An Error Correction Model on the Impact of Government Expenditure on Economic Growth in Liberia from 1970 to 2020: Keynesian Economics Visited

Abstract

Liberia is currently experiencing one of its worse economic decline in over a decade. Various explanations are attributable to this decline. The 2014 Ebola Virus disease, the withdrawal of the multinational peace keeping force and the reduction in its primary exports, rubber, timber, etc can all be cited as causes of such decline. To further inflame the anguish of the economy, the 2019 corona virus disease dampened the hopes for further economic repairs. The decline in the global economies weakens the demand for Liberia's primary exports, iron ore and rubber. Given all these shocks, this research investigated the effect of government expenditure on economic growth in Liberia over the last 50 years. The research used vector error correction model to test for long run relationship between the two variables and found that there is a slightly strong long run relationship between government expenditure and growth, but did not find any short run relationship between government spending and growth. This implies that any non-performance of the budget which is the vehicle used to ferry government activities will have an adverse short run implication on the macroeconomy of Liberia. The research used data on government expenditure obtained from the Ministry of Finance and Development planning in Liberia, the World Bank database for economic growth.