Fiscal Rule in Africa

Olatunji Abdul Shobande

doi:10.1515/openec-2020-0107

Abstract

Abstract Fiscal policy has recently been encouraged to increase competition, monitor Africa’s debt to GDP and improve its economic growth. Importantly, the present fiscal situation in most African countries will seem to have significant consequences for both public and private investments. This paper examines whether fiscal policy and investment matters for GDP growth in a panel of forty-eight (48) African countries for the period 1970-2017. The empirical evidence explored is based on the Fixed Effect (FE) and System Generalised Method of Moment (GMM) estimators. The results suggest that public and private investment among selected African countries has a positive impact on GDP growth. The findings further indicate that fiscal policies must play a more prominent role in sustaining potential private and public investments, especially as debt servicing among the African’ countries examined may have serious shortcomings on sustainable economic growth

Highlights

This paper investigates the role of fiscal policy in the relationship between core investment and economic growth in Africa
We begin our discourse with the celebrated work of Arrow and Kurz hypothesis that serves a persuasive suggestion that government can manipulate tax and debt to stimulate private investment and enhance optimal fiscal policy (Arrow & Kurz, 1970; Eller, Fidrmuc, & Fungáčová, 2016; Futagami, Morita, & Shibata, 1993; Gobbi & Grazzini, 2019; Hartley & Rogers, 2006; Prota & Grisorio, 2018)
This article is motivated by the urgent need to unravel the ambiguity surrounding the relative impacts of fiscal policy on economic growth

Summary

Introduction

This paper investigates the role of fiscal policy in the relationship between core investment and economic growth in Africa. It probes whether the present fiscal authorities should be held responsible for the slow economic growth and increase in the unemployment rate in the region. It re-evaluates whether the existing fiscal policy can attract investment and pave the way for job creation. Arrow and Kurz hypothesis showed that government’s spending is confronted with fiscal space, causing the need for a switch in investment priorities between private investors and the government

Objectives

Methods

Findings

Conclusion