The Long Run Relationship Between Governments Expenditure And Economic Grouth In Ethiopia

Abstract

This study examined the long run relationship between government expenditure and economic growth in Ethiopia using VAR co-integration and error correction model for the period 1974/75 -2014/15. A time series data was obtained from the Central Bank of Ethiopia and Minster of Finance and Economic Development for the analysis. The outcome of the unit root test in the ADF and PP test indicated that all variables included in the model were non- stationary at their level and first difference but integrated of order two, I(2). From the long-run analysis,(co-integration) the results revealed a positive and significant linear relationship between these government sectoral expenditure and economic growths in Ethiopia (measured by real GDP).Granger causality is one a use full technique for determining whether one time series has a long run relationship with another .The result of Pair wise Granger Causality test in a Vector Correction Model indicated unidirectional (one-way) causality, running from government expenditure on general services to economic growth ,(real GDP) while there is no causality runs from other sectoral government expenditure to economic growth (real GDP) and vice versa. On the other hand causality also can check jointly by using Granger Causality (Block exogeneity Wald test) the outcome indicates that government Expenditure on general services (GSEX) and government Expenditure on Social Services(SSEX) jointly has unidirectional(one-way) causality to economic growth,(real GDP).And also from the result we can understand all other things remain constant one unit change in GSEX brought 4.05 unit change in real GDP; one unit increase in SSEX resulted in87816.37 unit change in real GDP per capita and a one unit change in EEX and MEX real GDP per capita change changes 0.207663 and -1.474983 times per unit respectively in the short run Therefore, the study recommended the need to stimulate economic growth by allocating appropriate proportion sectoral government expenditure in the national budget.