The Impact of Public Expenditure on Economic Growth in Ghana (1970-1998)

Abstract

The government's fiscal policy involves the use of its expenditure and taxation policies to achieve desired targets; this paper is however, based on the former. Both the theoretical and empirical literature surrounding the relationship between government activity and economic growth remain controversial to this day. Empirical works including those of Ram (1986), Landau (1983, 1986) and Rubinson (1977) among others have produced mixed results. This study analyses the contribution of government expenditure to the economic growth process in Ghana between 1970-1998. The results indicate that the aggregate government expenditure variable is negatively and significantly associated with economic growth. Although, the empirical results on the impact of government on economic growth is inconclusive, a negative association with Ghana's economic growth was unexpected but explicable. The choice of the size of government follows the approach adopted by Ram (1986). The composition of government expenditure also has mixed impact on Ghana's economic growth over the stipulated period. The growth rates of the expenditure components (incrementalist approach) were employed in this research. The results indicate that education expenditure and expenditures on roads and waterways have the expected positive and significant impact on Ghana's economic growth over the period under consideration. It is also clear that in a labour surplus economy such as Ghana, the neo-classical labour force variable is not an important determinant of growth. In addition, defence expenditure had a negative but insignificant impact on economic growth. The other growth variables introduced in the model such as investment and export had the expected positive signs in all the regressions undertaken. The study reveals that the most robust variable for Ghana's economic growth is investment. The proxy for the labour force variable (the rate of growth of population) had the expected positive association with economic growth but insignificant. Interestingly, the two political economy variables- political instability and the nature of government (democracy or autocracy) are statistically insignificant in explaining Ghana's economic growth (especially as the last seven years of the data set is biased towards democracy).