Govt. Spending Tanzania
Govt. Spending Tanzania
Govt. Spending Tanzania
1, 7-16
Available online at http://pubs.sciepub.com/ijefm/6/1/2
©Science and Education Publishing
DOI:10.12691/ijefm-6-1-2
Abstract This paper presents empirical analysis of the relationship between sectoral public expenditure and
economic growth in Tanzania. It uses time series data spanning over the period from 1968 - 2011. In this paper real
gross domestic product (GDP) is used as a proxy of economic growth. The investigation focuses on analysis of
relationship between public expenditure on education, agriculture, transport and communication and the rest of the
sectors (ROS) and economic growth. Augmented Dicker-Fuller, Phillips-Perron, Johansen co-integration test and
vector error correction model are used to capture short and long-run dynamics of economic growth. Our result
indicates that public expenditure plays no significant role in accelerating economic growth in Tanzania for the last
44 years. These finding may give some overview of policy implications to the Tanzania policymakers on optimizing
the effects of government expenditure in economic growth.
Keywords: public expenditure, economic growth, Tanzania
Cite This Article: Kimea, A.J, and Kiangi, R.F., “Economic Growth and Public Spending on Selected
Sectors in Tanzania.” International Journal of Econometrics and Financial Management, vol. 6, no. 1 (2018):
7-16. doi: 10.12691/ijefm-6-1-2.
that (i) individual interests are pursued best by individuals; above discussion and it is that both magnitude and
and (ii) if each individual maximizes his/her interest, composition/structure of public expenditure are important
social interest is also maximized. Thus conflict between i) facets in its inter-face with economic growth. Though
one and other individual’s interest, and ii) individual and numerous studies of aggregate public expenditure have
social interest was overlooked. Unbridled pursuit of profit been conducted, yet only a few studies are based on the
at any cost by capitalist producers ended up in (i) division analysis of particular country, which focus on public
of society into haves and have-nots, and (ii) though expenditure on key sectors of the economy.
capitalists rolled in prosperity, yet working classes lived Lin, S [12] revealed that government expenditure on
in a state of misery, squalor, deprivation and even non-productive activities play significant role in
immesirisation. This created wide spread anger and developing economies. This study also furnishes rationale
opposition against the laissez faire philosophy by social for treating public spending be of paramount importance
leaders, thinkers and philosophers. in developing countries. Vedder and Gallaway, [13] lend
The new philosophy and political theory then emerged; support for the findings of Lin and they showed the
the concept of ruling state was replaced by the welfare reasons that make government expenditure the major
state where government/state has to protect and promote determinant of economic growth in developing countries.
wellbeing of the people. Consequently, there has been It was inferred that given their high levels of public debt,
substantial increase in the roles and functions of state and an increase in public expenditure may not have its
this resulted in an increased roles and functions of the intended beneficial effect in developing countries. It was
state in various countries. Pigou [5], the author of also argued that public spending promotes growth by
‘Economics of Welfare’ initiated the study of public enhancing the capital stock, advances in technology, and
expenditure on social welfare. Among other scholars, who improvement in quality of human resources and literacy
have popularly explained the role of state in the economy, (For inter-relation between Literacy and Growth [14,15]).
Wagner’s Law and Keynesian Hypothesis are important. The role of government and its public expenditure in
Wagner’s Law states the tendency of bureaucracy developing countries has a strong bearing in correcting
to spread its wings as a consequence of which public market failures and promoting economic growth through
expenditure increases continually. Keynes advocated fiscal policies (which include taxation and public expenditure).
government intervention to propel effective demand by Fiscal instruments have proved more effective in stimulating
public expenditure. Public intervention was supposed to growth in many developing countries than the monetary
fill up the gap in demand left by the market operation. instruments; reason is that most of these countries still
Wagner, A. [6] assumed the “tendency of expansion of continue to have predominantly non-monetized segments in
public in general and state activities in particularly’’ the economy. Inadequate capital base, low per capita
suggested that greater public spending is important for income not being the base for capital accumulation by
promoting economic growth. The law states that “as the households, poor infrastructure and non-availability of
economy develops over time, the activities and functions entrepreneurs in adequate numbers [7]. Gupta et al. [16]
of the government increase”. Private expenditure on also provided empirical evidence to support the view that
(i) health, (ii) education, and (iii) irrigation, depends on fiscal policy plays a significant role in catalyzing growth
public expenditure. Besides, increase in public expenditure and development of developing countries like Tanzania.
on economic infrastructure like roads, aviation, banking This is why the issue of the relationship between public
and insurance also stimulates private expenditure on spending and growth has continued to remain in of
such items [7]. Keynesian Hypothesis states that public researchers, policy makers, activists and academicians.
