sinking funds were underutilized
 7

especially where national and self-interests were in conflict. There was need for political reforms

as the “solution for public debts lay generally in the dissemination of good doctrines.”

Ricardo (1818), He advocated for emerging services for the poor such as saving banks

but also pointed out that due to profit overriding aim of the banks. According to him, the

government has a duty to guard against exploitation and educate the public so they could make

informed decisions. The two agreed that that government spending was inefficient and

unproductive when spent on projects but was beneficial if spent on infrastructural projects.

Ricardo argued that public debt redemption would have no effect on the level of aggregate

demand contrasting Malthus observation but would lead to transfer of assets from taxpayers to

public creditors. On Malthus “under consumptionist” argument, he observed that production of

unwanted goods and miscalculation were the causes of stagnation in commerce. On taxation

effects on agriculture, he argued that the distress experienced was not because of taxes but due to

abundance in production.

Malthus (1820), observed that debt redemption would lead to harmful distributional

effects, which would lead to acceleration of existing economic distress. He actually viewed the

class of public creditors as unproductive consumers. According to him given the existing

economic situation in England, redemption of debts would lead the society being worse off

rather than better off. In his view, it would be a misconception to think property owners or

capitalist would be willing to increase their consumption following debt redemption. On the

other hand, should they adopt Ricardo views of saving and lending their increased income then

the society would end up even more badly off. New distribution of produce would diminish the

results of productive labour and as more revenues were converted into capital profits fell. (486)

Increased taxation would downsize wealth accumulation inhibiting both domestic and foreign
 8

trade. Increase in fixed income receiving public creditors led to possibility of redistribution of

purchasing power. This research adopted the Keynesian theory of public debt based on the

assumption that government should borrow in other the bust economic growth and reducue the

rate of poverty.

2.2.3 The Structural /Marxian Theory of Poverty

Larger economic and social structures have been found to account for poverty.

Perspectives regarding structural factors argue that capitalism creates conditions that promote

poverty. Marx (1932) pointed out that the growth of industrialization has led to a significant

economic vulnerability of labourers in the capitalist system while the concept of exploitation was

used during the Industrial Revolution. Marx utilized the concept of exploitation to explain the

fundamental cause of poverty among workers during the Industrial Revolution (Hurst, 2004).

The Industrial Revolution was characterized by what Karl Marx termed exploitation of labour.

During Industrial Revolution there was a great demand for the labour power of the poor.

According to Marx, capitalists own the factors of production while proletarians hire their labor to

capitalists.

Marx (1932), however, emphasized that the poverty status of the worker is due to

capitalist exploitation of the worker. Marx (1932) believed that although the worker is the center

of production in any industrial setting yet the worker receives very little or no rewards.

According to Marx (1932), the profit that the capitalist makes is a derivative of the accumulated

surplus of the workers’ production, and the extent of the capitalist’s profit is directly proportional

to the surplus products created by the worker (Calhoun, 2002). Marx argued that the capitalist

accumulates more wealth and surplus through exploitation or dehumanization of the worker.

Marx (1932) described the extent to which workers have been dehumanized by stating that “the
 9

worker sinks to the level of a commodity… and that the wretchedness of the worker is in inverse

proportion to the power and magnitude of his production”, as cited in Calhoun (2002). According

to Marx, the worker’s poor quality of life is due to the capitalist’s exploitation or alienation of

the worker. Marx underscored four main dimensions of exploitation or alienation.

According to Marx (1932) a worker is alienated from his product, alienated from himself,

from his fellow human beings and from the process of production. Marx emphasized that a

worker’s labor is external to him because it is not part of his nature. He suggested there is a

constant struggle between the bourgeoisie (the capitalist) and the worker (the proletarian) in a

capitalist society.

