The Impacts of Public Spending on Economic Growth and Poverty Reduction in Ethiopia: A Dynamic Computable General Equilibrium Analysis

Jibril Haji
2012
Public expenditure could play an important role in promoting economic growth and poverty reduction. Given the significant role of public spending, this study empirically explores the impacts of public spending on long-run economic growth and poverty reduction in Ethiopia. In particular, the researcher assessed the effects of public spending (disaggregated by function into human capital and agriculture) that can be financed via government saving or foreign saving on economic growth and poverty
more » ... rowth and poverty reduction in the country through its indirect effects on total factor productivity. The researcher employed a dynamic computable general equilibrium model that linked with micro simulation model that is solved recursively for the period 2009-2020. The CGE model used the updated 2009/10 social accounting matrix (SAM) while the MS model employed the 2004/05 household income, consumption and expenditure (HICE) survey to investigate household poverty via the consumption expenditure changes from the CGE model. The results of the study revealed that the government spending either allocated towards human capital or agriculture has improved the macro-economy, welfare and poverty situation of the country regardless of financing options. Given high elasticity of public expenditure on human capital with respect to total factor productivity, public spending targeted towards human capital resulted in high GDP growth and hence significantly reduced the poverty as compared to expenditure targeted agricultural sector. Moreover, the magnitudes of the welfare and poverty improvements is differ among financing options where the improvement of welfare of households and reduction of poverty is large under foreign saving means of financing against government saving financing schemes. Financing additional public expenditure through foreign saving increases the consumption of all households group more than financing through domestic resources (government saving) as households are supposed to save more at the expense of consumption under government [...]
doi:10.20372/nadre/8712 fatcat:jncjv36iqnaxddibtssycb44jy