expenditure overcomes the constraining influence of Commenting on the role of public spending on economic
inadequacy of market based effective demand; it paves the growth Jaroensathapornkul, J. [17] argued that public
way for active public policy and decisive role of the spending significantly affects economic growth positively.
government in economic affairs of the countries. Unlike This study focused on three main development sectors of
Adam Smith, this theory was one of the earliest attempts the economy of Thailand, i.e. education, economic service
that emphasizes public sector growth as determinant of and defence. These sectors which are analysed in this
economic growth. One major criticism of Wagner's work study are indeed important to economic growth although
is that he does not specify whether he refers to the growth agriculture, transport and communication and education
of (i) absolute public expenditure, or (ii) public are more important for the case of Tanzanian economy. So,
expenditure relative to GDP, or (iii) public sector relative this study has included them in the analysis.
to the size of the economy [8]. However, Musgrave [9] In contrast to the views discussed above, the neo-
interpreted Wagner’s law as relating to the size of public classicists consider fiscal policies including public
sector relative to the size of the economy. expenditure fruitless since public expenditure reduces
Devarajan, S. and Swaroop, V., [10] used a sample of private investment in sectors like education, health,
14 OECD countries. Their findings revealed the positive agriculture, transport and communication through the so
impact of public expenditure on social and economic called “crowding-out”. For example, Diamond, [18]
infrastructure. Above all, they noted that public expenditure explained that crowding-out of private investment is due
on education and defence has harmful effect on growth. to budget deficits and its effect on interest rates. This is
However, inter-relations between income and expenditure on similar to the arguments of the neoclassical economists
education are characterized by lead-lag structure; if that increased public spending can affect the economy by
these facets are not incorporated in the analysis of data, shifting resources from the private sector to the
results shall be awry like the ones reported above [8,11]. government sector. This creates negative effect on the
Besides, one inference may easily be drawn from the private sector and consequently on economic growth.
International Journal of Econometrics and Financial Management 9
This study is different from earlier studies in several against three enemies of development which are ignorance,
respects, especially in theoretical thrust and methodological poverty and diseases. Thus the government has been
advancement. This study considers aggregate public incurring some costs when implementing policies which it
expenditure along with public expenditure on agriculture, has been trying to establish and other existing policies to
transport and communication and education as the most which is trying to make some changes so as to fight
important sectors that are not related directly to public against the development problems.
expenditure but with growth of these sectors paves the Recurrent and development expenditures constitute
way for growth of the economy as a whole. Recent studies main components of government expenditure. Recurrent
Kweka & Morrisey, [19] did not include public expenditure expenditure is used to finance daily activities of the
on agriculture in the growth model. Tanzania as one of the government, for example, salaries for its employees and,
developing countries is currently experiencing increased over twenty years, recurrent expenditure has taken a larger
public expenditure that seems to be not associated with share which is more than sixty percent while development
significant growth in total output. Keeping various studies expenditure which is used to finance development projects
in view and theories related to the roles and functions of such as construction of roads, railway lines, takes a small
public expenditure it is important to carry out an empirical share which is less than forty percent [20]. Government
study to investigate whether public expenditure on these spending on some sectors has been reduced, for example
key sectors of Tanzanian economy has positive or agricultural subsidies, where the emphasis is given
negative impact on economic growth. As observed above, to the private sector as proposed by SAPs conditionality.
various studies have shown contradictory findings in Furthermore, Government expenditure is further subdivided
relation to the impact of public expenditure on economic into Ministerial, Regional and Local Government expenditure
growth. There is only one study which found direct [21].
relationship with the current study for the case of The government expenditure of Tanzania has been
Tanzania [19]. However, Kweka and Morrissey did not increasing yearly due to the increase in the activities that
focus on the key economic sectors of Tanzanian economy are financed by the government. For example, the
such as agriculture which contributes over 85 percent to government expenditure has been rising in an attempt to
Tanzania total exports. This sector accounts for more than alleviate poverty since the onset of the Poverty Reduction
24.5 percent of GDP and employs about 80% of the work Strategy Programme (PRSP), the policy established at the
force. But the findings of this study are contradictory. end of 1990s specifically as a special programme for
This research investigation is focused on addressing the poverty alleviation. This led to the high increase on
question as to whether aggregate public expenditure along government spending from Tsh 444.8 billion in 1995 to
with sectoral expenditure on three key sectors of the Tsh 2,993.8 billion in 2004 [22] also the total government
Tanzanian economy including agriculture, education and expenditure increased from Tsh 326 billion in 1986 to
transport and communication affects economic growth; Tsh 602 billion in 1999 (all measured in 1995 constant
this is what differentiates the scope of present study from prices) and the Government spending of a given year is
the earlier studies. Time period covered and evaluation of determined by the national budget of each year.
impact of globalization on growth and its comparison are The share of spending on social services in total
other distinguishing features of this thesis. government expenditure grew from 14 percent in 1986 to
25 percent in 1999 while the spending on economic services
increased from Tsh 64 billion in 1986 to Tsh 135 billion in
2. Literature Review 1995 before falling to Tsh 36 billion in 1996. Until 1999
spending on economic services was Tsh 128 billion [23].
