The effect of fiscal expenditure on the economic growth of developing countries in West Africa

Abstract

This study examines the effect of fiscal expenditure on economic growth in West African developing countries. This analysis used World Bank World Development Indicators data for 10 West African from 1999 to 2023. We used panel data methods such as pooled ordinary least squares (OLS) and generalized method of moments (GMM) to analyse the data and the panel corrected standard errors model to test robustness and confirm the study's findings. We chose GMM because it effectively addresses potential endogeneity issues, ensuring that the results are consistent and reliable. This analysis focuses on fiscal expenditures, specifically capital and current expenditures. Results demonstrate that capital expenditure exerts a positive and statistically significant effect on economic growth in West African developing countries, a finding consistent with Keynesian theory. In contrast, current expenditure reduces economic growth in pooled OLS and GMM models. Furthermore, labour and consumer price index positively and considerably affect economic growth, whereas trade openness negatively affects it. These findings emphasize the need for West African policymakers to strategically reallocate fiscal resources toward productive capital expenditures such as infrastructure and technology while cutting unproductive recurrent spending such as administrative overheads. This can directly reduce inefficient spending and boost productivity. These policies, along with trade efficiency and worker productivity changes, could boost regional economic growth.

Points for practitioners

Fiscal expenditure refers to government spending on goods and services, which can stimulate economic growth by increasing demand, investing in infrastructure and enhancing human capital. Our study highlights the essential role of fiscal expenditure in driving economic growth in West Africa. Policymakers should prioritize capital expenditures on infrastructure and technology to enhance productivity. Additionally, reducing unproductive current expenditures can help optimize fiscal resources, fostering sustainable economic growth in the region.