ECONOMIC GROWTH MODELS AND GOVERNMENT EXPENDITURE IN SOUTH AFRICA: A DISAGGREGATED IMPACT ANALYSIS

Year 2019, , 33 - 48, 17.06.2019

İfeoma Anthonia Iwegbunam Zurika Robinson

https://doi.org/10.34109/ijefs.201911103

Cited By: 3

Abstract

This study examined the effects of government expenditure on different components of
economic growth in South Africa. The six key policy variables employed in the analysis
were derived from the Solow neoclassical growth model and the New Growth Path
(NGP), a macroeconomic framework designed to address the main challenges
(unemployment, poverty and inequality) facing the economy as a result of its political
past. The analysis of the relationship was carried out using the cointegration model, longrun estimates and the VECM, because assessing the effects of government expenditure on
economic growth goes beyond the short-term period, due to the fact that it takes time
before government outlays have an effect on the economy. The findings from the analysis
revealed that though there exists a long-run equilibrium relationship among the variables
with the cointegration results, the long-run estimates showed that aggregate private
consumption expenditure and employment-to-population ratio are significantly, but
negatively, related to economic growth, while net inflows of foreign direct investment
and gross fixed capital formation are negatively related to gross government expenditure.
This implies that government needs to direct most of its spending towards human
capital development, in order to overcome the challenges. However, government
expenditure needs to be monitored, since excessive public capital expenditure might
reduce the positive impact of foreign direct investment on economic growth. The
study therefore suggests that government should consider increasing its expenditure on the significant variables that support labour and capital development, in order to
enhance economic growth in South Africa.

Keywords

Government expenditure, economic growth models, government policy, VECM, South Africa

