Capital Spending and Economic Growth Correlation in Georgia

Abstract

Nino Mikeladze
 Email:ninomikeladze88@gmail.com
 Doctoral student (Master’s in Economics) Ivane Javakhishvili Tbilisi State University 
 Tbilisi, Georgia
 https://orcid.org/0009-0008-1214-7241
 Government measures during the economic policy implementation should be based on the impact on economic growth and economic development. Moreover, as it is inevitable to have government expenditures, it is crucial to analyze what kind of relationship exists between economic growth and government expenditure. According to Keynes, government expenditure is the measure of the fiscal policy, On the other hand, according to Wagner, public spending is endogenous factor of economic development. There is no common attitude towards Wagner theory. Moreover, Wagner theory is considered to be valid for the long run period and results could be more valid in terms of economic as well as statistical interpretation, when longer time-series is taken. While exploting the dependence between economic growth and government spending, we should analyze the Armey-Rahn curve as well, which explains that up to some point, when government spending is increasing, economic activity is increasing as well, but then is starts to decline. The paper examines such dependence based on Wagner’s law and Keynes’s theory for Georgia, but using only capital spending as it is perceived as one of the main sources for economic growth. All the available data is used, during 1995-2022, for capital spending growth and economic growth indicators. 
 The results show that Wagner’s law is not fulfilled meaning that economic growth is depended variable and capital spending growth is explanatory. The impact on economic growth is observed after 3 years, which makes sense if we consider the nature of capital spending. However, we can say that due to the lack of data and only two variables included in the analysis, the results might not be relevant.