Government spending and economic growth in the Middle East and North Africa region

Abstract

In 2011, during the Arab Spring, citizens in some Arab countries marched in the streets, demanding decreased corruption, increased public participation in running state affairs, and provision of jobs for citizens. In response, governments in the Middle East and North Africa region initiated strategic plans to meet the people’s demands (e.g. Morocco Vision 2030, Saudi Vision 2030). One of the main parts of these plans is related to reforming the public finance sector. Recently, in response to the novel coronavirus (COVID-19) pandemic, most Middle East and North Africa countries have taken loans or withdrawn from reserves (both considered sources of funding for government expenditures) to support the economy and fund the healthcare plans to fight the disease. Thus, the efficiency and effectiveness of government spending is very important in utilizing the available resources at all times. Using data for the Middle East and North Africa region from 1990 to 2019, and utilizing a scatterplot technique and the general linear modeling procedure, this article explores the relationship between public expenditures and economic growth. The results show that the current public expenditure system is inefficient and that efficient public spending has to be combined with other factors that influence the economy (e.g. enhancing public participation in running state affairs, controlling corruption, and supporting good governance practices in the public sector).

Points for practitioners

Government spending is one of the most important elements in managing state affairs toward achieving advanced levels of development and providing high-quality services to beneficiaries. This research explores the relationship between government spending and economic growth; the result of this study confirms that non-financial factors, such as fighting corruption, promoting democracy and freedom, enhancing public institutions’ quality, and supporting the productivity and accountability of the public sector, are important dimensions in promoting economic growth, especially in developing countries.

Keywords

economic growth government effectiveness Middle East and North Africa public expenditure efficiency public policies

Introduction

The efficiency of government spending is a key issue in political and academic debates, regardless of the development level of a nation. Budget allocations for public services and programs are of public concern because they influence the quality of services introduced to people. Many schools of thought have discussed the importance of public spending to the status of a country’s economic development, including classical economic theory, Wagner’s law, and Keynesian theory and its derivatives (Afonso et al., 2005; Wijeweera and Garis, 2009).

Classical economic theory advocates that markets work best when they are left alone and that governments should have a limited role in stimulating economic growth (Palley, 2013). Government spending is a dangerous way of attempting to improve economic growth as it leads to crowding out private investment. The crowding-out effect involves the dampening of private sector spending activity caused by public sector spending. Classical economic theory and the crowding-out effect imply that there are no systematic relationships between government spending and economic growth (Carrasco, 1998; Schick, 1998).

On the other hand, Wagner’s law posits that economic growth (i.e. generating more national revenues) leads to an increase in government expenditure. Developing his theory in the late 1800s and early 1900s, German economist Adolph Wagner argued that public expenditure is an outcome, not a cause, of growth in gross domestic product (GDP) (Wijeweera and Garis, 2009). According to his theory, an economy develops over time, which leads to an increase in government activities, which, in turn, results in an increase in public spending. The increase in government activity is a result of: (1) an increase in demand for services from the public and increased welfare costs; (2) an increase of government functions and activities to ensure the market runs smoothly; and (3) the financing of large projects implemented by the government due to their economic infeasibility or the inability of the private sector to execute them (Dilrukshini, 2009; Eldemerdash and Ahmed, 2019; Musgrave, 1959). Critics of Wagner’s law have argued that government spending often has negative impacts on economic growth, such as the crowding-out effect (Dilrukshini, 2009; Mitchell, 2005).

Alternatively, Keynesian theory argues that governments need to intervene in order to enhance economic growth by, for example, spending more on social programs and projects, as well as providing valuable public goods such as education, healthcare, and infrastructure to beneficiaries (Ansari et al., 1997; Palley, 2013). In addition, the multiplier effect is a development of Keynesian theory positing that government spending intended to stimulate economic growth may also enhance private spending, thereby resulting in a synergistic stimulation of economic growth (Ono, 2011).