2.1. Overview Trend of Government Also the high spending had been noted during the Arusha
Expenditure in Tanzania declaration era from 1967 due to increased provision of
social services on equal basis and thus freely to all people.
Government expenditure is a term used to describe Furthermore, the high spending was noted in the 1970s
money that a government spends, including all government due to nationalization (1971) and decentralization (1972)
consumption and investment or it can be defined as “the policies. This led to high government expenditure due to
dispensation by the state (government), on non-market expansion of the government administrative machinery
criteria, of economic resources” that it has acquired from and staffing [24].
taxpayers and other public sources of finance [20]. Furthermore, the oil price shocks of 1973/74 and 1978
Expenditure occurs on every level of government, from local led to an increase in import bill which resulted into the
councils to central organizations. There are several different increase in government spending, while in 1974/75 there
types of government expenditure, including the purchase was high government spending due to the drought that led
and provision of goods and services, investments, and to importation of food stuffs. Lastly the breakup of the
money transfers. former East Africa Community (EAC) in 1977 led to the
One form of government expenditure is akin to investing, use of resources to develop infrastructure while Kagera
though formally referred to as gross fixed capital formation. war of 1978/79 also led to increase of the government
This involves the creation and support of systems and expenditure [25].
institutions that are seen as assets to the producing value The government spending on general public services
of the country. The building of new road systems, bridges including administration was continuously rising in the
and airports are also major areas of this type of spending. period 1970–1990, while in 2011 it was 39.0 percent.
Since independence, the government of Tanzania has Similarly, government spending on public debt grew
been financing different projects and activities to fight rapidly, increasing from about 7 percent of total spending
10 International Journal of Econometrics and Financial Management
in 1970 to about 30 percent in 1990 and then to 30.9 function in providing qualitative and quantitative labour
percent in 2001, while in 2011 it was 15.3 percent. This required in the development process, while on the other
increase in government expenditure on general public hand, with its production and dissemination of knowledge
services and public debt was at the expense of a decline in function, it encourages countries to follow and develop modern
public spending on social services as well as economic manufacturing technologies and to transfer them to the
services, which implies also that while expenditure on production process. The increase in labor productivity as the
education and health has been indicating a significant level of education increases affects the competitiveness of
decrease, debt servicing has been increasing over time countries positively and facilitates openness. Differences in
from 6.8 percent in 1970 to 11.6 percent in 1980 and then education level are one of the main reasons of economic
to 29.8 percent in 1990 before rising to 30.9 percent in 2001. performance differences between developed and developing
During 1970s, the trend of government expenditure in countries.
education sector differs from that of 1980s to 1990s. The fact that education has important effects on
Government expenditure in education gradually declined economic growth today is accepted beyond argument. The
from 13.6 percent in 1970 to 12.0 percent in 1980, slowing studies to display the effect of education and education
down to 6.9 percent in 1990 before rising to 16.1 percent expenses on growth are highly important in Economics
in 2001. Also the spending declined to 9.1 percent and 6 theory. There is a wide range of literature on this issue, on
percent in 2008 and 2011 respectively [26]. Lately the this backdrop, some studies [29,30,31,32,33] argue that
government has been implementing two education policies, there is a direct effect of investments in education on
namely Primary Education Development Program (PEDP) economic growth. On other hands, some studies
and Secondary Education Development program (SEDP), [34,35,36,37,38] argue contradictory results of the impacts
that aimed to increase the numbers of schools and teachers. of investment in education on economic growth. Cullison
Meanwhile the health sector was also affected due to [39] and Barro and Salai-Martin [40] found a positive
the economic crisis of 1980s which resulted into the relationship between government investment in education
decrease in government expenditure, for example health and economic growth, but Levin and Renelt [41] found
budget of 1982/83 was only 57 percent in real terms of that the government spending is not necessarily correlated
that of 1977/78 [27]. There was a decline in government with economic growth. Solow [42] revealed that capital,
expenditure on health services from 5.4 percent in 1970 to labour, and technology can not only be the ingredients of
4.9 percent in 1990, but later on rose from 3.7 percent in economic growth. Education is also one of the prime
1995 to 6.7 percent in 2001 and then increased to 5.4 factors to push economic growth as well. The impact of
percent in 2011. The increase in government spending education on economic growth was emphasized by one of
between 2000 and 2011 was due to the health policy the pioneer economists [43]. He investigated that there
which required rehabilitation and extension of the existing was a tremendous importance of education on economic
health centers. In addition, building of the health centers growth of a nation. Lucas [44] elucidated an endogenous
in each village has contributed much to the increase in growth model which further explained human capital as
government expenditure within the period [26]. one of the prime factors of economic growth. Human
By 1970 government expenditure on defense was 7.1 capital accumulation is possible through the expansion of
percent while by 1980 government expenditure on defense education Lucas [44] .It has a positive impact on labour
had increased to 11.1 percent but dropped to 6.2 percent productivity. Labour having more educational qualification
in 1990 before rising to 7.9 percent in 2001 [21]. Recently can be engaged in skilled works which envisage the
government expenditure on defense declined to 5.2 economic growth and nation building. Barro [45]
percent in 2011 [28]. demonstrated that economic growth and education are
Government expenditure on economic services declined positively related. The relationship between human capital
from about 38 percent in 1970 to about 16 percent in 1989 and economic development approach has been extensively
and then rose from about 22.1 percent in 1990 to 22.5 examined [45,46,47] and it demonstrates that economic
percent in 2001. The decline in government spending on growth and education are positively related to each other.
