Economic Growth in Saudi Arabia through Sectoral Reallocation of Government Expenditures

Abstract

The article employs auto-regressive distributed lag (ARDL) cointegration and error-correction modelling to study the long-run impact of investment, exports, imports, and three components of government expenditures (expenditures on health, education, and other government spending) on GDP growth in Saudi Arabia from 1985 to 2018. We observe the long-run positive relationship between GDP, investment, exports and government education expenditure, but a negative relationship between GDP, imports, government health spending, and government other expenditures. The analysis reveals that investment, exports, and government educational expenditures all have long-run positive effects on the GDP growth, while imports, government health expenditures, and government other expenditures negatively affect GDP growth in Saudi Arabia. The Toda-Yamamoto causality test that applies the Modified Wald test establishes causality from exports, government education spending, and government health spending to GDP. We deduce that education expenditures stimulate economic growth in Saudi Arabia in contrast to health expenditures. Additionally, we infer that the various categories of government expenditures have varying effects on GDP. This necessitates a prudent sectoral allocation of public expenditures to maximize its positive effects on GDP growth and stimulate economic growth in Saudi Arabia. Moreover, the above findings have policy implications for the government in Saudi Arabia while allocating its expenditures. Allocating more government expenditures to education, cutting down inessential spending, and downsizing government healthcare expenditures will enhance long-run economic growth in Saudi Arabia. JEL Classification: O470; I15; I25