Fiscal Policy, Public Investment and Economic Growth in Ethiopia

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Addis Ababa University


It remained a big intellectual puzzle both on theoretical and empirical front that the question of whether or not fiscal policy spurs economic growth. Proponents of government intervention believe that government involvement in economic phenomena is crucial for growth, but opponents have a view that government involvements are naturally bureaucratic and unproductive and therefore retarding rather than promoting growth. This contradicting view comes up with equally mixed results in the empirical literature. In line with argument, objective of this study is to contribute towards the literature on fiscal policy, public investment and economic growth in Ethiopia. This study used time series techniques and applied empirical model by Kneller et al (1999) and Bleaney et al (2000) to investigate the link between various components of fiscal policy on growth on annual data for the period 1981 – 2013. It employed the autoregressive distributed lag estimation technique. Results of the bound tests indicated that there was a long-run relationship between the variables. Disaggregating government expenditure into productive and unproductive and tax revenue into distortionary and non distortionary. The study found unproductive expenditure and nondistortionary tax revenue to be neutral to growth as predicted by economic theory. Productive expenditure has positive effect on growth while there was evidence of distortionary effects on growth. On the other hand, government investment was found to be beneficial to growth in the long run. These results give right signal to policy makers in Ethiopia in formulating expenditure and tax policies to ensure unproductive expenditures are reduced while at the same time boosting public investment.



Public Investment and Economic Growth