economic services led to their poor provision possibly Study conducted by Ese Urhie [48] in Nigeria which
affecting production and the overall performance of the examined the effects of the components of public education
economy [20], yet in 2011 the economic services received expenditure on both education attainment and economic
7.7 percent of the total budget [28]. growth from 1970 to 2010 by using Instrumental Variable
Finally, government expenditure on the other charges Two Stage Least Squares estimation technique reveals
varied from 4 percent in 1980 to 6.7 percent in 1990 that public education expenditure has both direct and
while in 2001 it was 0.9 percent before increasing to indirect effects on economic growth. Contrary I.R. Irughe
15.9 percent in 2011. The reasons for all these variations [49] found negative effect of government education
in government spending in the period (1970-2011) expenditure on economic growth in his study for period
were prompted by changes in government priorities from 1977-2009 using the error correction modeling
and conditionalities from donors such as International technique and a geometric method of analyses.
Monetary Fund (IMF) and World Bank (WB). According to Muktadir-Al-Mukit [50] Education is an
important determinant of economic growth for any
2.2. Government Expenditure on Education country. In his study which investigated the long-run
relationship between public expenditure on education
Education has a significant role in the development of sector and economic growth in Bangladesh found that
countries. It is widely acknowledged as an important public spending in education has a positive and significant
determinant factor of economic growth. Education fulfils impact on economic growth in the long run. In this study
International Journal of Econometrics and Financial Management 11
an econometric model is applied to the analysis with time agriculture is stagnant or declining. Therefore, this study
series data from 1995-2009. examines the significance and the contribution of the
The study conducted in Malaysia by Mohd Yahya Mohd government expenditure on agriculture on Tanzania
Hussin [51] which focuses on the long-run relationship economic growth. The following hypothesis developed.
and causality between government expenditure in education
and economic growth by using time series data for the Hii: There is a significant positive contribution of public
period 1970 to 2010 found that economic growth positively expenditure to agriculture on economic growth of Tanzania.
affected by government expenditure on education
Study by Mekdad at el [52] which seek to study the 2.4. Public Expenditure on Infrastructures
relationship between education and economic growth in
Algeria over the period 1974-2012 using endogenous The infrastructure development such as transports and
growth model suggested that Public spending on education communications are the central to a county growth and
affects positively economic growth in Algeria. Douanla development. Therefore, nations are striving to enhance
Tayo Lionel [53] used vector error correction model to quantity and quality of available infrastructure and
assess the effect of government spending in education on their accessibility. Among other things, the availability
economic growth in Cameroon over the period 1980-2012. of infrastructures such as road, airports, railways,
Study found that the education spending is one of the main telecommunications have significant effect on the quality
driving force of the economic growth process in Cameroon. of life of people in a given environment. The macroeconomic
Expenditure on education requires a little more availability of infrastructure services affects the marginal
discussion because some economists hypothesized that productivity of private capital. In the context of
expenditure on education is financed out of current microeconomics, infrastructure services influence reductions
income (Komorov, cited in [7]). But the majority of in production costs [56]. Infrastructure also influences
economists opined that expenditure on education, quality of life and well-being, affecting, among other
among other factors, determined the growth of income. things, consumption levels, labour productivity access to
Economists like Bowen hold the view that education- employment, levels of real wealth, macroeconomic
economy are bi-directionally related. The debate was stability, fiscal sustainability, the development of credit
resolved by S. Prakash [7,11] who opined that relation markets, and other aspects of labor markets.
