The Impact of public Sector Spending on the Economic Growth A particular Focus on Road and Electric Power Sector (The Case of Ethiopia)

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Addis Ababa University


The government of Ethiopia for the past ten years is exercising an expansionary fiscal policy with the aim of providing major public infrastructure services in the country. With regard to this, the government have increased the level of total public expenditure by more than hundred percent in GTP periods. Taking in to account the shortage of capital to finance public expenditures in Ethiopia, both the short run and long run effects of this government spending have to be measured to determine whether the expenditure is creating the intended economic growth. Short run economic outburst can misled governments that the existing public expenditure will have a positive outcome also in the long run while it may not. On the other hand, the increase in public expenditure can result in resource absorption from the productive private sector, which most scholars argue to be more efficient, to public sector. The objective of this paper is to analyze the impact of government spending on economic growth in Ethiopia. In doing so, considering the complexity of the link between government spending and economic growth, both descriptive explanations and econometric analysis were applied in the study. In addition, key informant interview was made in order to triangulate the empirical results obtained. The descriptive analysis found that the trend of public spending in Ethiopia and the deficit level is growing adjacently in recent years. However, the level of accumulated public debt borrowed to finance the deficit is at low risk according to IMF standard of high risk dept level. The empirical analysis found that public spending on social sectors has positive long run effect on the growth of real percapita income while spending on general services is suppressing its growth. From the selected infrastructure sector components, while public expenditure on electric power sector has significant positive effect, road sector development has insignificant effect on the growth of real percapita income growth



A particular focus, Electric Power sector, Ethiopia