Government Expenditures

Government Expenditures

Introduction

According to neoclassical theory of economic growth the long-run growth rate is exogenous. Specifically, the long-run growth rate depends solely on autonomous technological progress. Therefore, in the above theory a change in government expenditure will only have an impact on the transition towards the long-run growth rate. But a number of economists were not comfortable with the idea of an exogenous growth rate. This motivated, among others to develop theories where the long-run growth rate is determined endogenously.

Glass,( 2008) was the first to explicitly model government expenditure in a theory of endogenous growth. In this theory the long run rate of growth depends on, among other things, the structure of government expenditure. The structure of government spending refers to the proportion of spending that is productive/non-productive. Barro, however, does not formally classify expenditure on for example, defence, education, etc. as productive or non-productive in the theoretical modelling. Having said this, he does make some conjectures about the productivity of some categories of government spending. These conjectures are now discussed in more detail.

Drawing on the results reported in Aschauer, Barro predicts that investment in infrastructure will be one category of spending that is productive. Specifically, the coefficient on the aggregate infrastructure variable in the Aschauer study ranges from 0.34 to 0.49. The implication is that a 1% increase in public spending on aggregate infrastructure will lead to at least a 0.34% increase in private sector productivity. But such a large elasticity seems implausible and is almost certainly because Aschauer uses level data on productivity and infrastructure expenditure which is non-stationary. Using non-stationary data can lead to spurious relationships(Kollias et al., 2004) .

When Tatom and carry out unit root tests on similar data they find that the level series are non-stationary. Moreover, when Tatom and Holtz-Eakin use stationary first differenced data they both find that the coefficient on the aggregate infrastructure variable is not significant. In light of the above, unit root tests are carried out in this paper to establish if a series is stationary.1 Barro also predicts that expenditure on law and order will be productive because it reinforces property rights. This assertion is formally tested here. It may be the case of course that expenditure on public order and safety does not cause growth and causality actually runs in the opposite direction, i.e. reverse causality.

Hypothesis

Ho: There is no relation between “Defense” and economic affairs and ...