Fostering prosperity: Economic Growth and Government Sectorial Expenditure in Ethiopia

Abstract

This study delves into the complex relationship between government sectorial expenditure and economic growth in Ethiopia from 1980 to 2021. Utilizing a modified endogenous growth model and the ARDL bound test model approach to co-integration, the research uncovers a long-run co-integrating relationship among the variables. The model encompasses nine key variables: Real GDP, Health, Agriculture, Education, Defense, Road, Water expenditures, Consumer Price Index, Foreign Aid, and Government Tax Revenue. In long run, the study reveals significant positive impacts of government health, agriculture, education, road, water sector expenditures, consumer price index, and government tax revenue on economic growth. Conversely, expenditures on the defense sector and foreign aid exhibit negative and significant impacts on long-run economic growth. The comprehensive short-run analysis offers additional insights, with agriculture, defense, and road sector expenditures emerging as positive influencers of economic growth, while education sector expenditure, consumer price index, and foreign aid showcase significantly negative effects. Intriguingly, water sector expenditure emerges as a non-significant contributor to short-term economic growth. Moreover, the study employs the error correction mechanism (ECM) to underscore the dynamic equilibrium between short-run and long-run dynamics, revealing a noteworthy speed of adjustment of 84.75%. This underscores the pivotal role of the ECM in rectifying short-term deviations from long-term equilibria. To sum up, the study advocates for a paradigm shift towards increased expenditure on pro-poor government sectors, alongside the implementation of a well-defined expenditure strategy and efficient budgetary resource management. Such measures, the study posits, hold the potential to serve as catalysts for propelling sustained and inclusive economic growth in Ethiopia.

Keywords

• ARDL
• co-integration
• growth analysis
• Ethiopia
• government expenditure
• economic development