The Effect of Government Expenditure on Sectoral Performance In Malawi

Abstract

The relationship between government expenditure and economic growth has always been debated among scholars. While the Keynesian school of thought postulates a positive causal relationship, the Neo-classical school argues that the relationship is negative. A rather neutral view is associated with the Ricardian school, which postulates that the relationship is non-existent. Recently, the Malawi Government launched its long-term development plan for the country, the Malawi 2063. As has been the tradition with all the other policies that Malawi has been implementing, the agriculture, education, and health sectors have been highly prioritized in terms of public resource allocations. However, the performance response of these sectors to the increased government expenditure has not been established. Using data from 2002 to 2020, we employed the Fully Modified Ordinary Least Squares (FMOLS) technique to estimate this effect. We find a significantly positive relationship between government expenditure and the growth rates of the three sectors. Holding all other factors constant, a K1 billion increase in the Government’s total expenditure to each of the three sectors heads to a 0.24 percentage point increase in sectoral growth. Moreover, this effect is markedly higher for development expenditure (0.34 percentage points) than for recurrent expenditure (O.26 percentage points). The results point to the need for the government to continue allocating more resources to the three sectors, especially for capital investment rather than consumption expenditure. There is also a need to control inflation and encourage measures that curb corruption as the two retard the growth of the three sectors. Keywords: Government expenditure, sectoral performance, fully modified OLS DOI: 10.7176/JESD/14-4-07 Publication date: February 28 th 2023