between education economy have lead-lag structure. The impact of infrastructure on long-run economic
Current expenditure is, financed from current income. But growth has been studied extensively. The basic theoretical
expenditure on education incurred in the past for framework of the impact of public capital on economic
accumulating human capital determines current income growth was developed first by Arrow and Kurz [56].
both at national and households’ level. This analysis also Based on this framework, the endogenous growth literature
involves (i) testing the properties of time series data by the shows that an increase in the stock of public capital can
application of Augmented Dickey-Fuller test, and (ii) raise the steady state growth rate of output per capita, with
testing the short-run and long-run relationship between the permanent growth effects [57]. Other studies focus on the
variables by the application of Johansen and Juselius differential impact of capital and current components of
model of co-integration and vector error correction. public spending on growth [58], showing a positive effect
Based on the above literatures from previous studies from capital expenditures and often negative effects from
this paper would investigate the influence of the public current or consumption expenditures.
expenditure on Tanzania economic growth. Hence, the Calderon and Serven [59] analyze the impact of
following hypotheses were formulated. infrastructure on economic performance of African countries.
Using panel data for a large sample of countries for the
Hi: Higher level of public expenditure on education is period 1960-2005, they employ growth regressions estimated
associated with accelerated growth of output/income. through a Generalized Method of Moments estimator and
evaluate the impact of several types of infrastructure assets,
2.3. Public Expenditure on Agriculture as well as measures of quality of their services. Their findings
suggest that both infrastructure stock and quality are
For many developing countries, agriculture is the largest positively and significantly related to real GDP per capita
sector in terms of its share in GDP and employment. More growth. In addition, the latter study evaluates the impact of
importantly, the majority of the world’s poor live in rural a higher infrastructure development in African countries
areas and depend upon agriculture for their livelihood. over the last 15 years (comparing 2001-05 to 1991-1995).
Agriculture is therefore critical both for economic Finally, infrastructure also affects economic performance
development and poverty reduction. It follows that in through an indirect channel related to income distribution.
developing countries spending to agriculture is one of the Higher access to infrastructure services often helps reduce
most important government instruments for promoting income inequality by lowering logistics costs or raising
economic growth and alleviating poverty in rural areas the value of human capital or land [60,61,62]. This study
[54]. There have been many studies of the relationship investigated the important of public expenditure on
between government expenditure and economic growth. infastractures such as transport and communication on
Some of these studies have looked specifically at the link economic growth. The following hypothesis was developed
between government spending and agricultural growth
[55]. These studies show positive growth effects from Hiii: Public expenditure on transport and communication
public spending in agriculture. Yet, in the majority of has a positive impact on the growth of the economy of
developing countries aid and public expenditure to Tanzania.
12 International Journal of Econometrics and Financial Management
on transport and communication, education and agriculture is causality running from the four independent variables to
rejected at 5% significance level for statistics of trace. In GDP because the coefficient of lagged ECT is not
other words, test of trace reveals that, the five variables negative in all equations though significant for GDP, rest
are co-integrated or moving together in the long-run. of the sectors (ROS) and transport and communication
However, maximum Eigen-value test depicts no-integrating (TC). The conclusion drawn from these results is that, in
vectors. Table 3 above indicates the existence of at least the long-run there is no correlation among the variables in
one co-integrated equation meaning that all the four equilibrium, and expenditure on these sectors has no
variables have a long-run associationship or they move significant effect on economic growth. Similarly, growth
together in the long-run. GDP of Tanzania has no long-run effect on growth of
As indicated above, there is only one co-integrating public expenditure of various sectors of the economy. But,
equation. It entails that the number of variables (i=5) is in the short-run, there is a significant causality running
greater than the number of co-integrating equations. If the from rest of the sectors to GDP, agriculture and transport
number of co-integrating vectors is less than number of and communication. As explained earlier, increasing role
equation, then, there is a need for normalization in order to of private sector in post globalization era has disrupted the
identify the long-run parameters [64]. Table 4 presents long-run direction of causality. Besides, there is evidence
estimates of the normalized vectors and respective of significant causality from agriculture to education.
t-statistics (in the parentheses) to reflect how much Public expenditure on these sectors does not have any
co-integration there is for the period under study. The significant short-run effect on growth of GDP. It is
table shows one co-integrating equation with normalized noteworthy that investment in health, education, irrigation
co-integrating coefficients. This advocates that public takes long-time to reach the stage when it starts yielding
expenditure on education and agriculture sectors have income streams. Production/completion of the process
positive long-run effects on economic growth while that may take from 10 to 17 years in education and big irrigation
on transport and communication and rest of the sectors has projects. The study found no significant evidence showing
negative long-run effects on growth. The negative sign a direct relationship between expenditure on education
here implies long-run inverse relationship between public and GDP in the short-run. This implies that rest of the
expenditure on transport and communication and rest of the sectors like energy, mining, manufacturing and construction,
sectors and economic growth. These results may probably social security and welfare services, general public
be attributed to the increasing role being assigned to services, tourism and others play more significant role in
private sector, especially road transport, and mobile the growth of Tanzanian economy in the short-run than
segments and internet segment being mainly in the education, agriculture, transport and communication.
