The effect of government expenditure on cross country income variation has elicited considerable interest in the past decades [1-2]. Improving the quality of institutions could boost Sub-Saharan African’s output growth by 0.9 of a percentage [3]. However, very few SSA countries have managed to better their institutional quality. SSA countries have experienced underdevelopment and low economic growth. At the aggregate level, this perception is confirmed by the low average income per person and the low average rates of income increase over the last few decades [4].Government expenditure policies that maintain sustainable economic growth remain key objective that governments pursue. Efficient resource allocation, distribution and stabilization are also important in the realization of fiscal discipline that improves the economic growth of a particular country [5-6]. A sound fiscal policy significantly contributes to stable economic environment which creates expectation in the economy which foster long run income growth of a country [7-8].

Despite poor economic performance of SSA countries, Botswana is an example of successstory in Africa. WDI showed that Botswana had income per capita of $5,796 in 1998,which was almostfour times average African income per capita. For the periods 1965 to1998, Botswana’s income per capita grew 7.7 percent annually. According to Acemoglu, Johnson and Robinson [9], Botswana achieved robust economic growth because item braced better in stitutions than other African countries. Good institutions provide an environment for property rights (PRs) protection, enhance political stability and cushioninvestors against interference from political elites. In contrast, Democratic Republic of the Congo (DRC) Despite having large mineral deposits, it has remained underdeveloped. Therefore, poor governance arisingfrom corruption that distorts economic incentives can lead to low investment and the inefficient use of resources [10].

According to Vitola, and Senfelde [11] institutional checks and balances that renew policy makersthrough elections cushion the economy against corruption and misallocation of resources. Institutions that embrace democracy are believed to enhance economic prosperity by providing an environment that protects PRs, and it also nurtures civil rights. This therefore provides economic players with incentives to undertake investment, which consequently enhanceseconomic growth. The mixed economic activity outcome in SSA therefore suggests that economic growth is determined by the strength of institutional variables.

The problem then is seen not as one of the resource constraints in SSA but rather institutional weakness and poor policies. Institutional quality includes civil and political liberties, extent of corruption, political stability, public sector efficiency, regulatory framework and economic freedom. Governance should be seen as a function of the country’s institutions which implies that good institutions translate into good governance and policies, transparency and accountability. This paves way to allocation efficiency and visionary leadership. However, institutional quality, public expenditure and economic growth are interlinked. Understanding how public spending impact economic growth and exploring the role institutions play on growth is important for various reasons.  

Statement of the Research Problem

Several research works that involve output growth and government expenditure for SSAs have been conducted. The findings have remained inconclusive on whether spending significantly retards or enhances output growth. The decline in output growth resulting from state spending is attributed to crowding out phenomenon. Provision of public goods through domestic borrowing could lead to a decrease in the private sector. However, this understanding of crowding out does not consider the efficacy of publice xpenditure [12-13]. In contrast, it is argued that resources alone are not enough but the institutional capacity i.e., nature of structure and policies and institutional quality are Also important drivers for economic growth. Improving the quality of institutions could boost Sub-Saharan Africa’s output growth by 0.9 of a percentage [14]. However, very few SSA countries have managed to better their institutional quality. Some countries in SSA are experiencing political strife, mega corruption Scandals and poor implementation of budgetary policies, i.e., DRC, Kenya, and the Central African Republic (CAR). Consequently, an important issue in public sector expenditure is whether an improvement in institutional quality can help in ameliorating the impact of public spending on economic growth in SSA. Although increased public spending as a form of fiscal policy can spur economic growth, efficient outcomes can be achieved with well-functioning institutions

This study therefore seek to answer the following questions:

• Whatis the effectof publicexpenditure on output growth in SSA

• What is the status of efficiency of public spendingin SSA

• (3)How does institutional quality affecteconomic output growth in SSA

Thesethree questionsformedthe researchgapthatthis paperaddressed.

