The impact of government expenditure on economic growth in Ethiopia: an empirical analysis using Johansen Cointegration approach

Abstract

This thesis is conducted on "The Impact of Government Expenditure on Economic growth in Ethiopia" by using time series data of 1970171 to 2010111, applying Ram's (1986) endogenous growth accounting model. The general objective of the study is to investigate the relationship between the components of government expenditure and economic growth in Ethiopia. Both descriptive and econometric techniques were employed for the purpose of analysis. Descriptive part deals about the general compositions and trends of public spending, the growth patterns of economy, and sectoral composition of national output. Econometric analysis is conducted by using Johansen Maximum Likelihood Estimation procedure. Before estimating the long run model, the time series characteristic of the data is tested using DF and ADF test and found that all the variables are integrated of order one. Then, the cointegration test was conducted and concluded that there is one co integrating equation between variables. The long run estimation result revealed that real government spending on human capital formation is growth promoting; real government consumption is growth retarding and real government physical investment becomes insignificant in explaining growth of real per capita income. Real Private investment and real openness affect the growth of real per capita income positively and significantly. Furthermore, VECM is employed to estimate the short run dynamics. The result revealed that all components of government expenditure do not have significant effect in explaining growth of real per capita income in the short run. Issues of quality, transparency, accountability and capacity building should be well established in public expenditures particularly on huge investment projects to ensure fiscal regulation and management of scarce resources and promotion of sustainable development, an effective channeling of unproductive public funds to productive activities should be implemented. ix