THE LONG RUN RELATIONSHIP BETWEEN GOVERNMENT EXPENDITURES AND ECONOMIC GROWTH: CASE OF JORDAN

ABSTRACT Using data from the Jordanian economy, the paper conducts a causality test of the which states that there is a relationship between the growth in government expenditures and the economic growth. The findings of the study show that the growth in the economy Granger causes the growth in the government sector. Thus, the applies to the case of Jordan. Using co-integration technique and the VAR model, the study suggests that there is a uni-directional relationship between the economic growth and the growth in the government expenditures. INTRODUCTION The size of the government expenditures in Jordan has increased since 1969. With respect to the government services, its contribution to the GDP in the years 1969, 1980, and 1990 was 27.2 percent, 28.5 percent, and 30.9 percent, respectively (Penn Tables). The purpose of this paper is to examine the relationship between the government size and the economic development in the case of Jordan. This goal will be achieved using the methodology suggested by Wagner (1893), and Islam and Nazemzadeh (2001). This analysis will be in the framework of Wagner's Law that suggested that there is correlation between the relative size of government sector and the economic development in the country. That is, there is a tendency for the government sector to grow as the national income grows. So this paper will test empirically whether or not a causal relationship exists between the size of the government sector and the growth of the economy. Review of the literature shows mixed support of Wagner's Law which suggests that there is a relationship between the relative size of the government and the economic growth. Conte and Darrat (1988) conducted an empirical study on the OECD countries for the period 1960-1984 to test whether there is Granger causality relationship between the growth in the public sector and economic growth in these countries. Their findings showed that the growth in the government sector had mixed impact on the rate of economic growth, and that in most of the OECD countries had no clear effect on the growth rate in their real income. Other study on the Canadian economy for the period 1947-1986, Afxentious and Serletis (1991) have empirically tested the Granger-Sims causality relationship between government expenditure and gross domestic product. Their findings indicated that neither hypothesis, which runs from GDP to government spending, nor the reverse causality, which runs from the government spending to GDP, is statistically supported. In addition, Yousefi and Abizadeh (1992) tested using data over the period 1950-1985 for each of the randomly selected 30 states of the U.S. economy. The empirical findings of their study indicated that is valid for 70 percent of the cases considered in the study, i.e., in 21 out of the 30 states selected randomly. In another study, Abizadeh and Yousefi (1998) have empirically tested the on the South Korean economy and they concluded that government expenditures have not contributed to economic growth in the case of South Korea. An empirical study on the U.S. economy by Islam and Nazemzadeh (2001) shows that a long run relationship exists between the relative size of the government and the economic development. It also shows that there is a uni-directional causal relationship between the relative size of the government and the economic development and that relationship goes from economic development to the relative size of the government. The paper will be organized as follows. Section 2 presents the data used in the study. Methodology will be discussed in section 3, while the empirical results will be discussed in section 4. Finally, summary and conclusion will be presented in section 5. DATA Data used in the study were extracted from various sources. These include the Central Bank of Jordan, Jordan Department of Statistics, and the international financial statistics. …

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