ABSTRACT

It has long been argued that a country cannot develop without government. However, researchers have diverse opinions with regards to the impact of government size on economic growth. Whiles some researchers (Ahuja, 2013; Zareen & Qayyum, 2014) argue that large government size is most likely to enhance economic growth, other researchers (Armey, 1995; Vedder & Gallaway, 1998) believe that higher government expenditure has a tendency to harm economic growth. The third group of researchers believes that the full presence or total absence of government has its own consequences.

The contributions of Foreign Direct Investment (FDI) in an economy, especially, emerging economies cannot be overemphasised. As argued by some scholars (Odozi 1995; Makki & Somwura, 2004) FDI is a key driver of an economy. FDI is a significant source of development financing which contributes extensively to growth. The effect of government size and FDI on economic growth has, however, received less attention in  sub-Saharan African (SSA) countries.

This study empirically explores the impact of government size and FDI on economic growth in SSA. Data for this study was sourced from World development indicators, for 42 SSA countries covering the period 2000-2016. The model for the study was estimated

using the panel regression techniques. The study considered unobserved country heterogeneity and corrected for heteroscedasticity and autocorrelation. The study found that government size and FDI both have a positive significant effect on the economic growth of SSA countries. The study, therefore, recommends that governments of SSA countries invest significantly in infrastructure, health and education to increase its spending and consequently attract FDI to spur economic growth.

CHAPTER ONE

INTRODUCTION

Background to the study

It has long been argued that no economy has ever prospered without government; the absence of government brings about disorder and inefficiency. The absence of government reduces the level of economic activities and eventually reduces total economic output. Despite the fact that the presence of government is not a sufficient condition, it is a necessary condition of prosperity (Vedder & Gallaway, 1998). However, in instances where the government exerts monopoly power in economic decisions and resource allocation, economic prosperity is slowed (Vedder & Gallaway, 1998). An economy does not make progress in the total absence and full presence of

government (Ram, 1986; Armey, 1995; Vedder & Gallaway,  1998; Chen,           &

2005). This is to say that even though the presence of government is necessary to help in the allocation of resources and decision making, the full presence of government will lead to the misallocation of resources (Chen et al., 2005). This emphasises the assertion made by Vedder & Gallaway (1998) that too much government suffocates the spirit of enterprise and reduces the economic growth rate.

There are differences in opinions among researchers with regards, to how government size affects economic growth. Researchers that subscribe to the Keynesians view believe that large government size is most likely to enhance economic growth. Thus increasing demand for both private and public goods and services that enhances the production of  goods and services is linked to a high level of government consumption (Ahuja, 2013;

Zareen & Qayyum, 2014). The role of government is key in eliminating conflicts of interest between the public and private sector because it has the power to control and address negative externalities.

The assertion that higher government expenditure has tendencies to harm economic growth is hinged on the observed cases of inefficiencies associated with government institutions. Economic theory uses the “crowding-out” effect to explain how the presence of government gradually drives out the private sector, leading to a decline in private investments and ultimately retards growth due to a decline in the rates of capital accumulation. With the view of the continual presence of the government, most people prefer to lend to the government as compared to the private sector. Hence, in the event where the government and the private sector compete for funds to enable expansion and growth, the private sector is least likely to have access to a wide pool of funds. In view of this, although the private sector is identified as effective in the allocation of limited resources, their inability to raise funds from the public may cause their performance and growth to be stalled. This notwithstanding, some researchers believe that the  total absence and full presence of government is an economy has its own consequences. This argument is made on the basis of the Armey curve relationship which posits an inverted U curve relationship between government size and economic growth. Hence, it is believed that the presence of government promotes economic growth up to a certain point beyond which economic growth begins to decline (Armey, 1995; Vedder & Gallaway, 1998).

Government size and its impact on economic growth have also been argued out in a developed and developing country perspective. For developed countries, it is argued that

government size has an inverse relationship with GDP growth rate because of its perceived association with higher taxes and interest payment, and its ability to crowd out private investment. Given that higher government size is associated with higher spending, to finance the increased spending of government, it becomes necessary to generate a wider pool of revenue by imposing higher taxes on citizens. The upsurge in tax rates leads to a decline in economic activities and private investment that eventually affect economic growth rates negatively (Barro, 1990). In the case of developing countries, however, researchers have argued that government size positively impacts economic growth through its role in boosting private investment. Lin (1994), Vedder and Gallaway (1998) maintain that a significantly large government is likely to result in huge investments in economic infrastructure and technology.