Journal of Finance and Investment Analysis

Does Private Sector Growth Mediate the Relationship Between Government Expenditure and Economic Growth? Evidence From East African Community Countries

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• Abstract

   

  The study assessed the mediating role of Private Sector Growth (PSG) in the relationship between Government Expenditure (GE) and Economic Growth (EG) across East African Community (EAC) countries from 1970 to 2022. Using panel data from six member states and mediation analysis, the study results reveal that PSG partially mediates the GE–EG relationship. This suggests that while GE has a direct positive impact on EG, it also enhances growth indirectly by stimulating private sector performance. Grounded in Keynesian and endogenous growth theories, the findings emphasize that public investment can unlock private sector potential and drive long-term economic development. The study indicates the need to align fiscal policy with private sector development strategies to achieve more sustained growth. While regional integration efforts aim to foster collective growth, persistent disparities in EG across EAC countries highlight the need for a more harmonized and coordinated regional framework. Prioritizing GE in sectors with strong private sector spillovers, conducting regular fiscal audits, and reducing regulatory barriers are essential for enhancing the effectiveness of public investment. By leveraging PSG as a mediating force, EAC countries can better align fiscal policy with regional development goals, enabling a more inclusive and balanced transformation across member states.

  
  

  Keywords: Government Expenditure, Private Sector Growth, Economic Growth, Fiscal Policy, Regional Integration, East African Community (EAC).