The Moderating Effect of Institutions in Government Expenditures - Economic Development Nexus in ECOWAS Countries

Abstract

The total effect of growing public spending on economic development is ambiguous, especially with today’s realities of exposure to international trade and domestic factor such as institutions. Hence, the objective of this study is to test the hypothesis that good institutions moderate the effect of large government size on economic development. The study employed secondary data covering the period 1986 to 2018 and Arellano and Bover’s Generalized Methods of Moments (GMM) panel estimation technique was used to achieve the study objective. Data on Gross Domestic Product per capita, government size, population growth rate, inflation rate, gross fixed capital formation, human development index (HDI) and financial development were sourced from World Development indicator database while data on institutions was obtained from International County Risk Guide database. The study found that the stated hypothesis is validated i.e good institutions mitigate any negative effect of large government size on economic development for Economic Community of West African States (ECOWAS). The study therefore, concluded that the relationship between government size and economic development depends on quality of institutions in ECOWAS countries. It is recommended that member countries should embrace democratic governance and build democratic institutions in order to promote government stability. More so, there is need to tightening up of existing public sector rules and regulations on corruption and the setting up of anti-corruption institutions to fight corruption and check corrupt behaviour in the ECOWAS countries.