American Journal of Humanities and Social Sciences Research (AJHSSR)
2018
American Journal of Humanities and Social Sciences Research (AJHSSR)
e-ISSN :2378-703X Volume-02, Issue-06, pp-68-78 www.ajhssr.com Research Paper
Open Access
Budget Deficit and Economic Growth in Liberia: An Empirical Investigation 1 1,2
Prof. Emmanuel Ating Onwioduokit, 2Dr. Uduakobong S. Inam
Department of Economics, Faculty of Social Sciences University of Uyo, P.M.B. 1017, Uyo, Akwa Ibom State, Nigeria
ABSTRACT: This paper investigates the relationship between budget deficits and economic growth in Liberia. The study employed: the Classical Ordinary Least Squares Technique (OLS); The Augmented Dickey Fuller (ADF) and Phillip Perron unit root tests for stationarity; the Co-integration test using Engle-Granger Two-Step procedure (EGTS); and a parsimonious Error Correction Model of the relationship between Budget deficit and economic growth in Liberia. It is evident from the analysis that there exists a long run relationship between Budget deficit and economic growth in Liberia. There also exists a positive and significant relationship between Budget deficit and economic growth in Liberia. Therefore, a 1.0 percent increase in deficits will result in an increase of approximately 0.42 percent in economic growth in Liberia. The study recommends that government, policy makers and the monetary authorities should ensure an appropriate mix of monetary and fiscal policies such that would deliberately and strategically maximize the growth potentials of deficits in Liberia. JEL Classification : C2, E1, E2, O4, O5
KEYWORDS: Budget Deficit, Economic Growth, Cointegration, Liberia I.
INTRODUCTION
The consequence of budget deficit on economic growth is one of the fiercely contested themes in economics. The effect of fiscal deficit on output growth has been immensely debated in the past four decades. Achieving sustainable economic growth and macroeconomic stability is the reverie of several developed, developing, and underdeveloped economies. Governments in the global economy deploy diverse policies, plans and programmes to achieve macroeconomic stability in their respective countries. Fiscal Policy is one of the main drivers for the attainment of this laudable objective. Fiscal deficit is essentially the difference between government revenue and expenditure (including government expenditure and investment). Unpredictable deficits, regardless of the mode of financing, are assumed to be growth retarding. For instance, deficits financed through arrears is synonymous to imposition of unexpected and illegal tax on its local creditors by the government. This will lead to unexpected reduction in the profitability of indigenous investors, dimple relationship between the private and the public sectors, or perhaps create a crisis of confidence and thus dampen private initiative. Even when the accumulation is limited to domestic arrears, the damage done to the profitability of national endeavors could be enormous and the country‟s credibility could be systematically eroded. With respect to deficit financed through monetary expansion which amounts to imposition of an inflation tax, the real value of private claims on the government could be battered. Beaugrand (2004) noted that the negative effects on economic activities and social peace of continued attempts to impose the inflation tax will precipitate uncertainty in real interest and real exchange rates. The external financing option of deficits through the issue of foreign liabilities or accumulation of external arrears, could through the market perception of the risk of future debt-servicing difficulties, push up the country‟s risk premium, raising the country‟s cost of borrowing in international financial markets. Clearly, the concern about crowding out is closely related to the concept of intergenerational equity. Indeed, there is no consensus among economists on this issue either theoretically or empirically. The received wisdom is that high budget deficit is a source of macroeconomic instability. However, the empirics seem not to have conclusively supported this traditional perception as findings from various studies are varied and contentious across countries, data, and methodologies ((Fisher, 91993); Nelson and Singh, (1994); Ghura and Hadjimichael, (1996); Kneller et al., (2000) and Onwioduokit (2012)). These conflicting results have raised the vital interrogation of heterogeneity and underscores the usefulness of country specific studies as against cross- country studies, to address heterogeneity.
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