Government spending and inclusive growth in sub-Saharan Africa: A panel VAR analysis

This paper assesses the effects of government expenditure components on both equity and growth, especially whether it is possible to design public spending to promote a more equitable society without sacrificing economic growth. We employ a panel VAR technique to use a large annual dataset on 10 sub-Saharan African countries over the period 1990-2015. The VAR approach addresses the problem of endogeneity by allowing endogenous interaction between system variables. The panel has a medium time dimension and a relatively small number of countries, thus the panel with fixed effect specification (LSDV) is the most appropriated. The estimation and drawing Impulse Response Functions (IRFs) of different shocks were done using the Stata code (XTVAR). Our findings from impulsive response function give evidence that investment in infrastructure (quality and stock) contributed to more inclusive growth in sub-Saharan African economies than others government spending in long term. Moreover, social spending in developing countries often benefits the rich and middle classes more than the poor. Therefore, a higher share of social spending on items such as health and education will not be reflected in higher incomes for the poor. These results are confirmed by the variance decomposition analysis (FEVD).