Government welfare expenditure and economic growth in Sri Lanka: a comparative analysis of different policy regimes

Abstract

Introduction:

The specific feature of the government policies that were implemented by the different regimes that came into power in Sri Lanka after independence was the intervention in socioeconomic affairs and the diversity of the process of intervention. The elected governments allocated a considerable percentage for welfare from aggregate government expenditure. The main goals of government expenditure were to accelerate economic growth, uplift the living condition of the population and achieve social development. This study examines the relationship between economic growth and government welfare expenditure, with reference to different policy regimes; 1959-1977 (Inward-looking), 1978-2005 (Outward-looking economic policies) and the Mahinda Chinthana policy regime.

Many studies concerning economic growth start from the aggregate production function where factors of production determine the national output. According to the Neo-classical theories growth comes from three ways, if land is fixed. Those are increase in labor supply, increase in the capital stock and increase in productivity. The effectiveness of education, health and overall social welfare expenditure are very much crucial for the development of all the three factors mentioned above.

Many studies have been conducted on examining the relationship between government expenditure and economic growth. As a whole, the conclusions of these studies are quite contradictory. Alam and Mohammad (2010) and; Jiranyakul & Brahmasrene (2007) have found a positive relationship between government expenditure and economic growth. Baum & Lin (1993) and Sjoberg (2003) have found a negative relationship between government expenditure and economic growth. Apart from that, what has been indicated by the study on Sri Lanka by Abhayaratne and Kalansooriya (2008) is that additional growth gained by the investment of welfare resources is not quite proportional for achieving higher economic growth. It has been further explained that without the higher welfare expenditure, the social indicators would never be able to achieve their present status; also, a considerable level of economic growth can never be achieved.

In each of these studies, welfare expenditure is considered as government expenditure. Although the relationship between economic growth and the government welfare expenditure has been studied in Sri Lanka, it is not examined in terms of the different policy regimes. This study aims to fill this lacuna by analyzing the relationship between government welfare expenditure and economic growth with reference to different policy regimes during the period of 1959-2009.