The determinants of public investment in Ethiopia: An ARDL approach

Tilahun, Solomon Article The determinants of public investment in Ethiopia: An ARDL approach Cogent Economics & Finance Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Tilahun, Solomon (2021) : The determinants of public investment in Ethiopia: An ARDL approach, Cogent Economics & Finance, ISSN 2332-2039, Taylor & Francis, Abingdon, Vol. 9, Iss. 1, pp. 1-18, https://doi.org/10.1080/23322039.2021.1929680 This Version is available at: https://hdl.handle.net/10419/270094 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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Submit your article to this journal Article views: 5733 View related articles View Crossmark data Citing articles: 3 View citing articles GENERAL & APPLIED ECONOMICS | RESEARCH ARTICLE The determinants of public investment in Ethiopia: An ARDL approach Solomon Tilahun 1 * Abstract: Public investment has shown increasing trends both in nominal and as a share of GDP over years in Ethiopia. These upsurges in public investment are believed to be due to factors that have visible impact on the fiscal posture of the country. To investigate the validity of Wagner’s law in Ethiopia; this study sets determinants of public investment in Ethiopia as a general objective. Specifically, the study sought to examine the main influencing factors on level of public investment in Ethiopia along three sets of explanatory variables. In order to meet the aforementioned objective, the study employed an autoregressive distributed lag (ARDL) approach over the period 1985–2019. Results from the bound tests show that there is a long-run relationship between the variables. The real per capita GDP is found to be positively and significantly impact on level of public investment which shows that there an evidence in favour of Wagner’s law,i.e. public spending has a high income elasticity of demand. This study also found that there is a positive relationship between public investment and private investment which shows that two are moving in tandem. Again, the study also found that foreign aid has positive impact on public investment implying that additional foreign aid leads to larger spending of the government on capital. Moreover, the study found that the degree Solomon Tilahun ABOUT THE AUTHOR Solomon Tilahun is a Researcher at Poverty and Social Welfare Studies center of Policy Studies, Addis Ababa, Ethiopia. He has extensive years of experience in teaching, research at different universities and as well as experience in bureaucracy. He has an MSc degree in Economic Policy Analysis from Addis Ababa University and a BA degree in Economics from the same institute. His research areas of interest encompass impact evaluation of development projects, private sector development, review on social protection, poverty analysis and social welfare studies etc. PUBLIC INTEREST STATEMENT The rising of public investment through spending the infrastructures and economic service is receiving big attention at recent times in Ethiopia. In the last two decades, the country is achieving sustainable economic growth that is heralded with international financial institution like IMF and World Bank. Based on this success stories the Government of Ethiopia announced successive Economic Development plan requiring substantial amount of public investment. Many controversies have arisen since the plan was announced. The popular view is that the plan is too ambitious and will disturb the economy by crowding out private investment and by worsening the fiscal structure of the government. In line with this, this study attempt to assess the determinants of public investment spending in Ethiopia using time series data from 1985 to 2019. The study found that public investment plays complementary role to the private investment. In Ethiopia, this study indicated that there is an evidence of rise of public investment with level of economic growth and increase in rate of growth of economy. Tilahun, Cogent Economics & Finance (2021), 9: 1929680 https://doi.org/10.1080/23322039.2021.1929680 Page 1 of 18 Received: 24 February 2021 Accepted: 07 May 2021 *Corresponding author: Solomon Tilahun, Poverty and Social Welfare Studies Center, Policy Studies Institute, Around Stadium Area, 2479/1072, Addis Ababa, Ethiopia E-mail: [email protected] Reviewing editor: Francesco Tajani, university of bari, ITALY Additional information is available at the end of the article © 2021 The Author(s). This open access article is distributed under a Creative Commons Attribution (CC-BY) 4.0 license. of urbanization suggests that levels of public spending are higher in the urban sector than rural economies. These findings give strong policy implication to the policy makers because an increase in public investments in may then help spur economic growth. Subjects: Economics; Political Economy; History of Economic Thought Keywords: ARDL; Ethiopia; Wagner’s law; public investment; Economic Growth 1. Introduction The determinants that affect the size of government spending which is commonly known as public investment have been a centre of attention of economists since A. Wagner (1893). The increase in rate of public investment has an impact on the economic growth and development of a country (Cooray, 2009). Mo (2007) found that all other types of government expenditures excluding public investment have negative contribution to economic growth. The negative impact of unproductive government expenditure further is manifested in terms of higher unemployment and low levels of private investment. There are various studies that have recommended the factors that determine the growth of public investment as demographic factors such as population growth and urbanization (Kimakova, 2009; Shelton, 2007) and macroeconomic variables like debt and openness (Mahdavi, 2004). Throughout time investigations on the government spending begun to receive global attention. There has been relatively little research done on the determinants of public investment unlike private investment in developing countries