domain of private sector. In contrast, the positive sign
represents a long-run direct relationship between public 4.5. Residual Diagnostic Tests
expenditure on education and agriculture sectors and
economic growth. The study uses various diagnostic tests to assess the
robustness of the model used in the study. This is to
Table 4. Normalized co-integrating coefficients ensure that the reported regression estimator including
LNGDP LNED LNAG LNTC LNRPE standard errors and t-statistics are BLUE or best linear
1.0000 0.3870 0.3010 -0.3293 -0.7133 unbiased estimator. The following tests are used to
analyse robustness of residual: (i) Jarque-Bera test of
t-statistics (0.28850) (4.2303) (-6.658) (-5.614)
normality. This test assumes that the error terms are
In the parentheses () are t-statistics
normally distributed. Therefore, if the probability level of
Source: Own Compilation. the significance of Chi-Square is greater than 0.05, the
residuals are said to be normally distributed. The null
4.4. Granger Causality Results hypothesis is; residuals are normally distributed. The
results depicted in Table 6 fail to reject the null hypothesis;
Existence of long-run relationship among the variables, (ii) the second diagnostic test is Breusch-Godfrey Serial
as depicted by the Johansen test of co-integration, allows Correlation Lagrange Multiplier (LM). The test is used to
us to run Granger causality test to determine the causal determine if the residuals or error terms are serial
direction of relationship among the variables. This implies correlated. This test hypothesizes that error terms are not
that, if two or more variables are co-integrated, there serial correlated. (iii) Breusch-Pagan-Godfrey and
exists causality of at least one direction, [65]. This implies Autoregressive Conditional Heteroskedasticity (ARCH)
that causality can either be bidirectional, or unidirectional tests. The two tests assume the error terms are
or no causality (independent) (For more details see homoskedastic, but the latter test takes variance of current
equations 18 and 19 in chapter three). period’s error term as a function of the preceding period’s
The study uses Vector Error Correction model (VECM) error term. These tests are distributed as Chi-square values
of Granger causality to identify short and long-run and are more appropriate for large samples. The findings
causality or equilibrium relationship among variables. reported in Table 6 reveal that the residuals are
Table 5. presents Chi-Square (Wald) statistics of first homoskedastic because the null hypothesis is not rejected.
lagged differenced endogenous variables and the numbers The p-values of all four tests do not indicate significant
in parentheses () show the probability values. Similarly, change and thus the null hypothesis is not rejected in any
the numbers in squared brackets [] of the lagged error case. The value of Durbin Watson (2.0181) also supports
correction term are t-statistics. Results of the vector error Breusch-Godfrey LM test that there is no problem of
correction model confirm that there is no long-run autocorrelation in the model.
14 International Journal of Econometrics and Financial Management
Restructuring and Liberalization of the Economy of 21st Century. [32] Blankenau, W.F., 2005. Public Schooling, College Subsidies and
New Delhi: Deep and Deep. Growth. Journal of Economic Dynamics and Control, No. 29, pp.
[8] Shri Prakash and Sumitra Chowdhury (1995). Expenditure on 487-507.
Education: Theory and Growth. New Delhi: NIEPA (Now [33] Blankenau, W.F. and Simpson, N.B., 2004. Public education
NUEPA). expenditures and growth. Journal of Development Economics, No.
[9] Musgrave, R.A (1959).The Theory of Public Finance. McGraw- 73, pp. 583-605.
Hill Book Co. [34] Zhang, J., 1996. Optimal public investment in education and
[10] Devarajan, S. and Swaroop, V., 1993. What do governments buy? endogenous growth. Scandinavian Journal of Economics, No. 98,
The composition of public spending and economic performance. pp. 387-404.
[11] Shri Prakash (1977). Education System in India: An Econometric [35] Milesi-Ferretti, G. and Roubini, N., 1998. On the taxation of
Studies. Delhi: Concept Publishing Co. human and physical capital in models of endogenous growth.
[12] Lin, S (1994). Government Spending snd Economic Growth. Journal of Public Economics, No. 70, pp. 237-254.
Applied Economics 26: 83-94. [36] Hendricks, L., 1999.Taxation and long-run growth. Journal of
[13] Vedder, R.K and L.E. Gallaway (1998). Government Size and Monetary Economics, No. 43, pp. 411-434.
