Abstract:
This thesis is conducted on "The Impact of Government Expenditure on Economic
growth in Ethiopia" by using time series data of 1970171 to 2010111, applying Ram's
(1986) endogenous growth accounting model. The general objective of the study is to
investigate the relationship between the components of government expenditure and
economic growth in Ethiopia. Both descriptive and econometric techniques were
employed for the purpose of analysis. Descriptive part deals about the general
compositions and trends of public spending, the growth patterns of economy, and
sectoral composition of national output. Econometric analysis is conducted by using
Johansen Maximum Likelihood Estimation procedure. Before estimating the long run
model, the time series characteristic of the data is tested using DF and ADF test and
found that all the variables are integrated of order one. Then, the cointegration test was
conducted and concluded that there is one co integrating equation between variables. The
long run estimation result revealed that real government spending on human capital
formation is growth promoting; real government consumption is growth retarding and
real government physical investment becomes insignificant in explaining growth of real
per capita income. Real Private investment and real openness affect the growth of real
per capita income positively and significantly. Furthermore, VECM is employed to
estimate the short run dynamics. The result revealed that all components of government
expenditure do not have significant effect in explaining growth of real per capita income
in the short run. Issues of quality, transparency, accountability and capacity building
should be well established in public expenditures particularly on huge investment
projects to ensure fiscal regulation and management of scarce resources and promotion
of sustainable development, an effective channeling of unproductive public funds to
productive activities should be implemented.
