An analysis of the impact of the size and type of government intervention on economic growth in South Africa

Abstract

Government plays a crucial role in facilitating and enhancing economic growth and development within a country. The South African government, although faced with many unique socio-economic and macro-economic challenges, makes decisions based on selected economic objectives deemed important. Increasing levels of unemployment, inequality and subdued economic activity are among the challenges identified as most important in much of national economic policy, and remain key issues which the government continues to focus on. The interventionist role of government can be carried out in a variety of ways, including the way government spends collected revenue, the economic policies adopted as well as regulatory framework enforced by the government. However, despite the recognition of the above mentioned challenges the South African government continues to battle against these important issues concerning the overall health of the economy. The study had the primary objective of analysing the impact of the size and type of the South African government on economic growth. This involved categorising types of government spending according to the national budget’s over the period of the study, spending was broken down into three broad categories, namely economic development spending, social welfare spending and spending that went towards servicing the country’s debt. Moreover, the study included indexes such as the Government Effectiveness Index and the Corruption Control Index as variables in order to better understand the current state of affairs within the country, and the possible relationship they may have with economic growth. Furthermore, two main types of economic interventionism were reviewed and discussed, namely the developmental state and the welfare state approach. Contrasting the two mentioned methods of intervention, are key in understanding the behaviour of government and actions taken by government. In order to investigate the aforementioned variables, the study employed both a descriptive and an econometric analysis on the South African government spending patterns and interventionist action. Throughout the descriptive section, trends and graphs were used to analyse variables including government debt, government size, corruption, social welfare spending, economic development spending, government effectiveness and economic growth in South Africa. The econometric analysis ascertains the long-run and short-run relationship between the independent variables (mentioned above) and the dependent variable being economic growth. The study made use of a quantitative research methodology and the sample consisted of 21 annual observations collected for the period 1998 to 2018. The models employed under the econometric section of the study include the correlation matrix, ARDL bounds test for co-integration and the Toda-Yamamoto Granger non- causality test. The correlation matrix found that total government spending, social welfare spending, economic development spending and debt-service spending to have a positive relationship with economic growth, and all of the above variables were statistically significant at the one percent significance level. However, the Corruption Control Index and the Government Effectiveness Index were found to have a negative relationship with economic growth and were statistically significant at the one percent significance level. Long-run relationships were found, using the ARDL bounds test, between the independent variables total government spending, social welfare spending and economic development spending and the dependent variable economic growth. All were statistically significant at the five percent level of significance. The short-run Toda-Yamamoto Granger non-casualty found a unidirectional causal relationship between social welfare spending and economic growth at ten percent. This means that social welfare spending causes economic growth but not the other way around. There is also a bilateral causal relationship between the size of government and government debt-service costs at the one percent level of significance. This means that the size of government Granger causes debt-service costs, and debt-service costs Granger cause the size of government. There is also evidence that economic growth has a bilateral causal relationship with economic development spending at the five percent level of significance. This study contributed to the literature by theoretically and empirically reviewing the role of the South African government in achieving improved economic growth and economic development. This study is one of the few to make use of the ARDL estimation method with regards to disaggregated expenditure and economic growth in South Africa.