ABSTRACT
Studies
on economic growth have provided insights into why States grow at different
rates over time. Classical economics posits that economic growth is largely
influenced by factors of production, particularly labour and capital. The
proponents of the Classical school assert that the effect of government
spending is temporary and not effective, particularly in the long-run, when prices
adjust and output and employment are at their optimum levels. On the contrary,
the Keynesian economics opine that public consumption has a positive effect on
the economy. Most recently, endogenous growth economics asserts that government
expenditure and taxation will have both temporary and permanent effects on
economic growth. The debate on the effectiveness of fiscal policy as a tool for
promoting growth and development remains inconclusive given the above positions
as well as conflicting results of recent studies. Thus, the controversy is yet
to be settled. Against this background, therefore, this study sought to
determine: (i) the effect of government productive expenditure on the economic
growth of sub -Saharan African countries, (ii) the effect of government
unproductive expenditure on the economic growth of sub-Saharan African
countries, (iii) the effect of distortionary tax on the economic growth of
sub-Saharan African countries, (iv) ) the effect of non-distortionary tax on
the economic growth of sub-Saharan African countries, and (v) the effect of
budget surplus on the economic growth of sub-Saharan African Countries. The ex-post facto research design was adopted which enabled
the study to make use of secondary data of sub-Saharan African Countries
in panel least squares. The hypotheses were linearly modelled while adopting
the panel data estimation under the fixed-effect assumptions. Findings reveal
that Government productive and unproductive expenditures have a negative and
significant effect on the economic growth of sub -Saharan African countries,
while distortionary tax (a proportional tax on output at rate) and
non-distortionary taxes has a positive and significant effect on the economic
growth of sub-Saharan African countries. Findings also revealed the budget
balances of sub- Saharan African countries have a positive and insignificant
effect on the economic growth of sub-Saharan African countries. The study
therefore recommends that Governments of sub -Saharan African countries should
engage in more productive and unproductive expenditures while improving on the
mechanisms for the collection of distortionary and non-distortionary taxes for
enhanced economic growth.
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study.
Economic
growth studies has provided insights into why states grow at different rates
over time and that influence of government in her choice of tax and expenditure
determines that level at which a given economy will grow. Studies on economic
growth and drivers have received attention among scholars but with differing
evidences. Economic growth represents the expansion of a country’s potential
Gross Domestic Product (GDP) or output (Abata, et al., 2012).
A
number of Sub-Saharan African countries had relatively favourable development
prospects and income levels at the time of independence. However, overtime,
economic development in the region has been dependent on aid and debt due to
mismanagement of fiscal policies. When the region is compared with those in
Southeast Asian countries, it is obvious and glaring that economic development
in Sub-Saharan Africa has been lagging behind. In the most recent times many
Southeast Asian countries have far higher development and income levels with
some been categorised as emerging economies. The Sub-Saharan African economy
has been plagued with several challenges over the years. Notable among the
challenges is the management and mismanagement of fiscal policies. In spite of
many, and frequent changing of fiscal and other macro-economic policies, the
sub-Saharan African countries are yet to tap her economic potentials for rapid
economic development and growth. Fiscal policies are extremely linked in
macro-economic management; growth in one sector of the economy directly affects
growth in the other. Notably, fiscal policy is central to the health of any
economy, as government’s has power to raise revenue (tax) and expend revenue.
These actions affect the disposable income of citizens and corporations which
in turn affects the general economy as well.
Fiscal
policy has conventionally been associated with the use of taxation and public
expenditure to influence the level of economic activities. The implementation
of fiscal policy is essentially routed through government’s budget.
Consequently, the most important aspect of a public budget is its use as a tool
in the management of a nation’s economy (Omitogun & Ayinla, 2007). Fiscal
policy is a deliberate action of government.
