The service sector is a crucial component of every country’s economy, and it has been identified as a sector with the capability to become a significant driver of sustained growth in Africa [9]. The Nigerian service sector consists of several industries such as banking, retail and wholesale trade, tourism, real estate, telecommunications, motion pictures (Nollywood), information and communication technology, entertainment, and education. The service sector is currently the fastest growing sector in the world [14]. It accounts for a significant proportion of gross domestic product in most countries and makes significant contribution to the share of total employment. As of 2015, service sector contribution to Nigeria’s GDP stood at about 60%, with an average of about 33% of employment share compared to 7% for industry.
A productive service sector is known to strengthen the performance of other sectors in the economy such as manufacturing [14]. This is because the sector enables and facilitates the functioning of most sectors (manufacturing, industrial sector, etc), as most of these sectors rely majorly on the service sector to supply needed functions such as banking, accountancy, information, and technology. The service sector provides supplementary outputs to manufacturing firms that are dependent on external sourcing of basic inputs such as transportation, financing, design, and communication. The growth of the service sector is primarily a product of the level of individual consumption per capita [4] and demand from the manufacturing sector. The service sector also influences the development of businesses by increasing productivity and value added. This is attainable by using highly educated and experienced workers with particular cognitive skills, thus increasing the business productivity. Although the viability and sustainability of a service sector-led growth have been questioned, one of the reasons arising from the fact that Adam Smith defined services as non-productive [10].
The Nigerian economy has disregarded the service sector, as economic activities are majorly dominated by the activities in the oil sector, thus limiting the service sector from attaining greater productivity and full employment. Nigeria has been unable to achieve sustainable development due to her continuous dependence on the oil and gas sector. The main source of the nation’s revenue and foreign exchange earnings is from crude oil export, thereby making the country vulnerable to oil price volatilities. The urgent need to diversify the country’s economy cannot be overemphasized, especially going by the unstable and fluctuating global oil prices in order to minimize the country’s vulnerability to macroeconomic risks, such as decline in production, fall in demand and price, and also exhaust of reserves [19].
In almost all forms of economic arrangement, provision of services often comes with a significant level of government participation, either as regulators or as providers. The Nigerian government has found it difficult to excel as either regulators or providers. This is seen in the management of the Nigerian Telecommunications Limited (NITEL), and the recent case of power sector where management have been evolving frequently. The participation of the government is also shown by lack of control or laissez faire attitude towards regulating the activities of various services providers in the country.
The Nigerian service sector has been able to display impressive results despite tough economic circumstances. In 2014, Nigeria’s rebased Gross Domestic Product sectoral composition shifted toward the service sector and away from the oil sector. The service sector accounted for 54.8% of the rebased GDP, with the largest contributors being wholesale and retail trade contributing 16.27%, real estate contributing 8.37%, and Information and Communication contributing 11.04% [18]. The service sector has the potential to increase economic growth in Nigeria. Diversifying and harnessing the full benefits of the service sector will reduce Nigeria’s over-reliance on the oil sector, as innovations in the service sector play a crucial role in increasing both the productivity levels and also economic growth through innovation expenditures and innovation activities in general [5].
Hence, the contribution of this study to existing research is to show the extent of service subsector contribution to economic growth in relations to governance indicators knowing that there has been past misconception of services as being non-tradable, non-productive, and unable to drive growth in an economy. Government as a major participant in the service subsector has been given priority in this study as its contribution to service subsectors was examined from the windows of government expenditure. Governance and the mode of operations of the bureaucratic system of government have a long way of impacting on the execution of planned expenditure of government as most budgeted funds do not get to into the assigned projects and sectors where they are needed.
The contribution of Nigerian service subsector to her economic growth is pertinent, hence the examination of service subsector from the windows of government expenditure on education, health, transportation, and communication in relation to governance indicators (control of corruption and government effectiveness). Most of the previous studies carried out analysis the contribution of the service sector without considering the governance indicators. This study employs autoregressive distributed lag (ARDL) of Pesaran et al. [20].
The subsequent sections of the study are structured as follows. Section two presents the methodology. Section three presents results and discussion. Section four presents the conclusion.
