Public spending and economic growth: The role of institutions in Ivory Coast

Abstract

Several studies have analysed the effects of public spending, institutions and interaction between public spending and institutions on economic activity. This existing literature has ignored the effect of institutional shocks on the relationship between public spending and economic growth. To fill this gap, the current study aims to estimate the effects of public spending, institutional factors and institutional shocks on GDP per capita in Ivory Coast. It uses annual data that covers the period 1984-2019. We exploit the principal component analysis technique to construct an institutional composite index. We then estimate two Nonlinear AutoRegressive Distributed Lag models with interaction variables such as institutional index and public spending, corruption and public spending. The empirical results reveal symmetric effects of long-run institutional and corruption shocks on GDP per capita. In contrast, the effects of institutions are asymmetric in the short term. Negative institutional shocks worsen GDP per capita in the short term, as do positive corruption shocks in the long term. Similarly, public spending promotes economic growth, but neither institutions nor corruption significantly accentuate its effects. These results imply that improving the efficiency of public spending requires a prior improvement in the institutional framework and, above all, in the fight against corruption.