It involves the use of government spending, taxation and borrowing to
influence the pattern of economic activities and also the level and growth of
aggregate demand, output and employment. This includes sustainable economic
growth, high employment creation and low inflation. Thus, fiscal policy aims at
stabilizing the economy. Increases in government spending or a reduction in
taxes tend to pull the economy out of a recession; while reduced spending or
increased taxes slow down a boom (Dornbusch & Fischer, 1990). Fiscal policy
entails government's management of the economy through the manipulation of its
revenue and expenditure to achieve certain desired macroeconomic objectives
amongst which is economic growth (Medee & Nembee, 2011). Olawunmi and
Tajudeen (2007) opine that fiscal policy has conventionally been associated
with the use of taxation and public expenditure to influence the level of
economic activities. Furthermore, Olawunmi and Tajudeen (2007) argue that the
implementation of fiscal policy is essentially routed through government's budget.
Anyanwu (1993) notes that the objective of fiscal policy is to promote economic
conditions conducive to business growth while ensuring that any such government
actions are consistent with economic stability.
Over
the last decade, the growth impact of fiscal policy has generated large volume
of both theoretical and empirical literature. Economic growth has long been
considered an important goal of economic policy with a substantial body of
research dedicated to explaining how this goal can be achieved (Fadare, 2010).
Scholars argue that increase in government expenditure on socio-economic and
physical infrastructures encourage economic growth likewise expenditure in
health and education raise the productivity of labour and increase the growth
of national output (Barro & Sala-i-Matins, 1995). Similarly, expenditure on
infrastructure such as roads, communications, power, etc, reduces production
costs, increases private sector investment and profitability of firms, thus
fostering economic growth. Supporting this view, scholars concluded that
expansion of government expenditure contributes positively to economic growth
(Barro & Sala-i-Matins, 1995). Conversely, other school of thought claim
that increasing government expenditure deters economic growth, instead they
assert that higher government expenditure might slowdown overall performance of
the economy. Furthermore, in an attempt to finance rising expenditure,
government may increase taxes and/or borrowing which might affect her spending
behaviour. Thus, higher income tax discourages individual from working for long hours or even searching for jobs and
this reduces income and aggregate demand. In the same vein, higher profit tax
tends to increase production costs and reduces investment expenditure as well
as profitability of firms (Oseni & Onakoya, 2012). Moreover, if government
increases borrowing (especially from the banks) in order to finance its
expenditure; it will compete away the private sector, thus reducing private
investment.
Propositions
exist on the effect of fiscal policy on economic performance outcomes. Khosravi
& Karimi (2010) opine that classical studies estimate that economic growth
is largely linked to factors of production particularly labour and capital. The
proponents of the classical view assert that the effect of government spending
is temporary and not effective particularly in the long-run when prices adjust
and output and employment are at their optimum levels (Mathew, 2009).
Furthermore, Mathew (2009) notes on the contrary the Keynesian view as
represented in Blinder and Solow (2005) suggest that consumption has a positive
effect on the economy. Most recently, there has been the emergence of the
endogenous growth theory which predicts that government expenditure and taxation
will have both temporary and permanent effects on economic growth. Bogdanov
(2010) points out that the emergence of the endogenous growth theory has
encouraged specialists to question the role of other factors in explaining the
economic growth phenomenon.
Adeoye
(2006) points out that the debate on the effectiveness of fiscal policy as a
tool for promoting growth and development remains inconclusive given the
conflicting results of current studies. On the theoretical front, there are two
main strands of literature regarding the role fiscal policy play in fostering
economic growth. One view is that government’s support for knowledge
accumulation, research & development, productive investment, the
maintenance of law and order and the provision of other public goods and
services can stimulate growth in both the short-run and the long run (Easterly
& Ribero, 1993; Mauro, 1995; Folster & Henrekson, 1999). On the other
hand, there is also the view that governments are inherently bureaucratic and
less efficient and as a result they tend to hinder rather than facilitate
growth if they get involved in the productive sectors of the economy (Mathew, 2009). Thus government fiscal policy is thought to
stifle economic growth by distorting the effect of tax and inefficient
government spending.