Countries in the Middle East and North Africa (MENA) region have adopted strategic plans (i.e. visions) to meet people’s demands and support the quality of public services. These plans concentrate on increasing public spending on public programs and projects to reach the strategic goals of the nation (e.g. diversify the economy, diversify sources of income, and enhance the well-being of people). One of the purposes of this study was to determine which economic theory (i.e. Wagner’s law or Keynesian theory) is most applicable to explain the macroeconomic dynamics of 15 MENA countries. In part, this article assesses the performance of governments in implementing strategic plans since the 1970s and helps evaluate the steps taken so far in the new plans, bearing in mind that the new plans extend to 2030 or, in some countries, 2040. Besides gaining a better understanding of the governments’ financial behavior in the MENA region, the findings of this article are expected to help decision-makers adopt efficient and effective financial strategies to reach the goals of the governments’ visions. Thus, the following research question was addressed: What is the relationship between economic growth and government expenditure in the MENA countries between the years 1990 and 2019 inclusive?

This study is organized as follows. First, the article discusses the importance of public spending efficiency for economic development. Then, the literature addressing the relationship between public spending and the quality of governance will be explored. Next, the economic, political, and administrative structures of MENA countries will be addressed. The methodology used to analyze the relationship between government expenditure and economic growth will be presented. Finally, the results and outcomes of the analyses will be discussed, along with policy implications.

Public expenditure efficiency

The sole responsibility of the government is to adopt and implement sound public policies (e.g. quality fiscal and monetary policies) to enhance economic growth, improve the outcomes of government work, and maintain high-quality public services for people, especially in developing economies (Laffin, 2016; Rajkumar and Swaroop, 2008; Wildavsky, 1961). Accordingly, as part of the financial management system, the effectiveness and efficiency of public expenditures influence the quality of public services and programs introduced to beneficiaries in the country (Ansari et al., 1997; Schick, 1998). According to Khan and Murova (2015: 170): “measuring efficiency of public expenditures has considerable value for government: public expenditures constitute a significant percentage of domestic output with a direct impact on public policy involving services such as education, health care, public safety, transportation, and welfare.”

Public expenditures are connected to economic development due to the complex nature of public spending and changes in the demands of people. In addition, considering the limited resources that countries have, limiting public fund waste, fighting corruption, and enhancing the effectiveness of public expenditures (i.e. budget allocations) are all targets of public policies, especially in developing economies (Brini and Jemmali, 2016; Khan and Murova, 2015). Thus, public expenditure efficacy has been associated with the quality of institutions and good governance practices (e.g. quality of regulations and supporting transparency) (Abushamsieh et al., 2014; Borge et al., 2008). In their study, Rajkumar and Swaroop (2008: 97) note that “Poor budget management has frequently been cited as one of the main reasons why governments in developing countries find it difficult to translate public spending into effective services.” Consequently, improving budgeting system efficiency requires developing the governing process (Marek et al., 2020; Mattei et al., 2013).

Related research in MENA countries

Even though the efficiency of public expenditures is important in all countries, it is particularly important for developing and transition economies (e.g. MENA region countries). The share of the public sector compared to non-government sectors (i.e. private and not-for-profit) is high in developing countries, which makes public sector efficiency critical to economic and human development (Afonso et al., 2005). Thus, for decades, many countries in the MENA region have adopted development plans, with common themes of fighting corruption, creating jobs for citizens, and enhancing health and education systems. In addition, countries in the region have implemented market-based mechanisms (e.g. privatization and public–private partnerships (PPPs)) to enhance the private sector participation in the economy and remove some of the burden from the public budget (public funds are the main source of funds for public programs in MENA countries) (Biygautane et al., 2017; World Bank, 2019c).

However, as an indication of the inefficiency of public policies and programs, international indices (e.g. Worldwide Governance Indicators and Open Budget Index) show that MENA region countries suffer from high unemployment rates, low levels of public participation in running state affairs, and high levels of corruption (IMF, 2019; World Bank, 2019a, 2019b). Many reasons have been introduced for governments’ lack of success in meeting people’s needs and demands, including the absence of accountability, low quality of institutions implementing the plans, and changes in strategic and executive plans whenever there is a new ruler or minister, resulting in the misuse and waste of public funds (Brun and Compaore, 2019; Looney, 2001; Rajkumar and Swaroop, 2008).

