Endogenous Growth Theory

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

The theory establishes historical stages of growth that societies must undergo. Of importance is that the theory asserts that in early stages of economic growth, public expenditure in the economy should be encouraged. The theory further states during the early stages of growth there exists market failures and hence there should be robust government involvement to deal with these market failures. The weakness of the theory is that it ignores the contribution to development by the private sector by assuming the government expenditure is the only driver of economic growth.

The endogenous growth theory is a more recent theory, which makes a significant improvement over the previous growth theories. It incorporates technology in the model as an endogenous variable rather than exogenous variable. Thus it posits that mostly economic growth comes from technological progress through creative

Deverajan et. al. (1993) using a sample of 14 OECD countries found that spending on health transport and communication have positive impacts whereas spending on education and defense don’t have a positive impact.

Biswas, B. and Ram, R. (1986), made an attempt to investigate effect of public expenditure on economic growth through the use of a theoretical framework of production function specified for both public and private sector. The data used spanned 115 market economies. He found out that government expenditure to have a positive externality to growth particularly on least developed countries but total government spending to have a negative effect on growth. Cooray (2009) found out that both the size and quality of government are associated with economic