Journal of Economic Development
No. 206 , October 2011, Page 31-39

Public Spending And Economic Growth: A Granger's Causality Test In A Multivariate Model For The Case Of Vietnam

Over the past two decades, Vietnam's public spending increases rapidly from 14.2% of GDP in 1991 to 20.2% of GDP in 2010. Additionally, since Vietnam resumed its relations with community of international donors, inflows of ODA have numerously supported government's spending; Vietnam's economic growth rate has reached 7.3% on average. The question is whether the rise in public spending will expedite the national economic growth or the national economic growth will push public spending up. This paper looks into the causal relationship between public spending and economic growth. The research model is developed from the comprehensive production function wherein public spending is split into two components (i.e. budget spending and ODA spending) with a view to evaluating how efficiently public finance resources are allocated. Simultaneously, trade openness, private investments and labor force are treated as control variables. With the data set of the period 1990-2010 and the Granger causality test in the multivariate VAR model, the research finds that the model is statistically significant and the two-component public spending has a unidirectional causal relationship with economic growth. Another significant finding is that public spending does not have any relationship with private investment. Eventually, based on findings, some solutions and policy implications will be recommended.

Public Spending, ODA, Economic Growth.
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