Mohaddes et al. (2018) address how financial institution quality in the MENA region affects the utilization of the countries’ resources. While the MENA region countries show different levels of richness and development, Mohaddes et al. (2018) find that all of these countries share similarly inefficient financial systems, which influence public policy execution and public program outcomes. Furthermore, while MENA countries launched their visions (i.e. plans) from 2012 onward, Mohaddes et al. (2018: 28) recommend supporting budget transparency and adopting a public budget planning model to enhance public expenditure efficiency in the MENA region, stating: “Clearly, what is required is comprehensive reform in fiscal and related management programs, including deep-seated institutional reform.”

Budgeting deficits are considered to be among the main issues in the discussion of utilizing nations’ resources in the literature on the MENA region. Scholars argue that inefficiency in public spending leads to a long-term budget deficit as a result of inefficient budget allocation systems, where revenues are used to pay the national debt and balance the public budget rather than spent to enhance infrastructure and support social programs (Arjomand et al., 2016; Rayp and Van De Sijpe, 2007). Arjomand et al. (2016) explore the influence of budget deficits on economic growth and inflation in the MENA countries from 2000 to 2013; they find that inefficient budgeting systems negatively influence economic growth and the outcome of public programs due to the waste and misuse of budget allocations for these programs, as well as the lack of proper fiscal and monetary policies.

Brini and Jemmali (2016) investigated the efficiency of public spending on government work, healthcare services, education systems, and infrastructure quality in non-oil-based MENA economies (i.e. Algeria, Djibouti, Egypt, Iran, Iraq, Jordan, Lebanon, Libya, Morocco, Syria, Tunisia, West Bank and Gaza, and Yemen) from 1996 to 2011. Brini and Jemmali’s (2016: 1) study finds that “political stability, trade freedom and economic growth have a positive effect on public spending efficiency. Nevertheless, voice and accountability negatively affect the efficiency of public spending.” Thus, the literature review shows that the lack of adoption of good governance factors (e.g. transparency and accountability) by countries has been pointed out by many studies as a reason for the inefficient public spending systems in the MENA region (Abushamsieh et al., 2014; Albassam, 2015; Christopoulos and McAdam, 2015).

The MENA region

In this study, the MENA region is defined as including 19 countries: Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, United Arab Emirates, West Bank and Gaza, and Yemen. Countries in the region have different economic, political, and administrative structures, where different levels of governance quality and different economic growth levels are in place, making them a challenge to study.

The MENA region has experienced a great deal of political instability since the 1950s. The fact that most countries in the region gained independence from colonists during the 1950s–1970s, the civil war in Lebanon from 1975 to 1989, the invasion of Kuwait by Iraq in 1993, the invasion of Iraq by the US in 2003, and the Arab Spring in 2011 have all had an impact on the governing process in the region. The demands of people in the MENA countries that initiated the Arab Spring revolutions are related to supporting the quality of public services, fighting corruption, and increasing equality and equity among citizens in jobs and services.

The MENA region accounts for approximately 6% of the world’s population, 60% of the world’s oil reserves, and 45% of the world’s natural gas reserves. Due to the region’s substantial petroleum and natural gas reserves, the MENA region is an important source of global economic stability (World Bank, 2019b, 2019c). Table 1 shows data from selected indicators to provide a better understanding of the economic structure of the region. Specifically, these include: the Human Development Index (HDI) (a statistics index based on the three components of life expectancy, education, and per capita income) (UNDP, 2019); the Economic Complexity Index (ECI), which measures the diversity of imports and exports of countries (i.e. economic diversification) (Observatory of Economic Complexity, 2019); general government final consumption expenditures as a percentage of GDP, which refers to “all government current expenditures for purchases of goods and services (including compensation of employees)” (World Bank, 2019c); expenses as a percentage of GDP, which refers to “cash payments for operating activities of the government in providing goods and services [including] compensation of employees (such as wages and salaries), interest and subsidies, grants, social benefits, and other expenses such as rent and dividends” (World Bank, 2019a); and total natural resource rents as a percentage of GDP, which refers to “the sum of oil rents, natural gas rents, coal rents (hard and soft), mineral rents, and forest rents” (World Bank, 2019b).

Table 1.

Selected economic indicators: MENA region.

