Government Expenditure Pattern & Investment Behaviour in Ghana: from the Abyss into Recovery

Abstract

The significance of Ghana’s policy of Economics Recovery Programme (ERP) in stimulating gross investment and thus structurally shifting the economy away from the abyss of the pre policy was on course.

Among the policy packages under the ERP included the use of realistic and flexible exchange rates, financial and expenditure reforms in the public sector, restrictive monetary credit measures and interest rate and investment code review to stimulate private and foreign sector activity. All these were purported to have significant effects on macro –economic variables.

Within the policy frame work of the ERP the present study concludes on the basis of empirical evidence that investment behavior in Ghana. During the two decades beginning 1970, was dictated by output and government expenditure considerations.

Apart from the general reinforcement due to government expenditure as a whole, the empirical results also show that the functional requirement expenditure impacted differently on investment. Government expenditure component related to human capital factors such as health, general administration and defence (and not excluding education) positively influenced investment. But government expenditure on community services as well as economic services tended to adversely affect gross investment. In a way therefore, it is suggested that the ERP essentially mapped out the course towards human capital formation with its attendant long term benefits.

These conclusions have rich implications for fiscal, monetary and mixed policy decisions in terms of the management of the menu of government expenditure patterns for achieving optimum macro-economic goals