The Effect of Components of Government Expenditure on Economic Growth Evidence From Ethiopia. (1980-2010)

Abstract

This study examined the effect of components of government expenditure on economic growth of Ethiopia from 1980-2010 using ordinary least square (OLS), co-integration and Error correction mechanism. The unit root and co-integration test were conducted on the variables of interest. While error correction model were estimated. The results suggest that components of government expenditure have long run effect on economic growth. In addition to this the empirical results suggest that components of government expenditure such as expenditure on health, agriculture, education and transport and communication have a positive and significant effect on economic growth. While other components such as expenditure on defense and recurrent expenditure have a negative and significant effect on economic growth. The study therefore concludes that government expenditure on education, health, agriculture and transport and communication were growth –enhancing while government expenditure on defense and the recurrent expenditure were growth-retarding during the period under investigation. In addition to this the co-integration result indicates that there is a long run relationship between the variables.

Keyword: Economic growth, effect of components of government expenditure, co-integration.