Country	HDI (2017)^a	Economic complexity rankings (ECI) (2017)^b	GDP growth (annual %)	General government final consumption expenditures (% of GDP)	Expenses (% of GDP)	Total natural resource rents (% of GDP)
Algeria	0.754	–0.78	2.1 (2018)	19.2 (2017)	N/A	14.7 (2017)
Bahrain	0.846	N/A	1.8 (2018)	17.5 (2018)	20.2 (2004)	3.7 (2017)
Djibouti	0.476	N/A	6.0 (2018)	31.5 (2018)	N/A	0.7 (2017)
Egypt	0.696	–0.32	5.3 (2018)	8.4 (2018)	30.2 (2015)	5.4 (2017)
Iran	0.798	–0.16	3.8 (2017)	13.4 (2018)	19.6 (2009)	17.8 (2017)
Iraq	0.685	N/A	0.6 (2018)	21.0 (2018)	26.0 (2016)	38.0 (2017)
Jordan	0.735	–0.15	1.9 (2018)	15.5 (2018)	26.1 (2017)	0.7 (2017)
Kuwait	0.803	0.12	1.8 (2018)	25.1 (2018)	52.0 (2015)	37.1 (2017)
Lebanon	0.757	0.08	0.2 (2018)	13.7 (2018)	25.8 (2017)	0.0 (2017)
Libya	0.706	–0.97	7.8 (2018)	9.9 (2018)	N/A	38.5 (2017)
Morocco	0.667	–0.86	3.0 (2018)	19.3 (2018)	24.5 (2017)	1.6 (2017)
Oman	0.821	–0.06	2.1 (2018)	23.4 (2018)	N/A	23.5 (2017)
Qatar	0.856	0.40	1.4 (2018)	17.0 (2017)	N/A	17.9 (2017)
Saudi Arabia	0.853	0.75	2.2 (2018)	23.2 (2018)	28 (2017)	23.8 (2017)
Syria	0.536	–0.74	5.7 (2007)	12.3 (2008)	N/A	21.6 (2007)
Tunisia	0.735	–0.29	2.5 (2018)	20.8 (2017)	35.5 (2012)	2.4 (2017)
United Arab Emirates	0.863	0.13	1.4 (2018)	13.1 (2018)	4.1 (2017)	13.7 (2017)
West Bank and Gaza	0.686	N/A	0.9 (2018)	26.2 (2018)	8.3 (2017)	0.0 (2017)
Yemen	0.452	–0.97	–2.7 (2018)	n/a	N/A	1.9 (2017)
MENA (Avg.)	N/A	N/A	2.4 (2018)	15.6 (2017)	N/A	16.2 (2017)

Notes: ^aVery high human development = 0.800–100; high human development = 0.700–0.799; medium human development = 0.550–0.699; low human development = 0.350–0.549. ^b ECI ranges from about –2.8 (weak) to about 2.6 (strong).

Source: UNDP (2019) and World Bank (2019a, 2019b, 2019c).

From Table 1, we can observe different groups of countries in terms of human development and economic growth levels, where countries with high levels of human development tend to have a good economic growth rate. In addition, countries with a high rate of natural resource rents have a small or negative economic complexity rate; this means that when a higher share of national income comes from natural resources, countries are less committed to economic diversification. Another explanation is that decision-makers in natural-resource-based economies are less willing than those in non-natural-resource-based economies to push for a long-term plan for economic diversification, resulting in inefficient economic diversification policies and programs (Albassam, 2015). In addition, when we look at general government consumption expenditures, we can see that there is no substantial difference among countries; this could be interpreted as indicating that governments in the MENA region spend a greater share of their GDP on current expenses than on capital expenses (capital investment). Similarly, expenses as a percentage of GDP show that there is a trend of a positive relationship between funding government activities and natural resources’ share of the GDP in the examined countries.

In addition, based on the available data in Table 1, most of the countries score high in human development, except Djibouti and Yemen. However, this level of human development has not translated into building a good knowledge-based economy in the region (Albassam, 2019a, 2019b; Biygautane et al., 2017). In addition, data on the percentage of general government expenditures as a percentage of GDP show that the public sector in almost all countries in the region plays an important role in economic growth. Thus, in general, we could argue that regardless of diversity among countries in terms of economic and administrative structure, MENA countries share more similarities than differences with regard to budgeting systems and the behavior of public expenditures (Menifield, 2011; Msann and Saad, 2020). Also, the outdated data and shortage of data availability in the region result from the low level of transparency and ineffectiveness of government work in these countries with low levels of governance (Abushamsieh et al., 2014).

