EFFECTIVENESS OF FISCAL POLICY IN ECONOMIC GROWTH: THE CASE OF ZIMBABWE.

Transcription

1 EFFECTIVENESS OF FISCAL POLICY IN ECONOMIC GROWTH: THE CASE OF ZIMBABWE. Auhor: Munongo Simon Grea Zimbabwe Universiy Box 1235, Masvingo, Zimbabwe Absrac The sudy invesigaes he effeciveness of fiscal policy in spurring economic growh in Zimbabwe. Annual daa covering were uilized. Uni roos of he series were examined using he Augmened Dickey-Fuller echnique afer which he coinegraion es was conduced using he Johansen Approach. Error-correcion models were esimaed o ake care of shor-run dynamics. The resuls indicae ha governmen consumpion expendiure and income ax posiively impaced on economic growh during he period of coverage bu capial expendiure by governmen has a negaive effec and a long-run relaionship exiss beween hem as confirmed by he coinegraion es. Keywords: Fiscal Policy and Coinergraion Inroducion Over he las decade in Zimbabwe, inervenionis macroeconomic policies have been dominan. However he growh impac of fiscal policy sill remains unclear o policy makers in he economy. Mos of he sudies on fiscal policy effeciveness paid more aenion on developed economies and he inclusion of developing counries in case of crosscounry sudies were mainly o generae enough degrees of freedom in he course of saisical analysis (Aregbeyen, 2007). The inen of fiscal policy is essenially o simulae economic and social developmen by pursuing a policy sance ha ensures a sense of balance beween axaion, expendiure and borrowing ha is consisen wih susainable growh (Ocran 2009). The major quesion however has been has fiscal policy been used o achieve economic growh his in Zimbabwe in view of he fac ha he exen o which fiscal policy affec economic growh coninue o arac heoreical and empirical debae especially in developing counries. In recen years Zimbabwe has given fiscal policy he bigges role in economic simulus given he muli- currency regime which has limied he role of moneary policy. The purpose of he paper is o examine he effeciveness of fiscal policy insrumens in Zimbabwe on economic growh as he major arge variable in he period The fiscal policy variables considered in he sudy include 93

2 governmen gross fixed capial formaion, ax expendiure and governmen consumpion expendiure. The res of he paper is srucured as follows. Secion wo provides a brief review of he evoluion of fiscal policy sance over he sudy period in Zimbabwe. Previous sudies of relevance o he sudy are discussed in Secion hree. The mehodology adoped for he esimaion and daa issues are considered in Secion four. In chaper five we show he sudy findings and conclusions. Fiscal policy in Zimbabwe The Zimbabwean governmen in he 1980s o 1990s widely used financial budgeary suppor from Inernaional Moneary Fund, World Bank and oher commercial lenders. The over reliance on exernal borrowings o finance he naional budge led o he accumulaion of huge deb obligaions, and in 1999, he counry defauled on is paymen obligaions and was labelled no credi worhy. This led o he wihdrawal of financial assisance by inernaional organisaion. The Zimbabwean governmen hen resored o domesic borrowing, resuling in domesic deb sock progressively increasing over he years (MEFMI repor 2001). Lack of macroeconomic policy implemenaion credibiliy, inconsisen policy formulaion and high inflaion levels, he mauriy srucure of domesic deb became concenraed owards he shorer end of he marke (RBZ repor 2002) The firs fiscal policy announcemen in Zimbabwe 1980 saw he governmen making a commimen of fiscal soundness, argeing a reducion in he rae of growh of ne curren expendiure o levels below 7% in real erms or 1% below ha of Gross Domesic Produc (GDP) per annum. This was mean o reduce he budge defici and allows susainable fiscal policy managemen in he 1980s. In he early 1990s he governmen of Zimbabwe adoped he liberalisaion policies under he Economic Srucural Adjusmen Programme (ESAP). The ESAP policy sough o achieve fiscal defici reducion. Budge defici as a proporion of GDP was o reduce by 2% annually from 10% o a arge of 5% by In addiion, Governmen argeed o reduce ax raio from 35% of GDP o abou 33% by he end of he reform period, while a he same ime inroducing cos recovery measures o boos non-ax revenues. Measures proposed o reduce budge defici involved posponemen of 94