The extent to which services have been utilized as a driver to the growth of countries, particularly developing countries, has in recent times received considerable attention in the literature. Uwitonze and Heshmati [24] studied the development of the service sector over the years in Rwanda’s economy. They employed the regression analysis, and their result showed the factors which have contributed to the development of the service sector. These factors can be used in forming public policy with the aim of using the service sector as a vehicle for speeding up the shift from low-income state to middle-income state. Kabeta and Sidhu [13] determined the contribution of the service sector to the growth of Ethiopia. They made use of co-integration test and the Granger causality test, and their result showed that during 1999–2005 growth periods, Ethiopian per capita GDP growth was mainly contributed by employment rate changes originated from the agricultural sector, whereas the service sector had the highest contribution in productivity but a negative contribution in employment change. However, the high growth period in per capita GDP is due to productivity growth which emanates from the service sectors specifically from the distributive service sector. Tandrayen-Ragoobur [22] examined the impact of the service sector on the economic growth of Mauritius. They adopted the ARDL model, and the result of their study revealed the existence of long-run causal relationship from the service sector to GDP per capita while short-run causality runs from per capita GDP to service sector performance. Their findings further confirmed the stability of the relationship between service sector development and economic growth for small island economies like Mauritius.
Ehigiator [6] argued that the service sector is an escalator for new economic growth in Nigeria. His study provided an overview of the Nigerian service sector and showed the contribution of services to the growth of the Nigerian economy and also explained that it plays a more significant role than industry in the economy through its contribution to Gross Domestic Product (GDP), capital imports, and employment. He employed the vector autoregression model to carry out his analysis, which provided evidence showing the growth and contribution of Nigeria’s service sector, especially the knowledge-intensive services to the economy (GDP), employment, and capital imports. He concluded on the note that the growth of services in the country is being reflected in enhancing the economic life of Nigerians. Antai et al. [2] determined the contribution of different sectors in the Nigerian economy other than the oil and gas sector. They adopted the VAR technique and were able to prove that the service sector does not only promote the level of economic growth in the economy but also connect every other sector, while GDP does not promote output growth in the services sector. Also, agricultural output is observed to be directly related to growth.
Narayan [17] analyzed the impact of tourism on Fiji’s economy. He made use of the computable general equilibrium (CGE) model, and his result showed that a 10% increase in Fiji’s tourism expenditure increases GDP by 0.5%, consumption by 0.72%, real national welfare by 0.67% and an improvement in the balance of payment. Linden and Mahmood [15] analyzed the long-run relationship between sectorial shares (agriculture, manufacturing, and services). They employed pooled EGLS (cross-section SUR), and the result of their analysis provided evidence that there is a two-way causality between services share growth and growth rate of GDP per capita.
Hansda [11] in his study determined the service intensity of various sectors of the economy. He employed the panel regression analysis, and the result of his analysis showed that the service sector is more of a growth-inducing sector than the industrial or agricultural sector. Therefore, in order to sustain the overall growth process, the services-led growth augurs well for the Indian economy in so far as the growth impulses originate in service vis-à-vis industry or agriculture. Mujahid and Alam [16] analyzed the process of growth in service sector and assess its potential contribution toward growth in the case of Pakistan. He employed VAR technique, and the result of his analysis proved that there is a significant relationship between service sector and trade liberalization, and the present analysis demonstrates that trade liberalization policy is beneficial for Pakistan’s service sector growth.
Hussin and Ching [12] examined the contribution of economic sectors to economic growth in Malaysia and China from the years 1978 to 2007. They employed the augmented Dickey–Fuller (ADF) unit root test, and their result showed that the service sector generated the highest contribution to Malaysian’s economic growth, while manufacturing sector provided the biggest contribution to China’s economic growth. Tang and Selvanathan [23] determined the casual link between foreign direct investment and tourism in China. They used the Granger causality test and VAR, and their result provided evidence that there is a unidirectional causality from foreign direct investment to tourism. They concluded that this causality has contributed to the rapid growth of tourism in China in the past 10 years.
The relationship between service sector’s productivity and living standards was examined in a study by Eichengreen and Gupta [7] in Asia. Using descriptive statistics, they found a positive correlation between output share of services and income per capita, but such a relationship holds only for service activities that are usually a combination of traditional and modern services consumed majorly by households. Furthermore, their study finds that modern services not only have the highest productivity growth among the service industries, but their share in output tends to rise rapidly at high income levels. There is consistency in the assertion of authors who investigated Asia on the subject matter. A serious weakness, however, is that different methods were used in their analyses. Therefore, their results cannot be generalized.
ADB [3] showed that service sector growth tends to be higher when the level of service trade is higher, the share of urban population is larger and the age–dependence ratio is lower. It also points out that lack of human capital and restrictive regulations is the major bottleneck for developing a modern service sector. Eichengreen and Gupta [8] found the second wave of service sector growth is most apparent in countries that are open to trade, democratic, and relatively close to the major global financial centers.