Public Expenditure and Economic Growth Causal Linkage: Disaggregated Empirical Analysis for Zimbabwe

Abstract

The study explored whether government spending in Zimbabwe is an effective channel to growing the economy using a sample of economic data from 1980 to 2018. The ARDL model and VECM were applied using a dis-aggregated analysis of capital expenditure and consumption expenditure after controlling for growth variables like inflation, foreign direct investments, and real interest rates. To further check the effectiveness of government expenditure in Zimbabwe, three dummy variables were used: 1991-1995 Economic Structural Adjustment Program (ESAP), 2009 currency reform, and recurring droughts. The results showed a significant non-causal relationship between economic growth and consumption expenditure, in contrast to an unidirectional short-run and long run causal relationship running from economic growth to capital expenditure. Economic variables such as inflation, foreign direct investments and interest rates showed statistically significant relationships with economic growth. Furthermore, the results revealed that droughts and the use of a multi-currency system have long-run negative relationships with economic growth, and both adversely affect consumption expenditure?s relationship with economic growth. Policy implications emerge from the study. In the Keynesian spirit, there is a need for the government to improve expenditure efficiency and raise more revenue to sustain its activities, rather than cut consumption expenditure as was done during the ESAP period. This is not only counterproductive, but may lead to unwarranted suffering of the public due to excessive austerity measures. Secondly, there is a need to adopt either a weaker currency than the US dollar, or introduce a local currency after establishing sound economic fundamentals.