Literature Review

The nexus between government expenditure and output growth is an important subject thathas been studied by “Devarajan, Easterly, and Park [15], Barro [16], Kimaro, Keong, and Sea [17], among many other researchers, have examined this issue. Researchers want to know if financial discipline affects the production growth equation. One view is that public spending on human capacity building, infrastructure, and health enhances economic growth, although financing such government expenditure is associated with tax distortions, which can be growth-retarding. The public sector has expanded significantly over the years in various countries. At the beginning of the twentieth century, the public sector in many countries was small. However, expenditure increased gradually over the next sixty years. For SSA, the public sector has grown from 18.5% of GDP in the 1980s to about 29% of GDP in 2018. Despite this increase in public expenditure, SSA has experienced dwindling economic performance. The relationship between output growth and public spending for SSA nations has been extensively studied in the literature [17-23]. The diverse economic performance of the various countries was not taken into account in these research, which instead concentrated on the effect of public spending on output growth in SSA.None of thesestudies have dissected SSA countries into low- and middle-income countries. For policy makers, it will be crucial to have knowledge on which aspects of government spending contribute significantly and favourably to output growth for low and middle level economies SSA. These empirical findings will be helpful for formulating strategies that are particular to the level of economies, growth, and which will spur economic growth for low and middle level income economies of SSA. This study makes a distinctive contribution to the body of knowledge on production growth and public spending by dividing SSA countries into two groups: low- and middle-income countries.

The Efficiency of Public Spending in Sub-Saharan Africa

Government role in economic development is crucial in markets characterized by asymmetric information. Imperfect markets result in economic distortions and consequently worsen of welfare [24]. Government spending interventions in the economy are crucial for macroeconomic stabilization as well as improving long-term growth. With SSA countries faced with limited resources, investigating the effectiveness of public spending is essential because even little changes can have a significant influence on the achievement of governmental goals that are in line with the Sustainable Development Goals (SDGs). Different econometric techniques have been used to measure spending efficiency..Government is viewed as a producer since it uses different combination of labour and inputsto produce different outputs. According to Afonso et al. [25], governments that producemore outputs with fewer inputs are considered more efficient than governments that producefewer outputs but use more inputs. Some governments in the African region are characterizedby inefficiencies in the provision of public goods [26]. In order to account for government wastes, an empirical result that describes the degree of efficiency of government spending is essential. Additionally, care must be made when the government allocates its budgeted funds and when implementing procedures to increase the effectiveness of public spending.

Cross-country income variation is caused by numerous factors. The size of the government expenditure multiplier is one of these factors. Varied multipliers have different effects on how the change in the gross domestic product is realised (GDP). The effectiveness of government public expenditure execution is one of the other covariates [27]. Spending efficiency inturn is associated with a number of factors. This the study therefore analyses spending efficiency in SSA countries. Secondly, the study investigates how environmental factors contribute to inefficiencies of spending in SSA.

Institutional Quality and Economic Growth in Sub-Saharan Africa

Institutional quality is critical in the realization of economic success of developing countries.Institutional quality of a country facilitate international transactions, and provide for their security and predictability. It is a wide notion that encompasses the rule of law, individual rights, and top-notch public policies. Over the long run, institutional quality and economic growth support one another, but numerous studies contend that institutional quality creates a positive feedback loop.

Public institutions and governance that are inclusive are capable of delivering quality services that are important in improving people’s welfare. This is in line with the Sustainable Development Goals (SDGs) which advocate for strong institutions. Developing countries have recently embarked on radical reforms aimed at improving governance. This has been informed by the realization that good institutions are crucial for enhancing economic growth. North [28], for example, argues that good governance provides rules that are consistent and take the form of institutions important for sustainable growth. However, poor economic performance is associated with weak institutions [29]. If weak institutions negatively influence income growth, then policy actors should design policies that strengthen institutions [30].

Theoretical Review

The Wagner’s Organic State Theory, Keynesian Theory, Crowding out Theory, Neo-Classical Theory of Growth, and Endogenous Growth Theory was adopted in this research.

The Wagner’s Organic State Theory

Wagner's law states that complexity in the political system promotes economic expansion. This is required by the necessity to enact statutory laws and the growth of the legal system, both of which raise public expenditures. According to Wagner law, the process of urbanisation is accompanied by externalities that necessitate government intervention to lessen their consequences. Within the economic and fiscal aspects of public expenditure expansion, economic research has taken two main lines in analysing the expansion of the public economy.

Keynesian Theory

Keynes, in “The General Theory of Employment, Interest and Money” proposed that state intervention in economic activity is necessary since economies do not stabilize very quickly [31]. According to Keynes [31], in times of economic distress, government spending is required to boost employment. Government spending is necessary for promoting growth. Keynes believed that microeconomic interventions by both firms and individuals can lead to inefficient macroeconomic outcomes, leading to a general glut where the economy operates below its potential output and growth rate. Keynesian theory finds relevance in the context of Sub-Saharan African Countries. Government expenditure in infrastructure like road construction has been used by many governments to reduce unemployment during economic downturn. Economic stimulus like road construction has multiplier effect of increasing aggregate demand of economy and hence improving aggregate economic performance.

