The Impact of Public Expenditure Components on Economic Growth in Ethiopia; Vector Autoregressive Approach

Endaylalu Solomon

doi:10.11648/j.ijber.20190804.16

Abstract

The study analyzes the impact of public expenditure components on economic growth in the Ethiopian economy using annual time series data for the period 1982-2016. The study uses public expenditure variables from economic infrastructures (agriculture, road and energy), social infrastructure (education) and recurrent and capital expenditure components. With the help of co-integration and vector error correction analysis, the impact of various areas of public expenditures was assessed in the long-run as well as in the short-run. The study found that public expenditure components at all have a significant positive effect on economic growth in the long-run but they have insignificant impact in the short-run except education and road. Expenditure on education and road has both short-run and long run effects on economic growth. The impact of educational expenditure on economic growth is highly significant and positive which have powerful role in promoting the country’s economic growth compared to other variables. In the short run the impact of education on economic growth is negative and significant whereas that of road expenditure is significant and positive. Based on the results of the co-integrated and vector error correction model, this study found that, it is better and advisable to have an excessive expenditure on education and road construction than other areas of public expenditure, so as to accelerate economic growth in Ethiopia.

Highlights

The crowding out effect of public investment has raised some other issues in contrary to this crowding out effect. [11] A stylized fact for many industrialized economies is the marked decline in the ratio of public investment to gross domestic product that has occurred over the last three decades
As explained in the long-run equation above, growth of real domestic product (RGDP) in the long run is affected by expenditures on recurrent transactions (RECU), energy including mining (ENER), education (EDUC), capital expenditure (CAP) and expenditure on agriculture (AGR) and road (ROAD)
Expenditure on energy takes the lowest share in explaining economic growth in which its one percent increase will bring only 0.04 percent economic growth followed by capital expenditure which is one percent increase brings 0.06 percent economic growth

Summary

Introduction

The crowding out effect of public investment has raised some other issues in contrary to this crowding out effect. [11] A stylized fact for many industrialized economies is the marked decline in the ratio of public investment to gross domestic product that has occurred over the last three decades. [11] A stylized fact for many industrialized economies is the marked decline in the ratio of public investment to gross domestic product that has occurred over the last three decades. This decline have not bring improvements in private investment and it has raised concerns that public capital stocks have fallen to sub-optimal levels, possibly reducing private sector productivity and imposing a constraint on economic growth instead of tackling crowding out effect. The government might have political or social objectives to invest in those areas, but unless these investment projects have adequate economic return, their positive effects could not be sustainable

Methods

Results

Discussion

Conclusion