Impact Of Government Expenditure On Economic Growth In Ethiopia

The debate about the role of public expenditure or government involvement in general in the economy of a country is a long routed one which didn’t yet settle on a single conclusion. This study is thus aimed at investigating the influence of government expenditure on a country’s economic growth by taking Ethiopian case into perspective. 33 years of data on government expenditure and GDP were used. Two models were formulated based on the two types of classifications of government expenditure. The first model used capital and recurrent expenditures by the government together with foreign aid while sectoral expenditures are considered in the second one. Unit root tests were applied to check the stationarity in the variables and they indicated existence of trends in most of the variables. This led to use of cointegration test and the results showed that there exists at least one cointegration equation between the variables in both sets. Ordinary Least square technique was adopted for the regression analysis. Serial correlation and heteroskedasticity tests were performed before interpreting the coefficients. The significant variables were identified by the T-tests. F-test results showed the both sets of variables have significant collective influence on the country’s GDP. Finally, the coefficient interpretation showed that recurrent expenditure has a higher positive influence on economic growth of a country than capital expenditure with a 0.54 to 0.37 ratio variation seen in the potential rise in log(GDP) as a result of 2.72% increment in their respective values. In the other scenario where sectoral expenditures were investigated, the expenditure in the health sector proved to be the one paying a slightly better dividend than the others as doubling(a 100% rise) in health expenditure resulted in 1.62% rise in the country’s GDP. Educational expenditure was also seen to have a positive though relatively small influence of the GDP, proving that the decision of the government to give due attention to the sector in the past three decades wasn’t a loss. These results led to the conclusion that government expenditure played an important role in Ethiopia’s economic growth and should keep doing so in the foreseeable future.