Methodology

The main purpose of this study is to examine the relationship between government expenditures and economic growth in 15 of the 19 MENA countries—Algeria, Bahrain, Djibouti, Iran, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Qatar, Saudi Arabia, Tunisia, United Arab Emirates, and Yemen—using available data provided by the World Bank (2019a, 2019c, 2020). Four countries/territories (Egypt, Iraq, Syria, and West Bank and Gaza) were excluded from the analysis due to a lack of data availability. The following research question was addressed: What are the relationships between economic growth and government expenditures in the MENA countries in the years 1990 to 2019 inclusive?

Economic growth was defined as the GDP per capita/purchasing power parity, measured in international dollars ($) at current prices. Government spending was initially recorded as a percentage of GDP but was converted to government expenditures (GEX) per capita in international dollars ($) at current prices (World Bank, 2019c, 2019d). Hence, the determination of the study period from 1990 to 2019 was based on the availability of data for analysis. In addition, the study of the relationship between the variables before and after the Arab Spring (which began in 2011 and is still ongoing in some Arab countries) contributes to the study outputs’ value and usefulness to researchers and decision-makers in the countries of the MENA region to assess the path of economic and administrative reforms recently adopted by most countries.

Results and analysis

For all countries

Bai-Perron multiple breakpoint tests were used to analyze the unpredicted change over time in GEX and general GDP from 1980 to 2019 for 15 MENA countries. According to Bai and Perron (2003: 81): “testing for structural change has always been an important issue in econometrics because a myriad of political and economic factors can cause the relationships among economic variables to change over time.” Table 2 shows the results of the Bai-Perron multiple breakpoint tests. According to the results, there are four significant structural breakpoints for GDP.

Table 2.

Structural breakpoints for GDP.

Sequential F-statistic determined breaks:			4
Break test	F-statistic	Scaled F-statistic	Critical value
0 vs 1*	59.153	59.153	8.580
1 vs 2*	77.190	77.190	10.130
2 vs 3*	77.835	77.835	11.140
3 vs 4*	31.387	31.387	11.830
4 vs 5	0	0	12.25

Note: *Significant at the 0.05 level.

In addition, running an augmented Dickey-Fuller test, as shown in Table 3, we conclude that GDP has no unit root and is stationary since the p-values for the GDP were less than 0.05.

Table 3.

Augmented Dickey-Fuller test statistic for GDP.

		t-statistic	Prob.^a
Augmented Dickey-Fuller test statistic		–9.385	3.604e–17
Test critical values:	1% level	–3.431
	5% level	–2.862
	10% level	–2.567

Note: ^aMacKinnon (1996) one-sided p-values.

In Table 4, results of Bai-Perron multiple breakpoint tests show that we have two significant structural breakpoints for GEX. We can see from the table that our statistical value of –9 is less than the value of –3.431 at 1%; this suggests that we can reject the null hypothesis with a significance level of less than 1%.

Table 4.

Structural breakpoints for GEX.

Sequential F-statistic determined breaks:			2
Break test	F-statistic	Scaled F-statistic	Critical value**
0 vs 1*	27.099	27.099	8.580
1 vs 2*	43.582	43.582	10.130
2 vs 3	7.775	7.775	11.140

Note: *Significant at the 0.05 level. **Bai-Perron (Econometric Journal, 2003) critical values.

In addition, running an augmented Dickey-Fuller test, as shown in Table 5, we can conclude that GEX has no unit root and is stationary since the p-values for the GEX were less than 0.05. We can see from the table that our statistical value of –8 is less than the value of –3.433 at 1%; this suggests that we can reject the null hypothesis with a significance level of less than 1%.

Table 5.

Augmented Dickey-Fuller test statistic for GEX.

		t-statistic	Prob.^a
Augmented Dickey-Fuller test statistic		–8.447	3.243e–14
Test critical values:	1% level	–3.433
	5% level	–2.862
	10% level	–2.567

Note: ^aMacKinnon (1996) one-sided p-values.

