Government Expenditure and Economic Growth: Does Corruption and Democracy Matter?

Abstract

This study investigated the potential role of corruption and democracy in the expenditure-economic growth nexus. Economic literature predicts economic growth-enhancing activities of various core functions of government. However, excess government expenditure, in corrupt and undemocratic countries, may slow down the overall performance of the economy through rent-seeking activities, ineffectiveness and engaging in unproductive projects. The research objective is to analyze the role of democracy and corruption levels in the effects of government expenditure on economic growth in Kenya over the period 1990-2020. The generalized method of moments (GMM) framework was exploited to estimate the regression model. The findings indicate that government expenditure, corruption and democracy have positive and direct effects on economic growth through improvements in the efficiency of government expenditure. Besides, this study finds that corruption and democracy can have indirect negative effects on growth through deterioration of the efficiency of government expenditure. The study results suggest that government policies aimed at promoting democracy and controlling corruption can have direct positive effects on economic growth and indirect negative effects through their influence in the efficiency of government expenditure.