2.2.4 The Conservative Theory of Poverty

a. Individualistic Theory of Poverty

This theory attributes poverty to individual deficiencies. The poor are assumed to be

responsible for creating their problems through lack of hard work and bad choices. Other

variations to this theory ascribe poverty to lack of certain genetic attributes, intelligence and even

punishment from God for sins committed. Neo- classical economists reinforce individualistic

sources of poverty with the assumption that individuals are responsible for their choices in

maximizing their wellbeing through wise investment. The theory cast the poor as a moral hazard

with claims that poverty persist because the poor are not doing enough or are engaged in

activities which are counterproductive (Gwartney & McCaleb, 1985). Poverty reduction is

achievable through skills acquisition, hard work, motivation and resilience. Poverty has been

aggravated by failure of individuals to take responsibility for their destinies in order to have a

brighter future. Failure of individuals to acquire adequate skills and training could lead to loss of

career opportunities and result in poverty. In analysing how individuals make wrong choice
 10

which inflict poverty, Dike (2009) explains that the wrong attitude and mentality towards

technical and vocational subjects by youths in Nigeria makes them “lack the skills and

knowledge to compete effectively in the rather tight labour market and thus loiter around in the

villages and cities from dawn to dusk looking for jobs that are not available”. Non- enrolment in

schools, laziness, indiscipline and engagement in crime and other social ills are personal choices

that could result in poverty for individuals. Such could have far reaching adverse effects on an

individual’s household as the economic status of parents have a strong impact on the

opportunities and academic performance of their children (Osonwa, Adejobi, Iyam, & Osonwa,

2013). Poverty induced by individual deficiencies can be alleviated if all stakeholders including

government and policy makers provide the needed support; opportunities and incentives that help

people make right choices to evade poverty.

b. Cultural Theory of Poverty

This concept was developed by Oscar Lewis (1958), an American anthropologist as a

result of his studies of the urban poor in Mexico and Puerto Rico. It constitutes a pattern of life,

which people adopt as a community, and is passed from one generation to the next. People adopt

a fatalistic attitude that leaves them feeling marginalized, helpless and inferior. Family life is

characterized by high divorce rates, with mother and children often abandoned. Individuals do

not participate in community life by engaging in voluntary associations, (religious or cultural

beliefs such that people are not psychologically geared towards taking advantage of changing

conditions or available opportunities) all based in life (Ryan, 1976). Harmful practices and

values are absorbed and perpetuated from generation to generation. The Culture of Poverty is

prevalent in developing countries and societies in the early stages of industrialization as well as

among the lower class in advanced capitalist societies. It is a reaction to low income and lack of
 11

opportunities such that people live for the present and believe in luck rather than effort to achieve

success. The culture can be eroded if the causes are removed.

2.2.5 Keynesian Theory

In a Keynesian/liberal perspective, poverty is mainly explained by "the misfortune of

certain minorities who fall out of work, cannot work or are not expected to", although they wish

to do so. It therefore follows that the state needs to act to “regulate, supplement and exhort, but

not impose” (Townsend, 1979). This theory contends that poverty can be a reflection of market

failures that under certain circumstances justify redistributive taxation in cash and kind from the

set of macroeconomic variables that Keynes and the new-Keynesians stress, aggregate

investment, with its positive effect in employment, emerges as the key element in generating the

type of growth that permits poverty relief. If entrepreneurial investment is low, this in turn raises

unemployment and poverty rates among suppliers of labour. It is thus suggested that government

revenue, raised via taxes or bond issue, should be channel to public investment. This was

viewed, in Keynes’ own words, as the “socialization of investment” (Jung & Smith, 2007).

Entrepreneurs would at the same time be prompted to invest in profitable projects rather than

saving if direct taxes were raised. The focus on public investment to attain the complementary

goals of economic growth, employment and poverty reduction is strongest in certain crucial

sectors which are considered to be strategic in the sense that they exhibit the highest multiplier

effects. These sectors correspond mainly to the infrastructure and human development or

educational sectors. By injecting resources into these areas, it is believed that private capital

investment follows, further boosting activity and helping alleviate poverty by generating value

added. Moreover, If a growing economy manages to stimulate job growth in a way that reduces

poverty, then doing so is appealing, for it avoids the need to resort to rises in tax rates to fund
 12

antipoverty programmes, since tax revenue increases automatically, while the lower poverty