Cross-country analysis

For each country, a scatterplot was constructed for log₁₀ GEX/capita ($) vs log₁₀ GDP/capita ($), and no time lags were performed. The scatterplot was partitioned into three categories, representing three successive decades: 1990–1999, 2000–2009, and 2010–2019 (see Appendix A, available at: https://journals-sagepub-com-s.web.bisu.edu.cn/doi/suppl/). The general linear modeling (GLM) procedure in IBM SPSS v. 24.0 was used to estimate the mean slopes of the three regression lines ±95% confidence intervals (CI), with one line for each decade. The analysis is based on the inferential statistics computed using analysis of covariance (ANCOVA) to evaluate the homogeneity of the three regression lines in each scatterplot and using the ANCOVA statistics (F, p, regression coefficients, 95% CI) to compare the regression lines. ANCOVA was the method used to determine whether two or more regression lines fitted to one set of time-series data were homogeneous (equal) or heterogeneous (different). It was necessary to include at least 10 data points in each group to achieve sufficient statistical power to distinguish between the three regression lines.

The dependent variable in the GLM was log₁₀ GEX/capita, while log₁₀ GDP/capita was the covariate. The time period was a fixed factor. The purpose of the logarithmic transformation was to homogenize the variances and normalize the residuals in order to comply with the assumptions of GLM and avoid the generation of biased statistical inferences (Rutherford, 2001). The interaction between the time factor and the covariate was interpreted to evaluate the homogeneity or equality of the regression lines. If the regression lines were not homogeneous, then it could be concluded that time had a moderating effect on the strength and/or direction of the relationship between GEX and GDP.

The deviation of the regression lines from homogeneity (i.e. the inequality of the coefficients) was assumed if p < 0.05 for the F test statistic; however, statistical significance was not the only criterion used to interpret the results of GLM. The interaction was considered to be of practical significance (implying that the effect of time was meaningful and important in the context of this study) if the effect size for the interaction was greater than about 20% (i.e. η² ≥ 0.2) (Rutherford, 2001). This interpretation of the effect size meant that at least 20% of the variance in the data was explained by the interaction. Table 6 shows a summary of the results of the analysis of GLM of each of 15 countries included in the analysis.

Table 6.

Summary of the results of GLM for MENA countries, 1990–2019.

Country	Unstandardized regression coefficient (β)			Test for homogeneity of regression coefficients
Country	1990–1999	2000–2009	2010–2019	F	p	Effect size
Algeria	+1.434	+1.409	+1.088	00.218	0.805	0.018
Bahrain	+1.075	–0.103	+1.622	08.170	0.002	0.405
Djibouti	+2.325	+1.931	+1.128	04.350	0.042	0.218
Iran	+1.116	+1.409	+2.418	00.407	0.407	0.072
Jordan	–0.088	+1.136	–0.408	08.220	0.002	0.407
Kuwait	–0.316	+1.136	–0.408	00.710	0.500	0056
Lebanon	+0.330	+0.631	+1.276	00.620	0.544	0.049
Libya	+0.355	+0.811	+0.286	00.570	0.571	0.046
Morocco	+0.039	+0.380	+0.198	26.500	>0.001*	0.689
Oman	+0.653	+0.569	+0.604	10.060	0.004	0.296
Qatar	+1.053	+1.217	+1.040	01.250	0.304	0.094
Saudi Arabia	+0.268	+0.250	+1.793	05.940	0.008	0.331
Tunisia	+0.694	+0.986	+1.594	09.460	0.001	0.441
UAE	–0.268	+0.250	+1.793	05.940	0.008	0.331
Yemen	+1.858	+1.930	+2.570	01.640	0.215	0.120

Note: * Significant if p < 0.05.

Many results can be drawn from the preceding analysis, which could be used to understand the relationship between economic growth and government expenditures in the MENA region. In general, a significant relationship from government expenditures to economic growth indicates that there is a high probability that this economy at this point in time is consistent with the Keynesian theory; in contrast, in the case of a nonsignificant relationship between government expenditures and economic growth, there is a high probability that this economy at this point in time is consistent with Wagner’s law.

