Academic journal article Journal of Economics and Economic Education Research

The Relationship between Government Expenditures and Economic Growth in Thailand

Academic journal article Journal of Economics and Economic Education Research

The Relationship between Government Expenditures and Economic Growth in Thailand

Article excerpt

ABSTRACT

The notion that more government expenditures can stimulate growth is still controversial. Some researchers found positive relationship between government expenditures and growth with bi-directional causation, while others indicated that growth caused government spending to expand. The causation between government expenditures and economic growth in Thailand was examined using the Granger causality test. There was no cointegration between government expenditures and economic growth. A unidirectional causality from government expenditures to economic growth existed. However, the causality from economic growth to government expenditures was not observed. Furthermore, estimation results from the ordinary least square confirmed the strong positive impact of government spending on economic growth during the period of investigation.

INTRODUCTION

According to the macroeconomic literature, budget deficits are expansionary to the economy while budget surpluses are contractionary. However, the notion that more government expenditures can stimulate growth is controversial. When considering the appropriate policy measures that stimulate growth, policymakers are usually interested in demand management policies and supply side policies. Demand management policies concentrate on the management of money supply and government expenditures. Controlling money supply will affect the level of liquidity in the financial market, and thus alters private spending. A change in level of government spending directly affects aggregate demand in the economy. Besides the role of export on economic growth, the economic success of the Newly Industrialized countries (NICs) in East Asia has been often attributed to the role of government. Thailand has strived to achieve an NIC status. However, that goal has not yet been attained.

Economic growth rate reached its peak in 1995 at 15.34 percent (Table 1). Then, it increased at a slower rate until reaching the lower turning point in 1998. This recession registered a negative growth of 2.24 percent as a result of the Asian financial crisis. The sagging economy eventually recovered at a remarkable pace approaching 9.69 percent in 2004 and 10 percent in 2006.

The Thai government realized that fiscal stimulation is deemed necessary in stabilization policy and economic development. As a result, chronic budget deficits were observed from the past up to 1987. The policy has been revised in response to changing economic conditions. From 1988 to 1996, the budget showed a surplus. A budget deficit occurred in 1997, the year of financial crisis, and continued through 2000. While the government has recently monitored its budget deficits, the nominal government expenditures have been steadily increased until the present time. Government expenditures grew at a fast pace of 12.77 percent in 1993, but the rate of increase had gradually declined to 1.53 percent in 1997. Spending increased steadily to 8.08 percent in 2006.

A similar pattern can be seen in money supply (M2). From 1993 to 1999, M2 grew at a decreasing rate from 18.38 to 2.13 percent. The economic slow down prompted the Bank of Thailand to increase money supply at an increasing rate from 3.67 percent in 2000 to 8.25 in 2005 and 5.98 percent in 2006. During 1993 and 2006, the average annual growth rates of GDP, government expenditures and money supply were 7.63, 8.86 and 8.85 percent, respectively. Overall, government expenditures and money supply increased steadily every year while economic growth rate presented more dramatic ups and downs.

LITERATURE REVIEW

In earlier empirical studies, Ram (1986), Holmes & Hutton (1990) and Aschauer (1989) found positive relationship between government expenditures and growth. On the contrary, Grier & Tullock (1989) used pooled regression on fiveyear averaged data in 113 countries to analyze the relationship between cross-country growth and various macroeconomic variables. …

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