PUBLIC SPENDING COMPOSITION AND EFFICIENCY: IT’S IMPLICATIONS FOR GROWTH, STRUCTURAL CHANGE AND HOUSEHOLD WELFARE IN ETHIOPIA (USING RECURSIVE DYNAMIC CGE MODEL)
Zerayehu Sime Eshete - Ph.D. (Economics), Yom Institute of Economic Development, A Collaborative Master of Science Program in Economics, Addis Ababa, Ethiopia
ABSTRACT
This study examines the impacts of change in spending composition and efficiency on economic growth, structural change process and household welfare using a recursive dynamic computable general equilibrium model. The specification of this model incorporates spending composition into account and calibrates elasticity coefficients derived from the relationship between spending composition and sectoral total factor productivity. This is important to capture the effects of shifting public resources from unproductive administration sector to productive and efficient sectors of agriculture, manufacturing and infrastructure. The reduction in public expenditure on administration would have negative spillover and externality effects that could in turn reduce the productivity of expenditure on productive sectors. Therefore, the study considers monetary cost or opportunity costs of such reallocation of public resources. The study finds that the net effects of such changes in spending composition positively influence the economy wide growth rate and household welfare, but have different implications for structural change process. It is only the spending option of shifting public resources from administration to manufacturing industry that generates a positive impact on structural change process in Ethiopia. The study also finds that spending on infrastructure and agriculture is better in fostering economic growth rate and improving household welfare respectively. All simulations also show that service sector dominates GDP composition and possibly leads to a structural change burden. The study therefore recommends that the government undertakes a series economic policy revision in spending composition and favors spending on manufacturing in order to achieve both sustained economic growth and rapid economic transformation.
