Econometric Analysis of Linkages between Sector Output Growth, Human Development and Public Spending in Uganda

Abstract

Uganda pursues a long-term policy objective of transforming the country’s society from the state peasantry to modernity and prosperity and increasing per-capita income to middle-income economy levels, government committed itself to redirect public investment to the critical growth sectors of the economy that lead to productivity enhancement. Government seeks to enhance productivity by increasing public expenditure on the key sectors and on human development.

Building on the Lewis’ dual economy theory with extensions to the endogenous growth by Lucas (1988), Barro (1988), Rebelo (1987) and Romer (1990), this study models and examines the endogenous relationship between sector output growth, human development, and public expenditure; and Uses the Error Correction Model to analyze economic behaviour of the three production sector over the long run. It was found that Industrial output growth and changes in service sector output growth lead to agriculture output growth, although industrial and services output growth are found not to be granger causd by agriculture output growth.

The study found that human development matters for economic growth and its indicators have short run rather than long-term links with sector output changes. Public spending on health, education and road and communication infrastructure had positive relationship with output growth across sectors. The study identifies strategies for taking advantage of identified linkages. There is need to strengthen the causal links from agriculture to other sectors of the economy through focused public spending in order to increase the benefits of economic transformation over the longterm.