Productivity Of Government Spending And Test Of Causality Between Government Expenditure And Economic Growth

Government expenditure as one of major instrument of fiscal policy is now becomingrnthe growing concern in almost all countries. Countries who follow the world bankrnsponsored structural adjustment program (SAP) need to revise their policy of publicrnspending . Ethiopia,being one of them , is going in restructuring its public resourcesrnallocation. Thus policy makers need to know the productivity of public expenditure.rnThis paper deals with how public spending did behave for the last three to fourrndecades and test the causal relation between the growing public expenditure and nationalrnincome. Using Granger causality and Translog production function, the available Ethiopianrndata show the presence of instantaneous bidirectional causal relation between growth ofrnreal percapita income and government expenditure. The elasticity estimates of the translogrnproduction function show government expenditure on human resource development andrncapital expenditure have the greatest effect on economic growth. Hence,the newrngovernment of Ethiopia has to give due consideration to these sectors' development whenrnit restructures the existing fiscal policy(expenditure restructuring).

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