Public Spending, Growth, and Poverty Alleviation in Sub-Saharan Africa: A Dynamic General Equilibrium Analysis

This study explores the impact of government policy on long-run growth and poverty in Sub-Saharan Africa (SSA), drawing on insights from cross-country research on the direct and indirect links between public spending and total factor productivity (TFP) growth. Methodologically, we use a dynamic, computable general equilibrium (CGE) model that is solved for the period 1998-2015. The model keeps track of the accumulation of major assets and captures the impact of government spending (disaggregated by function into agriculture, human capital, transportation-communication, defense, and other) on TFP growth. The model is applied to a stylized country-level data set that reflects the structural characteristics of economies in SSA and incorporates empirically estimated links between TFP and different types of public spending. Simulations of alternative government spending strategies suggest that a reallocation of spending to more productive areas, most importantly agriculture, and increased efficiency of government spending are key elements in pro-poor growth strategies. The returns from increased government spending in target areas without cuts elsewhere are lower since, in the absence of foreign financing, less resources is available for private consumption and investment. By releasing domestic resource constraints, foreign grant financing can play a crucial role in strategies aimed at drastic improvements in economic performance, including the realization of the Millennium Development goal of halving poverty by 2015.