Crowding Out Theory

Crowding out Theory is premised on the view that increased government intervention can reduce private activities. Crowding out is a byproduct of an expansive fiscal policy, in which the government finances expenditures through taxes or debt issuance. Crowding out is also a multidimensional concept that constitutes direct and indirect effects of state intervention on the private activities.

Neo-Classical Theory

The foundation of the neo-classical theory put forth by Solow-Swan in 1956 is the notion that as physical capital increases, returns diminish and that capital therefore has a transitory impact on the level of income in an economy. In order to promote economic growth, the theory contends that labour productivity must be raised. Accordingly, accumulation of capital and labour, as well as advancements in technology, can lead to steady state economic growth. According to the idea, equilibrium can be reached by adjusting the production function's appropriate ratios of capital and labour.

Endogenous Growth Theory

Endogenous Growth Theory takes the assumption of decreasing returns in capital in the neoclassical model inhibits the explanation of income variation in the long run. To remedy the shorting comings of neoclassical model, endogenous growth theory was conceived to model long run growth through technological transfer.In endogenous growth theory, steady economic growth is achieved through technological change that is endogenously determined.

Empirical Review

Table 1: Summary of Related Literature Review

The methodology employed in this study is the panel data analysis and the fixed effect model and random effects models were used. However, the Hausman test favored the use of fixed effect model as the most appropriate model of analysis in this study. The study also employed data from the world Development indicators of the World Bank. After modelling the fixed effect panel regression to check for the impact of institutional quality on economic growth, the study discovered that some key institutional quality variables exert insignificant and negative impact on economic growth. The data for this study was gotten from World Bank Government database containing information from Forty-eight countries from sub-Saharan Africa were selected for the study for the period 2005 to 2020. The countries are; Angola, Central African Republic, Burundi, Chad, Democratic Republic of, Congo, Congo, Republic of, Rwanda, Comoros, Eritrea, Ethiopia, Kenya, Madagascar, Mauritius, Seychelles, Somalia, South Sudan, Sudan, Tanzania, Uganda, Botswana, Eswatini (Formerly Known as Swaziland), Mozambique, Lesotho, Malawi, Namibia, Zimbabwe, South Africa, Zambia, Benin, Burkina Faso, Cabo Verde, Cameroon, Cote d'Ivoire, Equatorial Guinea, Gabon, The Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Mauritania, Niger, Nigeria, Sao Tome and Principe, Senegal, Sierra Leone, and Togo. The tri-directional relationship between institutional quality, government expenditure and economic growth is thus expressed using three models functionally; Model 1 (Economic Growth versus Government Expenditure), Model 2 (Economic Growth versus Institutional Quality), and Model 3 (Institutional Quality versus Government Expenditure). Data which were collected were further analysed using different statistical techniques including the Panel Unit Root (time-series variable), Dickey-fuller test, co-integration test, Granger causality test, The Hansen J-statistic Test of Over-Identifying Restrictions and diagnostic test. The descriptive statistics was used to determine the mean, standard deviation and variance of the data sets. The Ordinary Least Square (OLS) was used to test the hypotheses formulated with the aid of the Statistical Package for the Social Sciences (SPSS version 21). The F-test of Joint Significance test reports that the estimated coefficients on the regressors are jointly equal to zero (p = 0.000) at any conventional level of significance.

Theoretical Framework/Model Specification

The theoretical framework adopted for this study is drawn from the Wagner’s Organic State Theory, Keynesian Theory, Crowding Out Theory, Neo-Classical Theory of Growth, and Endogenous Growth Theory. The model adopted is a replica of Devarajan, Swaroop & Zou [43] study which assumes Cobb Douglas production function. This is indicated in the function below;

Where

Estimation Technique

A major problem associated with the system GMM approach is that it is preferred for controlling endogeneity bias, omitted variable bias, reverse causality, unobserved heterogeneity, the weak instruments problem and unit root effects in the choice of instruments. Moreover, the use of system GMM approach will take care of flaws and statistical problems that are associated with OLS, fixed and random effects models and that of the first-difference GMM by producing consistent and efficient parameter estimates. It allows for the analysis to deal with situations where there are a large number of cross sections (N) and relatively short periods (T) (short panel) in order to control for dynamic panel bias.

This section focuses on the presentation, analysis, interpretation and discussion of findings. The empirical results based on the specified models in the previous section are presented, while the interpretation and discussion of each result is related to the justification of the stated objectives.