in general and Ethiopia in particular. The main reason behind motivating this research on determinants of public investment is that public spending take the lion share of gross capital investment in Ethiopia and it is important to have an understanding of its determinants. Consequently, the objective of this study is to assess the determinants of public investment in Ethiopia in from 1985 to 2019. Moreover, the findings of this study will provide a platform for future research on the determinants of public investment in Ethiopia. The main aim of this research is to investigate the key determinants of public investment as well as the validity of Wagner’s law in Ethiopian context. This research has two important main contributions. First, it serves as a spring board for same type of studies that will be conducted in Ethiopia and also contributes to the existing literature in the field in general. Second, it also serve as whether public spending through public investment is crucial element of designing appropriate economic development strategies as well as help government of Ethiopia produce evidence based economic policy proposals for poverty reduction strategies. Moreover, by giving glimpse of ideas on factors that determine public investment in Ethiopia, the study will help policy makers to endorse appropriate policy that geared towards sustainable development and economic prosperity. This study is organized as follows: Section 2 presents background on public investment with brief literature review and Section 3 consists of a discussion on trends of public expenditures in Ethiopia. In Section 4, the theoretical consideration and model specification, the description of variables and empirical techniques while section 5 presents and discussion of the results of the study, while Section 6 gives conclusion of the study. 2. Background public investments: a brief literature review Public investment plays an important role in facilitating developing countries to enable sustain their economic growth and development at the same time letting them to realize their Sustainable Development Goals (SDGs) (UNCTAD, 2016). The importance of public investment to the socioeconomic advancement of a country cannot be overstated (Global Infrastructure Hub, 2017). Inadequate or underwhelming public investment hinders the general publics’ access to markets, as well as income opportunities and services such as clean water, education, health, transport and communication (ILO, 2010). Increasing public investment is thus generally perceived as a spine in national development strategies of emerging economies (Atolia et al., 2017). Both The World Bank Tilahun, Cogent Economics & Finance (2021), 9: 1929680 https://doi.org/10.1080/23322039.2021.1929680 Page 2 of 18 and African Development Bank (AfDB) promoted for public investment especially in the sector that take lion share in the economy to promote economic growth in sub-Saharan Africa (AfDB, 2020; World Bank, 2020). Retrospectively, the main factors that influence the level of public investments are diverse and differ from one country to another and from one economic region to another and so forth. Conventional economic theory on public investments and its means of financing believes that offers a basis for nation’s social and economic development (African Development Bank (ADB), 2018). These ideas are also forwarded by Nannan and Jianing (2012); they showed that public investment as an instrument to provide the basic framework for a country to sustenance necessary public service in order to get higher economic growth and a better quality of life. The lack of infrastructure such as water, power and transport services has been noted to be one of the major bottlenecks to industrial development in Africa. In reference to economists at the African Development Bank, industrialization is fundamental to ending poverty and generates employment for over 12 million young people in Africa (African Development Bank (ADB), 2018). Jedwab and Storeygard (2016) state these views by further asserting that socially, infrastructure investment leads to increased access to essential services which are meant to reduce inequality, foster inclusion and support poverty reduction efforts. In most cases, the poorest communities benefit the most from public infrastructure development because it brings basic amenities and employment right to their doorstep and thus refining their standard of living (Baum-Snow et al., 2017). It is general consensus among economists that public capital investment can have a multiplier effect on productive capacity of an area or place (Cavallo & Daude, 2011). Similarly, public investment boosts the productivity of private capital, raising its rate of return and inspiring more investment. Cohen and Morrison-Paul (2001) indicated that the amount and value of public investment have an impact on the costs and efficiency of private investments, and subsequently on economic dynamism and development. This in turn has brought about postulations that a 10% growth in infrastructure endowment increases output per worker by about 1% in the long run (Calderon et al., 2015). To sum up, infrastructure investment shapes economic activity in a country because it can produce long-standing economic improvements by reducing trade costs and integrating markets, possibly changing the economic setting in poor, remote regions with high trade costs (Gurara et al., 2018). For this aforementioned positive affirmation of public investment in economic growth and social change, Kodongo and Ojah (2016) assert that public investment should be in a sector that has comparative and competitive advantages. There is a numerous literature available on the study of the determinants of public investment, with different methodologies and techniques used in the studies. Some studies regard foreign aid is one of the reason for rise in demand for public investment (Njeru, 2003; Quattara, 2006; Swaroop et al., 2000), while some of them give credit to the burden of external debt servicing as one of the factors for rise in public investments (Mahdavi 