Is government spending a barrier to industrialisation? Evidence from Africa

Many studies have explored factors influencing industrialisation including remittances, human capital, energy poverty and income. Although government policies through public spending may have a central role in fostering industrialisation in Africa, very little attention has been given to this factor. This study fills this gap by analysing, probably for the first time, the association between government spending and industrialisation in 42 African countries over the period 1995–2021. Applying a variety of panel estimates, the following results are established. Government spending is found to foster industrialisation in Africa. Interestingly, results from the Oster coefficient stability test provide evidence to support that this result is not mainly driven by unobserved confounding factors. Moreover, we find evidence supporting the existence of an inverted U-shaped relationship between public spending and industrialisation suggesting that increases in public spending may foster industrialisation till a certain point; however, from this tipping point, any excessive government spending will be harmful to industrialisation. Empirical evidence supports that this non-linear association between government spending and industrialisation is mainly due to the crowding out of private investments by public spending. Thus, our findings suggest that policymakers should maintain government spending within the threshold limit.