Determining, social assistance level in African and Organisation for Economic Co-operation and Development (OECD) countries.

Abstract

The need to realise steady economic growth, measured in this research by Gross Domestic Product (GDP), has ignited a plethora of studies about the contributors of economic growth and their optimal levels. Government expenditure is one contributor to economic growth. From a theoretical standpoint, optimal government size is depicted by an inverted U-curve known as the Armey curve which is hypothesised between the relationship of government size and economic growth. Empirical literature provides evidence that optimal government size is between 20-30 percent a share of GDP. However, little has been done to investigate the optimal level of isolated components of government spending that maximizes economic growth. One component of government spending that has gained limelight over the past decade is that of social assistance. Defined as public expenditure spent as cash and food transfers to the poor, this research uses social assistance expenditure to assess its optimal level that maximizes growth. This is important because some policymakers are concerned about the ballooning budgets directed at social assistance, and argue that the scarce resources need to be transferred to other social services sectors such as health and education. Basing on the panel-data accessed from the World Bank, this research uses the quadratic equation model to determine the optimal level of social assistance for African and Organisation for Economic Co-Operation and Development (OECD) countries covering the period 2009-15. The finding is that the optimal level of social assistance spending for African and OECD countries is 3.2 percent of GDP and 29.4 percent of GDP respectively. The study also finds that both African and OECD countries operate below the optimal levels and it is suggested that they need to increase social assistance spending in order to realize positive contributions to economic growth.