count diminishes demands on antipoverty programmes (Jefferson, 2012) While growth is likely

to reduce absolute poverty, because it will tend to raise the incomes of all members of society,

the beneficial effects on relative poverty of the expansion of economic activity will only apply so

long as the rise in average income that economic growth permits is accompanied by a reduction

in the variance of the income distribution or it is accompanied by an increase in dispersion that

does not offset the increase in the average level of income (Granville & Mallick, 2006). Growth

in GDP can cause surges in relative poverty if wage dispersion rises along with it, even if the

average wage increases. The effect on absolute poverty is ambiguous provided that the average

wage also increases. This hypothesis corresponds to the theory that poverty rates can actually

persist and even grow despite economic growth if the deprived are left off the "growth wagon"

(Dickens & Ellwood, 2001).

Based on the theories reviewed, the study adopts the Keynesian theory. The Keynesian

Model stresses that the role of government intervention against poverty is needed in a wide range

of economic issues, from tackling involuntary unemployment to harnessing human capital

accumulation through investment in public education and other key sectors; hence economic

growth and a fall in poverty rates. The Keynesians affirm that growth can promote economic

development and reduce poverty. Hence a justification for government’s intervention through

public spending. Keynes supported government’s intervention during the time of great economic

turmoil. Among the theories he presented in the “The General Theory” was that economies are

chronically unstable and that full employment is only possible with a big incentive from

government policy and public spending (investment). Keynes affirmed that it was up to

government to employ whatever tools and measures needed to enable the economy reach full
 13

employment and hence attain economic growth and development. However, the adoption of the

theory for its analysis springs up from the realities happening in Nigeria due to high level of

unemployment which makes it difficult for individual to acquire their basic necessity, giving rise

to increase poverty in Nigeria.

2.3 EMPIRICAL REVIEW.

Adeyemi, Ijaiya and Raheem (2009) explored the determinants of poverty in Sub-Saharan

Africa using a set of cross-country data drawn from 48 countries. The study adopted a multiple

regression analysis for estimating the model. The regression estimates show that growth in

population, rising price level and external debt servicing amongst others are the factors

influencing the rate poverty in the sub-region. In view of the findings, the study recommended

for debt forgiveness, stability in macroeconomic outcomes and good governance as measures

for reducing the level and severity of poverty in the sub-region.

Udoka and Anyingang (2010) examined the connection between external debt

management policies and economic growth of Nigeria over the period 1970-2006. The Ordinary

least square multiple regression technique was used to analyzed data gathered for the period

under review. The result of the empirical analysis showed that, GDP, exchange rate, fiscal

deficit, interbank rate, and terms of trade are the major determinants of external debt in Nigeria.

It was therefore, recommended that the federal government should put in place well considered

guideline for external debt management.

Faraglia (2012) examined the impact of government debt maturity on inflation using

dynamic stochastic general equilibrium (DSGE) model. The following variables are used fiscal

Insurance, Fiscal Sustainability, Government Debt, Inflation, Interest Rates and Maturity. The

result showed that the persistence and volatility of inflation depends on the sign, size and
 14

maturity structure of government debt and remains significantly incomplete even with long

bonds and inflation which plays a minor role in achieving debt sustainability. The research

concluded that issuing long term debt does enable governments to use inflation more to achieve

fiscal sustainability. The longer the maturity of debt, the more volatile and persistent is inflation.

However the relative impact on inflation is modest and the relative importance of inflation in

achieving fiscal sustainability is modest whatever the length of maturity. A more substantial

contribution to debt stabilization comes from twigging interest rates.