Table 2 provides descriptive statistics in terms of mean and standard deviation for pooled observations for SSA countries, middle-income countries and low-income. GDP growth rate for pooled observation for SSA countries averages 4.53 percent with a standard deviation of 4.85 percent. Middle income countries reported higher average growth rate of 4.62 percent than low-income countries. Government effectiveness averaged -0.642 with a standard deviation of 0.614 for the sample for SSA countries, middle income countries averaged -0.247 with a standard deviation of 0.631, and low-income countries averaged -0.906 with a standard deviation of 0.436. On the average, political stability was -0.497 with a standard deviation of 0.945 for SAA countries, middle income countries had a mean of -0.138 with a standard deviation of 1.033 while low-income countries had a mean of -0.736 with a standard deviation of 0.799. On the average, rule of law for SSA countries is -0.627 with a standard deviation of 0.657, middle income countries is -0.266 with a standard deviation of 0.704 while low income countries averaged -0.867 with a standard deviation of 0.496. The descriptive statistics further revealed that voice and accountability averaged -0.500 with a standard deviation of 0.704 as compared to low-income countries with a mean of -0.740 and a standard deviation of 0.532. On average, control for corruption for SSA countries is -0.547 with a standard deviation of 0.616, the mean for middle income countries is -0.216 with a standard deviation of 0.725 while the mean value for control for corruption for low-income countries is -0.768 with a standard deviation of 0.402. Regulatory quality for SSA countries averaged -0.503 with a standard deviation of 0.700, middle income countries has a mean of -0.249 with a standard deviation of 0.606 while low income countries had a mean of -0.673 with a standard deviation of 0.708.

From Table 3, the variables, at level, with trend and intercept, are not stationary. This means that the properties (Mean, variance, autocorrelation) of the time series data is not constant, therefore it is imperative to differentiate and test for stationarity again. At first difference, the results show that the time series properties are now constant. It is therefore evident to say that they are integrated of order one. This result highlights that there is a high possibility of a long-run relationship between institutional quality and inclusive growth.

The econometrics estimates show that initial value of GDP growth rate significantly impact on the current economic growth (p<0.001). The findings in Table 4 indicate that government expenditure on infrastructure is positively and significantly related to economic growth with fixed effect coefficient value 0.04. Health expenditure and military expenditure are negatively and insignificantly related to economic growth at 5 percent level for SSA. The estimated coefficients on infrastructure expenditure categories emerge as significant correlates, with surprisingly positive signs across the fixed and the random effect. Health expenditure and military expenditure showed negative relationship to economic growth across fixed and random effects. At this stage, it remains unclear whether the shares of government spending are differentially productive. A possible explanation for these ambiguous results is the paucity of spending data, which as mentioned earlier are notoriously weak with many gaps over many years.

The results for the other variables in our model show that the estimated coefficient on physical capital is positive and significantly correlated with the growth rates of per capita GDP. A one percentage point increase in physical capital is associated with a 0.03-0.05 percent point improvement in per capita GDP growth rate. This robust positive relationship between investment and growth is consistent with the findings of other studies on drivers of growth[44].In this study, total productive workforce rate which is our measure of labour supply (L) appears to have imposed a great impact on the region’s economic growth prospects. The estimated coefficient is positive and significant, with a one percentage point increase in labour force predicted to increase the growth rate of the economy by 0.09-0.20 percentage points. The estimated coefficient also indicates that the productive workforce rate is one of the factors which significantly contribute to increase economic performance in SSA. The coefficient on the initial level of income at the beginning of every period is negative but very weak in most specifications, suggesting the existing of weak conditional convergence in Africa.

From the results in Table 4, institutional quality index (government effectiveness) shows a negative but insignificant effect on growth with fixed effect coefficient value 0.001. This shows that within the period under study, a unit increase in government effectiveness will lead to 0.001 percent decrease in growth. This further implies that on the whole, governments within the SSA renders quite a lot of inefficiency in policy stance, thus contributing to economic growth negatively. From the results in Table 4, institutional factor (which is the ability to control of corruption) shows a negative and insignificant effect on growth with fixed effect coefficient value 0.04 for the period under study. Corruption leads to high investment cost and low profits of government as well as foreign investment. In another dimension, corruption discourages investments which in turn negatively affect growth. The control of corruption which leads to the better management of public budget with consequences such as: good services to the population, reduction of inequalities, encouragement investors and developing partners is very crucial for sustainable growth. Table 4 shows that the one-year lag of growth as shown across the three (3) columns are highly and negatively associated with the current period growth regardless the income levels of the countries within the sub-region. From the results in Table 4.3, Regulatory Quality exhibits a positive and significant effect on economic growth with fixed effect coefficient value of 0.017. This implies that within the period under study, countries within the SSA have either being implemented or are still making institutional arrangements aimed at improving growth-promoting institutions (that is, formulating and implementing sound policies and regulations that will overtime permit and promote private sector development). Improved regulatory quality can only promote economic growth through creating effective and efficient incentives for private sector development.

