The Impacts of Public Spending on Economic Growth and Poverty Reduction in Ethiopia: A Dynamic Computable General Equilibrium Analysis
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Date
2012-12
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Addis Ababa University
Abstract
Public expenditure could play an important role in promoting economic growth and
poverty reduction. Given the significant role of public spending, this study empirically
explores the impacts of public spending on long-run economic growth and poverty
reduction in Ethiopia. In particular, the researcher assessed the effects of public spending
(disaggregated by function into human capital and agriculture) that can be financed via
government saving or foreign saving on economic growth and poverty reduction in the
country through its indirect effects on total factor productivity. The researcher employed
a dynamic computable general equilibrium model that linked with micro simulation
model that is solved recursively for the period 2009-2020. The CGE model used the
updated 2009/10 social accounting matrix (SAM) while the MS model employed the
2004/05 household income, consumption and expenditure (HICE) survey to investigate
household poverty via the consumption expenditure changes from the CGE model.
The results of the study revealed that the government spending either allocated towards
human capital or agriculture has improved the macro-economy, welfare and poverty
situation of the country regardless of financing options. Given high elasticity of public
expenditure on human capital with respect to total factor productivity, public spending
targeted towards human capital resulted in high GDP growth and hence significantly
reduced the poverty as compared to expenditure targeted agricultural sector. Moreover,
the magnitudes of the welfare and poverty improvements is differ among financing
options where the improvement of welfare of households and reduction of poverty is
large under foreign saving means of financing against government saving financing
schemes.
Financing additional public expenditure through foreign saving increases the
consumption of all households group more than financing through domestic resources
(government saving) as households are supposed to save more at the expense of
consumption under government saving financing option. In each simulation, the urban
households reap more benefit from the improvement of income and consumption than
rural households.
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Public Spending on Economic Growth