Oyedele, Emerah and Ogege (2013) applied cointegration and regression analysis in

investigating the impact of external debt and debt servicing on poverty reduction in Nigeria

using time series data that spanned from 1980 to 2010. Specifically, the empirical analysis

followed three procedures. First, the time series properties of the underlying variables were

examined with the help of the Augmented Dickey-Fuller (ADF) unit root procedures. Second,

the long-run relationship among poverty reduction, debt –Income ratio, debt-service, degree of

openness, growth of agricultural value added, per capital income, inflation rate and investment-

income ratio was examined using the Johansen and Juselius (1990) procedures. Lastly, a

multiple regression analysis was undertaken to examine the impact of external debt and debt

servicing on poverty reduction. From the results, it was found that both the external debt and

debt servicing cause poverty in Nigeria. This finding suggests that government needs to

mobilize domestic saving to adequate manage the external debt

Ekpo and Udo (2013) used econometric methodology to determine the link between debt

burden, growth and incidence of poverty in Nigeria over the period 1970-2011. In the

econometric model, elements of failing state comprising corruption, insecurity and ethnic

violence were also included as explanatory variables. Again, the incidence of poverty was
 15

measured by the proportion of government spending on social services and income per capita.

It was found that public debt is negatively related to growth and poverty reduction. The study

however, suggested that expenditure on social services should be promoted.

Abula and Ben (2016) examined the effect of public debt on economic development in

Nigeria from 1986 to 2014. Johansen co-integration test, Error Correction Method (ECM) and

the Granger Causality test were utilized in the analysis. The variables employed in the study

include gross domestic product, external debt stock, domestic debt stock, external debt service

payment and domestic debt service payment. The results showed evidence of long-run

relationship among the variables. The results of the ECM indicated that external debt servicing

and external debt stock had a negative impact on economic development in

Nigeria while domestic debt stock had a positive influence on economic development. The

results also showed that domestic debt service payment had a negative and significant effect on

economic development in Nigeria.

Akram (2016) assessed the implications of public debt on economic growth and poverty

reduction in some selected South Asian countries comprising Bangladesh, India, Pakistan and

Sri Lanka between 1975 and 2010. The results indicated that public debt profile had a negative

impact on economic growth. It was equally uncovered that neither public external debt nor

external debt servicing had a significant relationship with income inequality. This is an

indication that public external debt can be helpful or harmful for the poor as it is for the rich. On

the other hand, domestic debt has a positive link with economic growth and a negative impact on

the GINI coefficient, indicating that domestic debt is pro-poor.

Nassir and Wani (2016) investigated the relationship between public debt and economic

growth in Afghanistan for the period 2008-2012 using analysis of variance (ANOVA). The
 16

variables employed in the study include the gross domestic product (GDP), government stock,

Advances from commercial banks and external debt. The result showed that government stock,

Advances from commercial banks and external debt have negative and insignificant influence on

the gross domestic product (GDP) in Afghanistan.

Lucky and Godday (2017) empirically examined the nexus between the public debts

structure and the poverty rate in Nigerian economy for the period 1990-2015 using

simple and multiple regression analyses. The variables used in the analysis include poverty rate,

domestic debt, external debt and total debt. The results of the simple

regression total public debt have a positive and significant impact on gross domestic product in

Nigeria. Similarly, the results of the multiple regression analysis revealed that whereas the

external debt is negative and significant to economic growth in Nigeria.

Elom-Obed, Odo, Elom and Anoke (2017) carried out research on the nexus between

public debt and economic growth in Nigeria for the period 1980-2015 using co-integration test,

Vector Error Correction Model (VECM) and Granger causality test. The variables employed in

the investigation were the real gross domestic product, domestic private savings, external debt

and domestic debt. The empirical results revealed that external debt and domestic debt have

negative and significant effects on economic growth in Nigeria. More so, the results showed that

domestic debt and external debt granger caused real gross domestic product (RGDP) with

causality runs from external debt and domestic debt of RGDP

.
 17

2.4 RESEARCH GAP

From the literature reviewed, it is evident that most of the empirical literature is based on

poverty rate and economic development in studies such as Akram (2016); Abula and Ben (2016);

Elom-Obed, Odo, Elom and Anoke (2017); Nassir and Wani (2016). Hence this study will lay

more emphasis on public debt and poverty rate reduction in Nigeria using variables as external

debt internal debt and poverty rate which is different from the variables used by other

researchers. Also, this work will used the time period from 2000-2022 which makes this study

more recent.
 18

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