Economic Theory In Economic Growth

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Few generally accepted economic theories exist capable of explaining, with any degree of success, the process of economic growth. As in the research on other aspects of growth, empirical research on the relationship between government spending and economic growth is hampered by the lack of adequate statistical theory. However, a review of relevant theoretical and empirical literature will provide better insights into the rationale and dynamics of public expenditure thus enhancing the theoretical framework for empirical analysis in this study. 2.2 THEORETICAL LITERATURE REVIEW: There are several theories that reveal the role of public expenditure in the process of economic growth. Generally; economic growth theory deals with long-run growth…show more content…
Laudau (1983) examined the effect of government expenditure on economic growth for a sample of 96 countries. He found that government expenditure exerts a negative effect on real output. Similarly, Komain et al (2007), employing the Granger causality test, examined the relationship between government expenditures and economic growth in Thailand and found that government expenditures and economic growth are not co-integrated. The result also suggested that a unidirectional relationship, as causality runs from government expenditures to growth. However, the result indicated a significant positive effect of government spending on economic…show more content…
Their analysis showed that a long-run relationship exists between government expenditure and economic growth. The study also indicated a unidirectional causality from government expenditure to growth for 16 of the countries, thus supporting the Keynesian hypothesis government intervention. But, causality runs from economic growth to government expenditure in 10 of the countries, thereby confirming the Wagner’s law. For the remaining four countries, findings indicated existence of feedback relationship between government expenditure and economic growth. Maingi (2010) while conducting study on the impact of government expenditure on economic growth in Kenya reported that improved government expenditure on areas such as physical infrastructure development and in education enhance economic growth while areas such as foreign debts servicing, government consumption and expenditure on public order and security, salaries and allowances were growth
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