Based on the results of the analysis, the relationship between economic growth and government expenditures is significant for all countries collectively. The result shows that there is a significant relationship between government expenditures and economic growth, and time is of practical significance in analyzing the relationship, in Bahrain, Djibouti, Jordan, Morocco, Oman, Saudi Arabia, Tunisia, and United Arab Emirates; in contrast, the relationship is not significant in the rest of the countries included in the study (Algeria, Iran, Kuwait, Lebanon, Libya, Qatar, and Yemen).

In addition, to gain a better understanding of the relationship between government expenditures and economic growth, we can consider three groups of countries based on the results of the analysis. In the first group (Algeria, Djibouti, Iran, Lebanon, Oman, Qatar, Tunisia, and Yemen), the results of analyzing the data show that public spending drives the economy. However, the relationship between economic growth and government expenditures is only significant for Djibouti, Oman, and Tunisia in this group. In addition, all these countries enjoy a high development level, except Yemen, which scores low in human development. Regarding export and import diversity (economic complexity), Algeria, Iran, Oman, Tunisia, and Yemen show negative scores, whereas Lebanon and Qatar show positive but low scores. Additionally, in Algeria, Djibouti, Oman, and Tunisia, 20% of government expenditures are classified as current expenses, as a percentage of the GDP in 2019 (see Table 1).

On the other hand, countries in the second group (Bahrain, Jordan, Kuwait, Morocco, Saudi Arabia, and United Arab Emirates) show mixed results from 1990 to 2019 in shaping the relationship between government expenditures and economic growth. For example, during the period 1990–1999, we found that government expenditure has a significant and small impact on economic growth (nonsignificant only in Kuwait); here, the low price of oil ($8/barrel in 1998) could be the reason for the significant impact. In addition, looking at the pattern of government spending in these countries (see Table 1), we conclude that spending increases when the price of oil goes up, especially current spending (see Figure 1, available at: https://journals-sagepub-com-s.web.bisu.edu.cn/doi/suppl/). In addition, in 2018, current expenditures as a percentage of GDP tend to be around 20% for all countries in this group, except Kuwait (52%). Accordingly, by analyzing the trend of government spending (i.e. general government final consumption expenditures as a percentage of GDP), we can see that current expenditures rise when the income from natural resources is low, and vice versa. Finally, the second group of countries scores high compared to other groups on the ECI in 2019 (see Table 1). Lastly, Libya is the only country in the study that shows a nonsignificant relationship between government expenditures and economic growth from 1990 to 2019.

Outcomes of the study

One of the critical outcomes of the quantitative and qualitative analysis is the absence of a clear strategy for the MENA countries, especially the oil-based countries, to adopt a public finance plan that supports public spending efficiency as a key to economic growth (see Figure 1). While many other factors contribute to economic growth, increasing public spending seems to be the favorite tool used every time there is an economic crisis in the MENA countries. Thus, countries have yet to see long-term economic growth or less dependence on natural resources as the main source of income. In other words, MENA government plans to support the diversity of the economy and achieve sustainable economic growth have yet to be successful.

Another outcome of the analysis is that the results show no consistency in following a specific fiscal policy in running the economy; in most cases, governments react rather than act in dealing with economic crises (i.e. no successful emergency plans are in place) (Agnella and Sousa, 2016; Arjomand et al., 2016). Excluding countries that have suffered from political instability or war (Iraq, Libya, Syria, and Yemen), we can see in Figure 1 that there is inconsistency in the economic growth rate from 1999 to 2018 and, in many cases (e.g. Saudi Arabia and United Arab Emirates), economic growth remains significantly and positively correlated with oil prices in the global market.

Similarly, many studies in the MENA region (Arjomand et al., 2016; Brun and Compaore, 2019; Joharji and Willoughby, 2014; Msann and Saad, 2020) acknowledge the lack of fiscal planning, which influences the productivity of the public sector and the execution of economic plans, and causes high levels of corruption. The results emphasize the importance of the MENA countries benefiting from the advanced level of human development that most countries in the MENA region enjoy (see Table 1) and translating such development into building knowledge management systems that will help in creating a knowledge-based economy through knowledge transfer and attracting new technological industries to the economy. The outcome found here is that government spending does not result in economic development, which could be a sign of an inefficient public spending system.