Economic Growth. Paper Prepared for the Joint Economic [37] Brauninger, M. and Vidal, J.P., 1999. Private versus public
Committee of Us Congress. Pp.1-15. financing of education and endogenous growth. Journal of
[14] Sharma, Amit and S.R Ajeet (2010). Productivity, Literacy and Population Economics, No. 13, pp. 387-401.
Per Capita State Domestic Product of India States. In Shri Prakash [38] Bouzahzah, M., De la Croix, D. and Docquier, F., 2002. Policy
and H. Chaturved (eds.), Dynamics of Under Development of Reforms and Growth in Computable OLG Economies. Journal of
Economy of Uttar Pradesh. New Delhi: Bloomberg. Dynamics and Control, No. 26, pp. 2093-2113.
[15] Shri Prakash, Tarujyoti Buragohain and Abha Gupta (1993). [39] Cullison, W., 1993. Public investment and economic growth.
Literacy and Development: An Analysis of 114 Counties, 26 Federal Reserve Bank of Richmond Economic Quarterly, No. 79,
States and 452 Districts of India. Journal of Education Planning pp. 19-33.
and Administration, Special issue of Literacy and Development in [40] Barro, R.J. and Sala-i-Martin, X., 1995. Economic Growth.
Developing Counties. New Delhi: NIEPA (Now NUEPA). McGraw-Hill, 539 PP Journal of Economic Dynamics and Control
[16] Gupta, S., Clements, E. Baldacci and C. Mulas-Granados (2005). 21 (1997) 895-898.
Fiscal Policy, Expenditure Composition and Growth in Low- [41] Levine, R. and Renelt, D., 1992. A sensitivity analysis of cross-
Income Countries. country growth regressions. The American economic review, pp.
[17] Jaroensathapornkul, J (2010). Spending for Growth: An Empirical 942-963.
Evidence for Thailand, Applied Economic Journal 17(2): 27-44 [42] Solow, R.M., 1956. A contribution to the theory of economic
[18] Diamond, J (1989). Government Expenditure and Economic growth. The quarterly journal of economics, pp. 65-94.
Growth: An Empirical Investigation. IFM Working Paper [43] Denison, E., 1967. Why growth rates differ? The Brookings
No.89/45. Washington DC. Institution. Washington D.C. Engle, R.F. and Granger, C.W.J.,
[19] Kweka, J.P and Morrissey (1999). Government Sepemding and 1987. Co-integration and error correction: representation,
Economic Growth: Empirical Evidence from Tanzania (1965- Development Review, No. 16, pp. 385-398.
1996). CREDIT and School of Economics 00(6). Lasswell, Harold [44] Lucas, R.E., 1967. Adjustment costs and the theory of supply. The
D. (1971). A Preview of Policy Sciences. New York: Elsevier. Journal of Political Economy, pp. 321-334.
[20] Amani, H. K. R., S. M. Wangwe, D. C. Rweyemamu, R. Aiko and [45] Barro, R.J., 1991. Economic Growth in a Cross-Section of
G. G. Wanga (2003),“Understanding Economic and Political Countries. Quarterly Journal of Economics.
Reforms in Tanzania.” In Mensah, J. (ed) Understanding [46] Rebelo, S.T., 1991. Long Run Policy Analysis and Long Run
Economic Reforms in Africa: A Tale of Seven Nations.” Palgrave Growth. Journal of Political Economy, No. 99, pp. 500-521.
MacMillan. pp. 205-233. [47] Grossman, G.M. and Helpman, E., 1991. Innovation and Growth
[21] Fun, S. (2005), Public Investment and Poverty Reduction in in the Global Economy. MIT Press. Cambridge. MA.
Tanzania: Evidence from Household Survey Data. IFPRI, [48] Ese Urhie .2014. Public Education Expenditure and Economic
USA. Growth in Nigeria: A Disaggregated Approach Journal of
[22] Shenggen, F. (2005), Public Investment and Poverty Reduction in Empirical Economics Vol. 3, No. 6, 2014, 370-382.
Tanzania: Evidence from Household Survey Data. IFPRI, USA. [49] Irughe, I.R. (2013). The Impact of Educational Expenditure on
[23] Mbelle, A., (2005), Productivity Performance in Developing Economic Growth in Nigeria: An Error Correction Specification.
Countries: Country Case Studies, Tanzania. University of Dar es The Social Sciences, 8: pp 206-212.