References

• Agostino, G., Dunne, J.P. and Pieroni, L. (2016), “Government Spending, Corruption and Economic Growth,” World Development, Vol. 84, pp. 190-205.
• Ajakaiye, O., Afeikhena, T.J, Nabena, D. and Associate, (2016), “Understanding the Relationship between Growth and Employment in Nigeria,” Development Policy Research Unit: United Nations University (UNU- WIDER), pp. 1-32.
• Ajudua, E.I. and Ojima, D.J.P. (2015), “Government Expenditure, Foreign Direct Investment and Economic Growth in Nigeria,” Journal of Economics and Sustainable Development, Vol. 6, No. 8, pp. 79-84.
• Barro, R. (1990), “Government Spending in a Simple Model of Endogenous Growth,” The Journal of Political Economy, Vol. 98, No.5, pp. S103-S125.
• Carter, J., Craigwell, R. and Lowe, S. (2013), “Government Expenditure and Economic Growth in a Small Open Economy: a Disaggregated Approach,” Central Bank of Barbados, pp. 1-28.
• Chipaumire, G. and Associates, (2014), “The Impact of Government Spending on Economic Growth: A Case of South Africa,” Mediterranean Journal of Social Sciences, Vol. 5, No. 1, pp. 109-118.
• Daurlauf, S., Kourtellos, A. and Mankin, A. (2001), “The Local Solow Growth Model,” European Economic Review, Vol. 45, No. 4-6, pp. 928-940.
• Dickey, A.D. and Fuller, I.I.A. (1971), “Distribution of the Estimators for Autoregressive Time Series with Unit Root,” Journal of American Statistical Association, Vol. 75, pp. 427-431.
• Dickey, A.D. and Fuller, I.I.A. (1981), “Distribution of the Estimators for Autoregressive Time Series with Unit Root,” Journal of American Statistical Association, Vol. 102, pp. 53-69.
• Domar, E.D. (1946), “Capital Expansion, Rate of Growth and Employment,” Econometrica, Vol. 14, pp. 137-147.
• Engle, R.F. and Granger, C.W.J. (1987), “Cointegration and Error Correction: Representation, Estimation and Testing,” Econometrica, Vol. 55, No. 2, pp. 257-276.
• Fedderke, J., Perkins, P. and Luiz, J. (2006), “Infrastructural Investment in Long-Run Economic Growth: in South Africa,” World Development Journal, Vol. 34, No. 6, pp. 1037-1059.
• Gibeseu, O. (2010), “Does the Gross Fixed Capital Formation Represent a Factor for supporting the Economic Growth?” Munich Personal RePEc Archive (MPRA) Paper 50135, pp. 1-6.
• Granger, C.W. (1981), “Testing for causality,” Journal of Economic Dynamic and Control, Vol. 4, pp. 229-252.
• Harrod, R.F. (1939), “An Essay in Dynamic Theory,” Economic Journal, Vol. 49, pp. 14- 33.
• Johansen, S. and Juselius, K. (1990), “Maximum Likelihood Estimation and Inference on Cointegration with Applications to Money Demand,” Oxford Bulletin of Economics and Statistics, Vol. 52, No. 2, pp. 169-210.
• Karim, Z., Karim, B. and Zaidi, M. (2012), “Fixed Investment Household Consumption and Economic Growth: a Structural Vector Error Correction Model (SVECM) Study of Malaysia,” International Journal of Business and Society, Vol. 13, No. 1, pp. 63-76.
• Keita, L. (2016), “Models of Economic Growth and Development in the Context of Human Capital Investment-The Way Forward for Africa,” African Development, Vol. XLI, No. 1, pp.23-48.
• Keynes, J.M. (1936), The General Theory of Interest, Employment and Money, McMillan: London.
• Kolawale, B.O. and Odubunmi, S.A. (2015), “Government Capital Expenditure, Foreign Direct Investment and Economic Growth Relationship in Nigeria,” Mediterranean Journal of Social Sciences, Vol. 6, No. 4, pp.444-453.
• Liu, D. (2007), “Growth Theory and Application: the case South Africa”, University of Pretoria: Department of Economics Working Paper 2007-14. South Africa.
• Lucas, R. (1988), “On the Mechanics of Economic Development,” Journal of Monetary Economics, Vol. 22 No.1, pp. 3-42.
• Lutkepohl, H. and Killian, L. (2016), “Structural Vector Autoregressive Analysis,” Cambridge University Press: Cambridge, pp. 73-105.
• Mosikari, J. and Matlwa, K. (2014), “An Analysis of Defense Expenditure and Economic Growth in South Africa,” A Mediterranean Journal of Social Sciences, Vol. 20, No. 5, pp. 2769-2776.
• Moyo, T. and Mamobolo, M. (2014), “The National Development Programme (NDP): a Comparative Analysis with the Reconstruction and Development Programme (RDP), Growth Employment and Redistribution (GEAR) Programme and Accelerated and Shared Growth Initiative for South Africa (ASGISA),” Journal of Public Administration, Vol. 49, No. 3, pp. 946-959.
• Nasir, Z.A. (2012), “Household Consumption and Economic Growth: Cointegration and Causality Analysis of Malaysia,” International Journal of Business and Society, pp. 56- 70.
• National Planning Commission (2011), Diagnostic Overview of National Development Plan 2030, www.info.gov.za/views, [Accessed 22.08. 2017]
• Odiahmbo, N.M. (2015), “Government Expenditure and Economic Growth in South Africa: an Empirical Investigation,” Atlantic Economic Journal, Vol. 43, No. 3, pp. 393- 406.
• Philips, P. and Perron, P. (1988), “Testing for a Unit Root in time series regression,” Biometrika, Vol. 75, No. 2, pp. 335-346.
• Pleic, M. and Berry, A. (2009), “Employment and Economic Growth: Employment Elasticities in Thailand, Brazil, Chile and Argentina,” Human Sciences Research Council, pp. 2-47.
• Romer, P.M. (1986), “Increasing Returns and Long-Run Growth,” Journal of Political Economy, Vol. 94, No. 5, pp. 1002-1037.
• South African Reserve Bank), (2017), Quarterly Bulletin on Economic Growth, http://www.resbank.co.za/economicreview/DecisionMaking/Pages/growthmeasures.aspx, [Accessed 20. 05. 2016]
• Solow, R. M. (1956), “A Contribution to the Theory of Economic Growth,” Quarterly Journal of Economics, Vol. 70, No. 1, pp. 65-94.
• Suanin, W. (2015), “The Impact of Government Expenditure on Economic Growth in Thailand,” International Conference on Trends in Economic, Humanities and Management; Singapore, pp. 112-116.
• Swan, T.W. (1956), “Economic Growth and Capital Accumulation,” Economic Record, Vol.32, pp. 334-361.
• Uneze, E. (2013), “The Relationship between Capital Formation and Economic Growth: Evidence from Sub-Saharan Africa,” Journal of Economic Policy Reform, Vol. 16, No. 3, pp. 272-286.
• Vernon, R. (2013), International Investment and International Trade in Product Cycle: In Buckley P. (ed), Internalisation of the Firms, Academic Press, London.
• Wu, S., Tang, J. and Lin E. (2010), “The Impact of Government Expenditure on Economic Growth: How Sensitive to the Level of Development?” Journal of Policy Modeling, Vol. 32, No. 6, pp. 804-817.
• Zarenda, H. (2013), “South Africa’s National Development Plan and its Implications for Regional Development,” Stellenbosch Tralac Working Paper No. D13WP01: 1-15. Stellenbosch.