3 capial expendiure, reducion of civil service wage bill from 16.5% of GDP o 12.9% of GDP, removal of subsidies (which sood a 3.7% of GDP) and enhancemen of revenue collecion efficiency by Tax reforms argeed dispersion of ax raes, srenghening of ax adminisraion and reducion of ax burden on expor and impor secors (RBZ repor 2000). afer he grea depression he body of knowledge on he effeciveness of fiscal policy have grown over ime. Now he major research quesion has been on he condiions ha improve he effeciveness of fiscal policy inervenion on economic growh and recen years have seen a revival of he debae abou he role of fiscal policy in simulaing economic aciviy. A severe economic crisis bese he counry owards he end of 1997, following he suspension of balance of paymens suppor by he IMF. The suspension of balance of paymen suppor led o 50% depreciaion of he Zimbabwe dollar in November The economic urmoil coninued in Zimbabwe ill 2008 before he inroducion of he mulicurrency regime which have relaively sabilised he economy. During he period and he pos 2008 era he governmen of Zimbabwe heavily relied on fiscal policy o achieve economic sabilisaion. The heoreical underpinning for his sudy is basically endogenous growh heory, which advocaes he simulaion of level and growh rae of per capia oupu hrough wihin he model using policies like fiscal (e.g. governmen spending). More specifically, models of he growh effecs of fiscal policy are usually buil on he basis of Barro (1990) framework and subsequenly Barro and Sala-i-Marin (1992, 1995). This sudy draws inspiraion from hese sudies by employing a Cobb- Douglas producion funcion in which governmen expendiure eners as inpu. Therefore in his sudy we wan o esablish wheher fiscal policy was successful in Zimbabwe in achieving economic growh and sabilisaion in Zimbabwe. Lieraure review Since he days of Keynes he faher of macroeconomic inervenionis policies For he Keynesians, fiscal policy refers o he manipulaion of axes and public spending o influence aggregae demand. In Africa Sikiru e al (2010) invesigaed he impac of fiscal policy on economic growh in Nigeria. Annual daa covering were uilized. Uni roos of he series were examined using he 95

4 Augmened Dickey-Fuller echnique afer which he coinegraion es was conduced using he Engle-Granger Approach. Errorcorrecion models were esimaed o ake care of shor-run dynamics. Over all, he resuls indicae ha producive expendiure posiively impaced on economic growh during he period of coverage and a longrun relaionship exiss beween hem as confirmed by he coinegraion es. The paper recommends improvemen in governmen expendiure on healh, educaion and economic services, as componens of producive expendiure, o boos economic growh. Mansouri (2008) sudied he relaionship beween fiscal policy and economic growh in Egyp, Morocco and Tunisia. The spans of daa for each counry are: for Morocco, for Tunisia and for Egyp. The empirical resuls showed ha 1 percen increase in public spending raised he real GDP by 1.26 percen in Morocco, 1.15 percen in Tunisia and 0.56 percen in Egyp. The resuls also indicaed exisence of long-run relaionships for all he hree counries. Though here is vas lieraure on effeciveness of fiscal policy in developed counries evidence from developing counries is sill limied hus we seek o exen he debae o Zimbabwe. Mehodology The models we are going o use follow he leads of Sikiru e al (2010) in a similar sudy on Nigeria. The model specificaion is: InGDP = 0 + β1ingce + β 2 InDYT + β 3 β GKE + ε Where InGDP is Log of Real Gross Domesic Produc, InGCE is he Log of Governmen Consumpion Expendiure. In GKE is he governmen consumpion expendiure and InDYT is he Direc Income Tax. ε is a whie noise error erm. Economeric echniques o be employed include uni roo es and coinergraion ess. Many economic and financial ime series exhibi rending behaviour or nonsaionary in he mean. Leading examples are asse prices, exchange raes and he levels of macroeconomic aggregaes like real GDP. Uni roo ess can be used o deermine if rending daa should be firs differenced or regressed on deerminisic funcions of ime o render he daa saionary. Moreover, economic and finance heory ofen suggess he exisence of long-run equilibrium relaionships among non-saionary ime series variables. Thus, we inend o adop 96

