Fiscal Policy And Economic Growth Empirical Evidence From Ethiopia

The purpose of the paper is to exam ine the effect of fi scal policy variables on economiCrngrowth in Ethiopia using annual data over the period 1960/61-2007/08. To ach ieve the statedrnobj ective "Barro type" growth model is estimated with the aid of cointegrated Vectorrnautoregressive (V AR) and error correction modelling techn iques. This paper decomposesrnpublic spendi ng and revenues into various subcategories and estimates the impact of each ofrnthem on economic growth.rnThe result SUppOlt growth neutral nature of nondistortionary taxes and total recurrentrnexpenditures excluding health and education spending. Strong positive effect of human capitalrndevelopment expenditure was ascertained. There was evidence that shifting the governmentrnrevenue source from distortionary taxation towards non di stortionalY taxes can enhance realrnper capita GDP. Government investment, on the other hand, revealed a short run beneficiaryrneffect being unimportant in the long run. In light of this, the study proposes that in the questrnfor sustainable growth in Ethiopia, fiscal policy should be designed so that governmentrnexpenditure is focused in increasing human capital development with limiting governmentrninvestments in areas which are not complementary for the private sector.

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