In
the neoclassical growth model of Solow (1956), together with its many
subsequent extensions, the long-run growth rate is driven by population growth
and the rate of technical progress. Distortionary taxation or productive
government expenditures may affect the incentive to invest in human or physical
capital, but in the long run this affects only the equilibrium factor ratios
and not the growth rate, although there will in general be transitional growth
effects (Mathew, 2009). Endogenous growth models such as those of Barro (1990),
and King & Rebelo (1990), on the other hand, predict that distortionary
taxation and productive expenditures will affect the long-run growth rate. The
implications of endogenous growth models for fiscal policy have been
particularly examined by Barro (1990), Jones et al. (1993), Stokey & Rebelo
(1995) and Mendoza et al. (1997).
In
the light of the above, this study contributed to the debate by investigating
the effect of the two sides (structure) of fiscal policy on economic growth and
for sub-Saharan Africa.
1.2 STATEMENT OF PROBLEM.
A
major strand in literature regarding the role fiscal policy play in fostering
economic growth is that government’s support for knowledge accumulation,
research & development, productive investment, the maintenance of law and
order and the provision of other public goods and services can stimulate growth
in both the short-run and the long run (Easterly & Ribero, 1993; Mauro,
1995; Folster & Henrekson, 1999). This notwithstanding, the extent to which
fiscal policy engender economic growth has continued to attract empirical
debate especially in developing countries.
Fundamental
to this problem statement is the representation of fiscal policy. Literature
reveals that there are different opinions as to what coefficient best captures
fiscal stance. Theoretically, three standard fiscal policy measures;
spending/expenditure, taxation and deficits exist. Out of these three
variables, literature does not single out any as the most representative of
fiscal policy. While scholars such as (Rebelo, 1991; Xu, 1994; Stokely & Rebelo, 1995; Engen & Skiner, 1996) have made
use of tax rates as a proxy for fiscal policy others such as Martin and Fardmanesh
(1990) and Easterly & Sergio (1993) have used deficits to account for
fiscal policy in their estimations. Yet, scholars including Barro (1990),
Aushauer (1989) used expenditure to account for fiscal policy stance. When
expenditure is considered as a fiscal policy measure certain studies have
considered aggregate government expenditure as a single variable while others
are of the view that the variable ought to be decomposed into several
categories.
Consequently,
past empirical results differ greatly between various studies as (Levine and
Renelt, 1992) emphasized the sensitivity of the findings to changes in the set
of control variables. Levine and Renelt (1992) also argue that none of the
three policy variables has a robust association with economic growth when
examined individually. Fu, et al. (2003) suggest the inadequacy of any one of
the identified fiscal policy indicators (as pointed by Levine & Renelt,
1992) but disputed the mainstream growth literature which could be due to the
inability of any one policy factor to adequately account for a given fiscal
policy position. Mathew (2009) consequently points out that a third-generation
strand of the literature on fiscal policy and economic development has emerged
which attempts to examine the structure of at least two fiscal policy variables
simultaneously.
A
significant problem with most of the past African countries studies is the
inability of the studies to apply pair-wise combinations of the fiscal. This
implies testing the effects of fiscal policy on economic growth taking into
account the structure of fiscal policy i.e. both sides of taxation and
expenditure. In other words, past African studies focused on the effect of
government deliberate spending on economic growth while ignoring, at least partially,
the other side (taxation/ income) of fiscal policy. Bleaney, et al (2000)
opines that any fiscal policy growth study, which does not take both sides of
the fiscal policy into account, suffers from substantial biases of the
coefficient estimates. This study dealt with the above problems in the context
of static panel regressions by showing the complete specification of the
government budget constraint and careful attention to fiscal classifications to
produce dramatically different results for the economic growth effects of
fiscal policy.
The objectives of this study are as follows:
1. To determine if productive government expenditure
positively and significantly affect the economic growth of sub-Saharan African
Countries.
2. To ascertain if non-productive government
expenditure positively and significantly affect the economic growth of
sub-Saharan African Countries.
3. To determine if distortionary taxes negatively and
significantly affect the economic growth of sub-Saharan African Countries.
4. To ascertain if non-distortionary taxes negatively
and significantly affect the economic growth of sub-Saharan African Countries.
5. To find out if budget surplus positively and
significantly affect economic growth of sub-Saharan African Countries.
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