THE IMPACT OF HUMAN CAPITAL AND AGRICULTURE PUBLIC SPENDING ON ECONOMIC GROWTH IN ETHIOPIA

Abstract

The Ethiopian government aims to increase overall expenditure by more than 100% from 690.9 billion in GTP periods (2010/11-2014/15) as compared to previous plan period (PASDEP, 2004/05-2009/10) expenditure. According to some scholars- Keynesian view, the increase in public spending on socio-economic and physical structures is important and encourages economic growth. However some scholars – Classical economists on the other hand argue that the increase in public expenditure may shift resources from the productive private sector to public sector which they believe unproductive and hence, crowd out overall performance of the economy. These views indicate that policymakers are under debate whether increase in public spending helps or hinders economic growth. The paper investigates the relationship between government expenditure and domestic output (GDP) in Ethiopia. The study attempts to measure the impacts of sectoral public spending – human capital and agriculture, on economic growth; using annual data set on GDP and government expenditure for the period 1960/61-2010/11. Elasticities of GDP with respect to human capital and agriculture are estimated using OLS regression analysis. The study employ co-integration and error-correction model to examine the short and long run relationships between GDP and government sectoral spending (human capital and agriculture). It is found that education sector expenditure has both short-run and long-run statistically positive-significant effect on growth while health sector spending has negative- insignificant relation. With regard to agriculture, the result shows that it has negative relationship with growth. The result also found the existence of long run relationship between the components of government spending and economic growth. These results have policy implication that education if properly funded could bring about sustainable economic growth.