Policy and administrative implications

The relationship between economic growth and government expenditures is not a simple system that can be directly controlled, engineered, and improved upon by governments. Rather, it is the outcome of a complex natural and dynamic system (Higgins, 2013; Marek et al., 2020). The dynamic relationship between economic growth and government expenditures is influenced by monetary and fiscal policies (e.g. taxes, budgets, interest rates, money supply, etc.), the rate of inflation, labor market conditions, infrastructure developments, international trade agreements, the contribution of the private sector, the volatility of international financial markets, and the global economy (e.g. the global financial crisis of 2008). In addition, there are other unexpected factors that are difficult to predict (e.g. the 2020 coronavirus pandemic) (De Simone et al., 2019; Marek et al., 2020; Pierre and Peters, 2019).

Since 2012, many MENA countries have launched strategic plans (e.g. United Arab Emirates Vision 2021; Jordan Vision 2025) to diversify their economies, targeting long-term economic growth. Consequently, improving the productivity of the public sector and developing a public finance system (e.g. public spending) are essential tools in these plans. Increasing government spending has been the technique used by governments in the region for decades to attract local and international investments, support the private sector, and develop infrastructure in the country. However, these plans have not been successful in creating sustainable development and economic growth. In addition, public service quality has yet to see improvement, especially since the rate of population growth in the region is one of the highest in the world (2%), resulting in pressure on healthcare and education (World Bank, 2020).

The outcome of the current study in is line with many prior studies on the region (Christopoulos and McAdam 2015; Mohaddes et al., 2018; Msann and Saad, 2020), all of which agreed on the importance of having a strategic plan for the MENA countries to organize and govern the public financial system (e.g. budgeting system, public expenditures, and national income) to make the most of state resources, especially in countries with no significant relationship between government spending and economic growth (Algeria, Djibouti, Iran, Kuwait, Lebanon, Libya, Qatar, and Yemen). Hence, for example, concentrating on increasing public spending without controlling corruption and having an efficient public spending system will be a waste of public money. In addition, MENA countries suffer from low scores on such indicators as for public participation in running state affairs, good governance, and corruption. In contrast, human development scores high in most of the MENA countries; thus, investing in human capital and adopting institutional reforms that support public sector productivity and accountability need to be priorities in order for the countries to achieve economic growth and sustainable development.

Conclusion

Economic growth is the goal of the strategic plans of all of the MENA countries. In 2011, during the Arab Spring, citizens of most Arab countries marched in the streets to demand better living conditions and hold authorities accountable. Today, some countries in the region are still struggling to establish a stable political system (e.g. Iraq, Syria, and Yemen), and the rest of the countries face challenges in controlling unemployment and enhancing the well-being of the people. Additionally, the response of the MENA countries to the current coronavirus pandemic of 2020 is similar to their response to other crises as most countries continue to take loans or withdraw from reserves (i.e. public expenditures) to support the economy and fund the healthcare plans to fight the disease.

According to the findings of this study, relying only on increasing public spending to develop the economy is not a good strategy and may continue to result in unsuccessful plans like those the MENA countries have been adopting since the 1970s. Thus, this study suggests that developing the budgeting system is one of the most important tools in controlling the waste of public money and better utilizing the public funds spent. In addition, enhancing public institutions’ quality and supporting the productivity and accountability of the public sector as a part of the countries’ economic plans would be a good approach to reaching the goals of the strategic plans (i.e. visions), such as economic diversification, diversification of the national income, and building a knowledge-based economy.

Future research might concentrate on a single country. Also, including other factors that influence public spending efficiency in the analysis, such as good governance factors, is another suggestion for future research.

Supplemental Material

sj-pdf-1-ras-10.1177_0020852320969802 - Supplemental material for Government spending and economic growth in the Middle East and North Africa region

Supplemental material, sj-pdf-1-ras-10.1177_0020852320969802 for Government spending and economic growth in the Middle East and North Africa region by Bassam AbdullahAlbassam in International Review of Administrative Sciences

Footnotes

Declaration of conflicting interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

Bassam Abdullah Albassam is an Associate Professor in the Department of Public Administration at King Saud University, Saudi Arabia. He received a PhD degree in Public Administration, with a concentration in governance and public finance. He has published books, articles, and book reviews on different subjects, such as public administration, public finance, and governance.

ORCID iD

Bassam Abdullah Albassam

Supplemental material

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