Effect of Public Expenditure on Economic Growth: A Case Study of Nepal (1975-2008)

Abstract

The debate over the role of the government in the economy has lasted for many decades, dating back to the times of the predominantly laissez-faire and classical economy policies. Role of public expenditure has shown mixed result around the world. Although Nepal initiated planned development, effort since more than five decade ago, her performance in terms of economic growth is not satisfactory. Nepal, allover the time, has remained second from the last in the list of south Asian countries for their growth, whether it is relatively closed economy regime (before 1985) or open market regime (after 1985). Although Nepal adopted the policy of market-oriented economy after 1985 and accelerated the pace towards free market economy, size of the government has not reduced. In this context, this thesis seeks to analyze the causal relationship between public expenditure and growth by taking the data for the period of 1975-2008. For analyzing the problem, Nepal’s position of growth and expenditure has been compared with other south Asian countries and has been evaluated based on established theory and literature. Finally, link between growth and public expenditure has been evaluated quantitatively by carrying out regression using Ordinary Least Square (OLS) method. It is found that Nepal’s growth rate was in its heyday before 1985 and after 2000, in average, it is declining. It is quite difficult to identify the causes behind decelerating growth after 2000 as two major events i.e. moist insurgency and restoration of democracy had been taken place during same period. It is equally possible that either one of both of those events are responsible for that. In one hand Maoist insurgency was demolishing several physical infrastructures and on the other hand corruption was increasing rapidly during the same period. Expenditure pattern shows that it is increasing continuously but before 1990 i.e. before the restoration of democracy, capital expenditure had exceeded recurrent expenditure while after 1990 the scenario is just opposite. Less capital expenditure than recurrent expenditure is causing growth rate to decline. Again, it needs to identify the reason behind less capital expenditure. If we see the sectoral allocation of expenditure, then we find that capital expenditure on major economic and social sector is declining. Capital expenditure on education and infrastructure is declining while it is almost in stagnation on health sector. Government reluctance on education and infrastructure has both long term and short-term impact on growth of the economy. Lack of good infrastructure has increased the cost of the economy and hence competitiveness of the Nepalese economy. This has reduced Nepal’s access to the international market although Nepal is member of various regional and multilateral trade organizations. Finally, regression result shows that only recurrent expenditure has significant impact on growth of Nepal leaving private and public investment for question. Investment is not effective for enhancing growth, which is very serious issue, and policy maker should think in this direction.