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Government expenditure and economic growth: the ethiopian experience, 1950–2007

Author

Listed:
  • Kojo Menyah
  • Yemane Wolde-Rufael

    (London Metropolitan University, UK
    Independent Researcher, UK)

Abstract

This paper investigates the relationship between government expenditure and economic growth in Ethiopia to test Wagner’s Law which postulates that as real income increases there is a tendency for the share of public expenditure to increase relative to national income. Using the bounds test approach to cointegration, the paper finds robust evidence of a long-run relationship between government expenditure and GDP. Using four long-run estimators, we obtained elasticities ranging from 1.73 to 1.79, implying that a 1% increase in income leads to a 1.73–1.79% increase in government expenditure. Applying a modified version of the Granger causality test, we also found a unidirectional causality running only from GDP to government expenditure thus supporting the Wagnerian hypothesis of an expanding public sector. Since there was no causality running from government expenditure to income, the evidence suggests that the Keynesian view that government expenditure can be an effective policy instrument for promoting economic growth in Ethiopia was not supported. Therefore, there is a need for making fiscal policy as a stabilizer to enhance economic growth.

Suggested Citation

  • Kojo Menyah & Yemane Wolde-Rufael, 2013. "Government expenditure and economic growth: the ethiopian experience, 1950–2007," Journal of Developing Areas, Tennessee State University, College of Business, vol. 47(1), pages 263-280, January-J.
    • Handle: RePEc:jda:journl:vol.47:year:2013:issue1:pp:263-280
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    Citations

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    Cited by:

    1. Nayak, Dinesh Kumar & Hazarika, Bhabesh, 2022. "Linkage between Income and Government Expenditure at Indian Sub-nationals: A Second Generation Panel Co-integration Techniques," Working Papers 22/374, National Institute of Public Finance and Policy.
    2. Selim Demez, 2021. "Validity of Wagner’s Law in EU Member Transition Economies: Panel Causality Analysis," Journal of Economic Policy Researches, Istanbul University, Faculty of Economics, vol. 8(2), pages 199-210, July.
    3. Rashmi Rastogi & Sangeeta Chakravarty & Basanta K. Pradhan, 2019. "GWagner’s Law for Low Income States in India," IEG Working Papers 383, Institute of Economic Growth.
    4. B. Venkatraja, 2017. "Addressing the paradox of public expenditure – economic growth nexus: an econometric approach," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 5, pages 87-108,109-.
    5. Hassan Mohammadi & Rati Ram, 2015. "Economic Development and Government Spending: An Exploration of Wagner’s Hypothesis during Fifty Years of Growth in East Asia," Economies, MDPI, vol. 3(4), pages 1-11, October.
    6. Stephen Moore, 2016. "Wagner in Ireland: An Econometric Analysis," The Economic and Social Review, Economic and Social Studies, vol. 47(1), pages 69-103.
    7. Jobarteh, Mustapha, 2017. "Testing Wagner's Law for The Gambia, 1977-2013," MPRA Paper 76303, University Library of Munich, Germany.
    8. Omoshoro-Jones, Oyeyinka Sunday, 2016. "A Cointegration and Causality Test on Government Expenditure –Economic Growth Nexus: Empirical Evidence from a South African Province," MPRA Paper 102085, University Library of Munich, Germany, revised 17 Oct 2017.

    More about this item

    Keywords

    Government expenditure; Ethiopia; Wagner’s law; bounds approach to cointegration; causality;
    All these keywords.

    JEL classification:

    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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