Salaam. [50] Muktadir-Al-Mukit, D., 2012. Public Expenditure on Education
[24] Yabu, N. (2005). Government Expenditure and Economic Growth and Economic Growth: The Case of Bangladesh.
in Tanzania 1965-2001. University of Dar es Salaam, Tanzania. [51] Mohd Yahya Mohd Hussin, Fidlizan Muhammad, Mohd Fauzi
[25] United Republic of Tanzania, BOT (2011). Bank of Tanzania Abu Azila Abdul Razak. Education (2012) Expenditure and
Annual Report 2010/1. Retrieved Economic Growth: A Causal Analysis for Malaysia Journal of
https://www.bot.go.tz/Publications/EconomicAndOperationsAnnu Economics and Sustainable Development www.iiste.org ISSN
alReports/June_2011.pdf. 2222-1700 (Paper) ISSN 2222-2855 (Online) Vol.3, No.7, 71 No.
[26] United Republic of Tanzania, MOFEA (2011). Public Expenditure 90, pp. 1160-1183.
Review 2010. Prepared by the Members of Macro Group of the [52] Mekdad, Y., Dahmani, A. and Louaj, M., 2014. Public spending
Tanzania PER Working Group. Retrieved on education and economic growth in Algeria: Causality test.
“http://siteresources.worldbank.org/INTTANZANIA/Resources/T International Journal of Business and Management, 2(3), p.55.
anzania_PER_2010.pdf. [53] Lionel, D.T., 2015. Determinants of Health Spending Efficiency: a
[27] Feierman, E.K., 1981. Alternative medical services in rural Tobit Panel Data Approach Based on DEA Efficiency Scores.
Tanzania: a physician's view. Social Science & Medicine. Part B: Acta Universitatis Danubius. Œconomica, 11(4).
Medical Anthropology, 15(3), pp.399-404. [54] Fan, S. and Saurkar, A., 2006. Public spending in developing
[28] United Republic of Tanzania (2011). Economic Survey. Ministry countries: trends, determination and impact (mimeo). FAO (Food
of Finance Retrieved and Agriculture Organisation of the United Nations), FAOSTAT
http://www.mof.go.tz/mofdocs/Micro/2012/ECONOMIC%20SURV online databases, Rome (http://faostat. fao. org/default. aspx).
EY%20BOOK%202012.pdf. [55] Fan, S., Hazell, P. and Thorat, S., 2000. Government spending,
[29] Glomm, G. and Ravikumar, B., 1992. Public versus private growth and poverty in rural India. American journal of agricultural
investment in human capital: endogenous growth and income economics, 82(4), pp.1038-1051.
inequality. Journal of Political Economy, No. 100, pp. 818- 834. [56] Arrow, K.J. and Kurz, M., 1970. Optimal growth with irreversible
[30] Glomm. G. and B. Ravikumar, 1998, Flat-Rate Taxes, investment in a Ramsey model. Econometrica: Journal of the
Government Spending on Education and Growth, Review of Econometric Society, pp.331-344.
Economic Dynamics 1, 306-325. [57] Barro, R.J., Mankiw, N.G. and Sala-i-Martin, X., 1992. Capital
[31] Kaganovich, M. and Zilcha, I., 1999. Education, social security mobility in neoclassical models of growth (No. w4206). National
and growth. Journal of Public Economics. No. 71. pp. 289-309. Bureau of Economic Research.
16 International Journal of Econometrics and Financial Management
[58] Devarajan, Shantayanan, Vinaya Swaroop, and Heng-fu Zou [63] MacKinnon, J.G., 1990. Critical values for cointegration tests (pp.
(1996). ‘The Composition of Public Expenditure and Economic pp-267). San Diego: Department of Economics, University of
Growth, Journal of Monetary Economics, Vol. 37, 313-344. California.
[59] Calderon, C. and Serven, L., 2008. Infrastructure and economic [64] Mndeme, R.K., 2015. Impact of Non-Interest Income on Banking
development in Sub. Performance In Tanzania. International Journal of Economics,
[60] Estache, A., Foster, V. and Wodon, Q., 2002. Accounting for Commerce and Management, 3(5), pp. 75-92.
poverty in infrastructure reform: Learning from Latin America's [65] Kumar, S., Webber, D.J. and Fargher, S., 2012. Wagner's Law
experience. World Bank Publications. revisited: cointegration and causality tests for New Zealand.
[61] Estache, A., 2003. On Latin America's Infrastructure Privatization Applied Economics, 44(5), pp. 607-616
and its Distributional Effects. [66] United Republic of Tanzania (2008). Reforms towards delivering
[62] Galiani, S., Gertler, P. and Schargrodsky, E., 2005. Water for life: quality health services and clients satisfaction. Ministry of Health
The impact of the privatization of water services on child Retrieved
mortality. Journal of political economy, 113(1), pp.83-120. http://ihi.eprints.org/803/1/MoHSW.pdf_%2830%29.pdf.