Effect Of Government Expenditure On Economic Growth In East Africa: A Disaggregated Model

ABSTRACT

The goal of this research was to investigate empirically how government expenditure contributes to economic growth in East Africa. Most existing studies on the association between government expenditure and economic growth show conflicting results and mainly focus on developed economies. Hence this study focused on both the functional and composition of public spending of the East African countries over the period from 1980 to 2010, with a particular focus on sectoral expenditures: Education, Agriculture, Defense and Health. The objective of the study was to establish these government expenditure components that have effects on economic growth using panel data series for East Africa (for 31 years) in order to provide a guide for policy formulation. The study used the neoclassical augmented Solow growth theory as the theoretical framework. In this study, both descriptive and econometric inferential analyses were carried out. In the econometric analysis, total government expenditure was disaggregated to scrutinise the effect of different components of public spending on economic growth. This study used secondary data which was obtained from sources such as the specific countries Bureau of Statistics, Statistical abstracts and World Bank. Employing Levin-Lin-Chu test, this study tested for panel unit root and found that only two variables, that is, real GDP growth and investment expenditure are stationary at level while others were stationary at the first difference level. The collected data was estimated by balanced panel fixed effect model. The findings showed that expenditures on health, defense and investment were found to be positive and statistically significant effect on economic growth in East Africa. In contrast, expenditure on consumption was found to be negative and statistically significant effect on economic growth. Finally, education, agriculture and human capital expenditure were found to be insignificant. This study suggests that for East Africa, the policy of increasing government spending on health, defence and investment budget to promote economic growth will be appropriate, but fewer funds should be channeled towards other governmental programs.