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The Effect of Public Expenditure on Economic Growth in the East African Community
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DOI: http://dx.doi.org/10.15520/jbme.2015.vol3.iss10.151.pp09-13
Abstract: This study analyzed the effect of public expenditure on economic growth in Kenya, Uganda, Rwanda, Burundi and Tanzania. The
specific objectives of the study were to investigate the effect of public expenditure on components of consumption, health, defence and
agriculture. Using panel data covering the period 1995-2010, the study applied the Hausman test and verified results through the Fixed effects
method. The findings were that agriculture and defence expenditure had a negative impact on economic growth while health and consumption
expenditure had a positive impact on economic growth. Based on the summary of these findings, recommendations were prescribed to aid in
wise policy choices.
Key words: Public expenditure, economic growth, agriculture, health, consumption and defence.
INTRODUCTION
The relationship between economic growth and the size of
the public sector is an important subject of review and
analysis. The subject of debate is whether or not public
sector spending increases the growth rate of the economy.
Economic growth refers to a steady physical increase in a
countrys productive capacity which is identifiable by a
sustained increase in a countrys real output of goods and
services or real income over time (Mudida, 2009).
Sustained and equitable economic growth is an important
objective of public expenditure policy. Many public policy
programs are predominantly aimed at promoting sustained
and equitable economic growth. Public expenditures have
played an important role in physical and human capital
formation over time. Society demands for infrastructural
facilities such as education, health, electricity, transport
defence etc., to grow and improve on their standards of
living. Kenya, Uganda, Rwanda, Burundi and Tanzania are
no exception on this regard.
Cynaida Miriam Kwendo et al, Journal of Business Management and Economics, 3 (10), October, 2015,
GDP
HEALTH
AGRICULTURE
CONSUMPTION
ADF FISHER
CHI-SQUARE
44.019
(0.000)
60.276
(0.000)
64.634
(0.000)
39.668
(0.000)
38.094
(0.000)
LEVIN,
LIN &
CHUT
-7.378
(0.000)
-9.116
(0.000)
-13.668
(0.000)
-6.832
(0.000)
-3.870
(0.000)
CONCLUSION
AT LEVEL
1st DIFFERENCE
1st DIFFERENCE
1st DIFFERENCE
1st DIFFERENCE
MODEL SPECIFICATION
DEFENSE
The data that was used for the analysis was from the 1995 to
2010. The prime consideration in designing the
methodology was to incorporate all the important
expenditure variables and keep it straight and effective in
explaining their effects on economic growth. Under these
considerations, the following equation was estimated:
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Cynaida Miriam Kwendo et al, Journal of Business Management and Economics, 3 (10), October, 2015,
Table 2 Fixed Effects Model and random Effects Model
FEM
Variable
Coefficient
T-STATISTIC
P-Value
REM
Coefficient
T-statistic
P-Value
CONSTANT
Agriculture
3.639
-0.438
0.793
-0.657
0.431
0.5133
3.623
-0.109
1.637
-0.220
0.106
0.826
Health
Defence
0.4761
-0.544
0.695
-0.864
0.9630
0.3907
1.267
-0.335
3.254
-1.456
0.091
0.150
Consumption
R2
0.007
0.279
0.047
0.4896
-0.191
0.173
-1.716
0.008
DW
Probability(Statistic)
1.775
1.459
0.04
0.009
The results for the Fixed effects model table as shown in the
table 2above portrays that consumption expenditure and
health expenditure have a positive coefficient while
agriculture expenditure and defence expenditure have a
negative coefficient. All the variables were found to be
statistically insignificant because their P-values were more
than 5% and their corresponding t-statistic values were less
than two. The results for the random effects model show that
agriculture, consumption and defence have a negative
coefficient. Their P-values are more than 5% and t-statistic
values are less than two and they are insignificant.
Hausman Test:
The Hausman test is a diagnostic test used to differentiate
between fixed effects model and random effects model in
panel data. The fixed effects regression model allows the
intercept to vary but it does not change over time. On the
other hand the Random Effects model clusters the cross
sections and produces a common value for the intercept. The
Hausman test null hypothesis is that the Random effects
model is appropriate while the alternate is the Fixed effects
model is appropriate. In Appendix 3 the probability of the
test is 0.0464 we reject null hypothesis because the
probability 4.64% is less than 5% therefore the fixed effects
model is appropriate.
SUMMARY
This research empirically explores the effects of public
expenditure on economic growth. This study aims to find
out the impacts which are important to the policy makers in
the East African community. In order to account for the
impact of public expenditure on economic growth the unit
root test was done on the variables the independent variables
were all stationary at the first difference and GDP was
stationary at level.
Cynaida Miriam Kwendo et al, Journal of Business Management and Economics, 3 (10), October, 2015,
[8].
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[27].
[28].
The R squared for the fixed effects model was 27.9% which
was greater than the R squared of the random effects model
of 17.3% which shows that the Fixed effects model is more
appropriate. The Durbin Watson statistics also shows that
the Fixed effects model is appropriate because its value of
1.775 shows it has no autocorrelation between the
disturbances.
CONCLUSIONS
This study set out to investigate the effect of public
expenditure on economic growth and public expenditure
was divided into government consumption expenditure,
health expenditure, defence expenditure and agriculture
expenditure. Health expenditure and consumption
expenditure had a positive impact on economic growth and
this means that the various East African governments should
invest more in this sectors and reduce their spending on
defence.
SUGGESTED AREAS FOR FURTHER RESEARCH
I would suggest studies on areas of how economic growth is
affected by other factors other than the components of
public expenditure in East Africa. In addition on the same
study I would also like to find out the effect on other
variables like education and infrastructure expenditure. The
study should also be extended to other regions like the
Economic community of West African states and the
Southern African Development Community, a comparison
between the various regions is also necessary.
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Cynaida Miriam Kwendo et al, Journal of Business Management and Economics, 3 (10), October, 2015,
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