Nexus of Government expenditure and Industrial Growth in Ethiopia: Evidence from ARDL Approach

This study investigated the dynamic relationship between government expenditure and industrial growth. Specifically, the study answer the question whether spending has any significance effect on industrial growth of the country and it also determined the magnitude of the effect. In doing this, the study used an ARDL bound test approach to analyze Ethiopian data from 1974 to 2018 with Industry value add as a function of industrial growth, government consumption expenditure, government investment expenditure, labor force, trade openness, privet domestic investment and policy change dummy. To do so, secondary data were obtained from WDI, the official website of WB, UNCTAD stat and MoFED. The results of the estimated long run model revealed that, in long run, government expenditure on investment and private domestic investments have positive and significant effects on industrial growth. Trade openness is found to be statistically significant but it has negative sign. However, government consumption expenditure and labor force are found to be statistically insignificant. The results of the estimated short run model revealed more or less similar to the long run model results except on labor force. Unlike the result of the long run model, in the short run labor force showed a negative and significant effect. In addition, the results of the granger causality test showed that there is unidirectional causality between Gov’t Investment expenditure and industrial value-added that run from Gov’t Investment expenditure and industrial value-added. Although this study showed government investment expenditure has positive and significant effects on industrial growth both in short and long run, it is necessary to sustain it.