keynes collegeA new discussion paper by Jean-Pascal Nganou, Juste Somé and Guy Tchuente, KDPE 1609, September 2016

Non-technical summary

This paper estimates government spending multiplier for natural resource-rich lowincome countries (LICs). The government spending multiplier is the ratio of a change in national income to any autonomous change in government spending.

1. Short-run government spending multiplier

Today government spending usually has a direct effect on aggregate country production. Our paper measures this effect and proposes interesting results useful for Uganda oil and gas additional expected revenue. The short-run government spending multiplier for natural resource-rich countries is larger than in other countries. Our finding suggests that, in the short-run, the government spending multiplier is between 0.55 and 0.74 for the natural resource-rich LICs and around 0.4 for other countries.

There are two possible explanations for this difference. The first is related to credit constraint. Indeed, resource-rich countries endowed with the stock of resource are able to fund costly, with high returns, investments in infrastructure, energy or other goods. The second explanation has to do with allocation of government spending. In resource-rich countries, the government can allocate spending to pro-resource extraction spending, with the possibility of rent, it is therefore possible to have higher returns.

2. Long-run government spending multiplier

The full effect of an increase in government spending on GDP can take more than one year to be observed in the data. We, therefore, estimate longer-run GDP effects of government spending. Our estimates suggest also that government spending has a permanent impact on the real economic activity in resource-rich countries, while government spending in non-resource-rich countries has a transitory impact.

3. Government spending multiplier in recession

After the recent 2008 crisis, there are many voices advocating the used of government spending as one of the key ingredients of US recovery. However, our estimate multipliers suggest limited output effect of countercyclical responses of government spending in response to economic downturns in LICs, despite a larger effect for resource-rich countries. It is therefore not a good idea to use government spending to deal with the recession. The government should instead identify structural causes of the recession and address them in an efficient way.