From the results in Table 4, Rule of Law shows a positive and significant effect on growth with fixed effect coefficient value 0.002 for the period under study. This shows that a 1 percent increase in the Rule of Law will contribute to a 0.002 percent improvement in growth. This further implies that SSA countries have to an extent implemented growth-promoting institutions (in the form of protection of property rights and contractual rights by a country’s government to make markets more effective and efficient) which have triggered improvement in growth. From the results in Table 4, the Voice and Accountability exhibited a positive and significant effect on growth with fixed effect coefficient value 0.0004 for the period under study. This shows that a 1 percent increase in Voice and Accountability yielded a 0.0004 percent improvement in growth in SSA countries. This further imply that SSA countries have over time implemented growth-promoting institutions (high level of increased participation of citizen’s in selecting their government, freedom of association, freedom of expression, and a free media) which has reflected in the level of growth attained within the period studied. Political Stability and Absence of Violence show a positive and insignificant effect on growth with fixed effect coefficient value (0.0007). This implies that within the period under study, the dynamics surrounding the outcome of Absence of Violence and Political Stability has led to 0.007 percent increase in growth. Economic growth and political stability are deeply interconnected. On the one hand, the unpredictability brought on by a volatile political climate may slow growth and investment.

Table 2: Summary of Descriptive Statistics

N.B: GRGDP = GDP growth; GE = Government Effectiveness; PV = Absence of political stability and violence; RL = Rule of Law; VA = Voice and Accountability; CC= Control of Corruption; RQ = Regulatory Quality; L = Labour Force; K – Capital Formation; DE = Domestic Savings; GOVEXP = Total Government Expenditure; HLT = Health Expenditure; ML = Military Expenditure; Ed = Education Expenditure; INFR = Expenditure on Infrastructure. Source: Compiled by Author

Table 3: Summary of Unit Root Test (Augmented Dickey Fuller Test)

Source: Compiled by Author

Table 4: Model Estimation Results/Summary of Ordinary Least Square Result

* Significant at 1%, ** Significant at 5%, ***Significant at 10% Source: Compiled by Author

Policy Implications

The policy implication are discussed as follows:

• The ordinary least square (regression) result shows a significant relationship between government expenditure and economic growth in SSA

• There should be an existing policy framework that control government expenditure to enable maximum utilization of resources and capacity to utilize, government resources should be optimize

• The result shows that there is significant relationship between institutional quality and government expenditure in SSA on one hand and institutional quality and economic growth in SSA on the other hand which influence a great deal of national economy

Summary of Findings, Conclusion and Recommendations

The study investigated the relationship between institutional quality, government expenditure and the performance of Sub-Sahara Africa countries. The tri-directional relationship between institutional quality, government expenditure and economic growth was expressed using three models functionally; Model 1 (Economic Growth versus Government Expenditure), Model 2 (Economic Growth versus Institutional Quality), and Model 3 (Institutional Quality versus Government Expenditure). The findings of the research are as follows;

• There is significant relationship between government expenditure and economic growth in SSA

• There is significant relationship between institutional quality and government expenditure in SSA

• There is significant relationship between institutional quality and economic growth in SSA

Conclusion and Recommendation

The study contributed immensely by showing that the wasteful nature of the public sector in SSA, coupled with the high poverty incidence and low economic growth, necessitated this study. This is in line with the elusive question of what determines the real cause of economic growth. Although most African economic seem to be picking up in their respective growth trends, it has not been able to successfully translate to improved wellbeing of the citizens. This goes to show that an improvement in the institutions as regards the planning and execution of the various macroeconomic policies, make the economy to be better off. Also, government expenditure was found to have a positive significant impact on economic growth (in line with objective one). The study attributes this to the new consciousness amongst developing economies to consolidate the size of government expenditure especially capital expenditures.

Based on the afore-stated results, the following recommendations were put forward:

• There is need to strengthen and enforce full compliance in the institutional environment in the sub-region through reforms targeted at ensuring the independence and adequate funding of such institutions as the judiciary, the police and other law enforcement agencies so as to improve access to fair and equitable administration of the justice system in the region for the benefit for all citizens. This has the potential of creating the enabling environment for growth

• Institutions that promote political rights and civil liberty, private sector development, building political stability and an independent and credible judicial system for enforcement of contracts and property rights protection should be strengthened

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