Exploring Co-integration and Causality Relationships between Government Expenditure and Economic Performance in Namibia

Abstract

One of the heated discussions among economists nowadays relates to the efficacy of government expenditure as a tool for stimulating growth in the national economy. This research paper contributes to the existing literature by investigating the possibility of a dynamic relationship between government expenditure and economic growth in Namibia through the use of the two-step Engle-Granger approach. Accordingly, the study examines interactions between total government expenditure and economic growth by also including health and education as potential predictors of economic growth. The annual time-series macroeconomic secondary data-set relied upon runs from the period 1990 to 2013. The dependent variable, that is, real gross domestic product serves as a proxy to economic growth; while total public expenditure, as well as, expenditures on education and health operated in the model as predictors of economic growth. First, the study found co-integration relationships among the variables used in the study. Second, a unidirectional causality relationship running from economic growth to the health sector was observed. Further, the study found that government spending and expenditures on education and health are all weak predictors of economic growth. The lesson arising from this study would be that simply pumping a lot of financial resources into particular sectors of the economy is not a guarantee for growth. Forthcoming studies should amongst others direct attention to the type of activities that public finance is mainly used for in the health and education sectors in respect of Namibia.

Keywords: Namibia, economic growth, Granger-causality, co-integration, government expenditure, Engle-Granger technique