Government Expenditure and Economic Growth in Iran

Abstract

This paper examines causal relationships between Government Recurrent Expenditure (GRE) and GDP for Iran using annual data over the period 1970-2010. The Gregory-Hansen (1996 cointegration technique, allowing for the presence of potential structural breaks in data, is applied to empirically examine the long-run co-movement between these variables. The results suggest that there is a long-run relationship between these variables. The Granger Causality test indicates strong unidirectional effects from GDP to GRE. But there is no evidence that TRE promotes long-term economic growth. Moreover, the main results in this paper confirm that there is an instantaneous as well as unidirectional causal link running from GDP to GRE. Based on the results, the policy makers should ensure that recurrent expenditures are properly managed to accelerate economic growth. Moreover, government should promote efficiency in the allocation of resources by encouraging more private sector participation to ensure productivity-intensive growth.

The Role of Government Capital Expenditures in Economic Growth in Jordan

“…In another study, Mehrara, Abrishami, Boroujli, and Amin [23] examined the connection between government investment in infrastructure and economic growth in Iran.…”

“…Besides, government spending on education and health improves labor productivity and enhances growth of national output [16]. More importantly, expenditures on infrastructure including power, communications, and roads lowers production costs, improves private sector investment, and profitability of companies thus stimulating economic growth [23]. However, some scholars oppose the claim that government spending fosters economic growth.…”

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“…Mehrara et al [22] examine the causal link between government expenditure and economic growth in Iran from 1970 to 2010 using Gregory-Hansen cointegration test, error correction model and Granger causality test. Finding reveals a strong unidirectional link from GDP to recurrent expenditure in Iran.…”

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