5 Augmened Dickey-Fuller (ADF) Technique o verify he uni roo propery of he series. If hese variables are I (1), hen coinegraion echniques can be used o model hese long-run relaions. Hence, pre-esing for uni roos is ofen a firs Resuls and conclusions sep in he coinegraion modelling discussed. Thus o avoid spurious regression we are going o es for coinergraion using he Angle-Granger mehod. Table 1 Uni Roo Resuls Variable ADF saisic P-value Order of inergraion Log GDP I(1) Log GKE I(1) Log GVTEXP I(1) Log TAX I(1) Noe: all variables are significan a 5% Source: Auhor s compuer calculaions. Table 1 above shows ha he variables are saionary afer firs difference hence are inergraed of order 1 Table 2 Johansen Coinergraion Resuls Eigenvalue Likelihood Raio 5% criical value Hypohesized No. of CE(s) None ** A mos A mos A mos 3 *(**) denoe rejecion of hypehesis a 5% (1%) significance level Source: Auhor s compuer calculaions. Table 2 above shows he coinergraion regression resuls. Using he Johansen procedure we find ou ha here is on coinergraing equaion shown below: LogGDP = log GKE LogGVTEXP LogTAX 97

6 The equaion shows ha governmen capial expendiure is negaively relaed o Gross Domesic Produc which shows inefficiencies in governmen invesmens in Zimbabwe. Governmen expendiure posiively affecs GDP hus fiscal simulus increase growh. Also axaion posiively affecs GDP. The resuls show ha a one percen increase in governmen consumpion expendiure increases economic growh by 15.9 percen. Table 3 Error Correcion Model Esimaed Using VAR Dependen Variable Log GDP Variable Coefficien Sandard error -raio C -7.06*** Log GKE -5.18*** Log GVTEXP 0.608** Log TAX 0.05** ECT 0.179*** **(***) shows 5%(1%) level of significance S.D dependen variable Adjused R-squared Log-likelihood Table 3 shows error correcion which is he shor run speed of adjusmen an error correcion value of shows a fas shor-run speed of adjusmen back o he long run equilibrium in he variables. References 1. Aregbeyen, O. (2007). Public Expendiure and Economic Growh in Africa. African Journal of Economic Policy, 14(1): Barro, R. J. & Sala-I-Marin, X. (1992). Public Finance in Models of Economic Growh. Review of Economic Sudies, 59: Barro, R. J. & Sala-I-Marin, X. (1995). Economic Growh. McGraw-Hill. 4. Barro, R. J. (1990). Governmen Spending in a Simple Model of Endogenous Growh. Journal of Poliical Economy, 98 (2):

7 5. Mansouri, B. (2008). Fiscal Policy and Economic Growh: Egyp, Morocco and Tunisia Compared. Proceeding in UNECA Conference on: Macroeconomic Policy, Producive Capaciy and Economic Growh in Africa. Addis Ababa, November, MEFMI (2001), Susainabiliy of Domesic Deb, A MEFMI Sudy 7. Ocran. K. (2009). Fiscal Policy and Economic Growh in Souh Africa. A paper presened a he Cenre for he Sudy of African Economies Conference on Economic Developmen in Africa, S. Caherine s College, Oxford Universiy, UK. March 22-24, Reserve Bank of Zimbabwe, Annual repors, Quarerly Economic and Saisical Review, various issues 9. Sikiru. J. B. and Umaru A. (2010) Fiscal Policy and Economic Growh Relaionship in Nigeria. Inernaional Journal of Business and Social Science Vol. 2 No