Institutional Analysis of Government Spending Effects on Growth: Evidence from Africa

This paper analyses the role of the quality of institutions on the effectiveness of government spending towards output growth. Using a panel data set stretching 30 years (1983-2013) for 46 African countries this paper finds that the impact of government spending on output is dependent on the set of institutions and their quality as well. Countries with poor institutions exhibit negative government spending effects on growth, whilst those countries with above average institutions show a positive relationship between government spending and growth. Also, this paper shows that the impact of government spending is dependent on the type of public expenditures undertaken and the type of expenditures is determined by the institutional environment. Expenditures that are easy target for rent extraction are found to constitute a large share of total government spending in countries with poor institutions. Whilst, countries with above average institutions exhibit a large portion of productive expenditures as a ratio of total government spending. Differences in institutions are shown to generate differences on the effects of government spending on growth in African countries.