2004; Shonchoy, 2010) and Shelton (2007) argues that rise of populations and urbanization as determining factor for an increase in public investment (Shelton, 2007). Additionally studies (Milesi-Ferretti et al., 2002; Persson & Tabellini, 1999; Shelton, 2007; Shonchoy, 2010), income (Akpan, 2011; Aregbeyen, 2006; Henrekson, 1993; Hong, 2015; Hong & Nadler, 2015; Sideris, 2007) show that political regimes and institutions play determinate role in public spending. Public investments makes substantial contributions in terms of economic growth, productivity improvement, employment, trade competitiveness, environmental sustainability and people’s safety (Agénor, 2010; Heintz et al., 2009; Rioja, 2001; Zhang et al., 2011). Ethiopia envisioned graduating its transition to middle-income country and carbon-neutral economy by 2025. For success of this vision government has introduced prudent macro-policy management and large investments are allocated to provision of infrastructure development. Over the past decade, the average annual gross domestic product (GDP) growth has been 10.6%, that is, double the average in the rest of Sub Saharan Africa (International Monetary Fund, 2015).while also public expenditure has showed considerable increase while at the same time general government deficit expanded only marginally (by 0.2 percentage point) to an estimated 2.8 per cent of GDP. As a result, Tilahun, Cogent Economics & Finance (2021), 9: 1929680 https://doi.org/10.1080/23322039.2021.1929680 Page 3 of 18 their financing needs increased to 7.4 per cent of GDP, while public and publicly-guaranteed debt reached an estimated 50 per cent of GDP in June 2015 (International Monetary Fund, 2015).The rise in need for the public investment and neglect of this issue over the last generation has left Ethiopia with a critical infrastructure deficit. The result of such declining and insufficient investments has been a worsening infrastructure deficit and mounting investment needs. According to the overall competitiveness index in the ― 2013–2014 Global Competitiveness Report Ethiopia ranked just 124 th among 148 countries in terms of infrastructure (World Economic Forum, 2013).To address the country’s infrastructure deficit the Ethiopian government began spending huge amount of money in each fiscal year in addition to public enterprises investment. In the 1999/00 fiscal year the total physical public infrastructure investments (on transport, road construction, energy and telecommunication) equalled 5.82 per cent of GDP and the total social public infrastructure investments (on education and health) equalled 0.69 per cent of GDP; in 2009/10 fiscal year the gross capital formation of physical and social infrastructure increased impressively to 10.65 per cent and 2.63 % of GDP, respectively (MoFED, 2013). In the 2013/14 fiscal year the physical and social infrastructure investment was 9.83% and 2.42% of GDP, in this fiscal year the infrastructure investment as percentage of GDP decrease but it doesn’t mean the total investment amount decreased rather it is due to the expansion of the country’s economic base (MoFED, 2013).The figures above infer that the increment in public infrastructure in Ethiopia is quite impressive. So, this increase in the public investment from time to time has the connotation of how crucial this spending is for development. 3. Trends in public expenditure in Ethiopia Ethiopia has good success story in achieving a consolidated strong record of fiscal and public management (MoFED, 2013) while the fiscal deficit declined from 8.0 per cent of GDP in 2004/05 to 2 per cent in 2012/13, while net domestic borrowing fell from 2.5 to 0.2 per cent of GDP during the same period. In line with the Growth and Transformation Plan (GTP), pro-poor sector spending as a share of the general government budget has increased steadily from 28 per cent in 1999/2000 to reach the target of 70 per cent in 2012/13, although it has stagnated as a share of GDP as a result of the containment of total public sector spending as a share of GDP (MoFED, 2014). The Government has also stressed that coordination between policymaking, planning and budgeting is crucial to raising the efficiency of public expenditure on poverty-oriented sectors. The fiscal deficit of 2.0 percent of GDP in 2012/13 was kept at a low level as a result of cautious fiscal management. The deficit was largely financed by external borrowing supplemented by a small amount of net domestic borrowing, equivalent to about 0.2 percent GDP (MoFED, 2014). Ethiopia’s public finance management can be characterized as having been prudent: it has kept the budget deficit low, while scaling up expenditures on critical sectors of the economy, particularly infrastructure and pro-poor sectors. Public resource mobilization and investment have increased significantly over the past years. Resource mobilization has been largely domesticfocused and supported by measures taken to improve the tax administration (MoFED, 2014).In 1999/00 government expenditure was around 32 per cent of GDP while total government revenue was 19.4 per cent of GDP. This clearly indicates that there is an excess of government expenditure over revenue, which leads to huge budget deficit. As MoFED (2013) represented, the liberalized regime (1992–2012) revealed that the budget deficit has also remained significant even after the introduction of various reform programs during 1992/93. In simple and brief words, total revenue and expenditure are increasing. However, the increase in latter is much higher than that of the former one and this has created the budget deficit to be widened over time. Figure 1 below indicates that with respect to government expenditure, up to the period 2007/08 the share of current expenditure to total expenditure is greater than that of capital expenditure. In recent years capital expenditures and revenue mobilization were increasing. Specifically in 2008 and 2009 revenue collection was improved leading to fall in budget deficit growth rate. Generally fiscal situation of Ethiopia is determined by its capacity to mobilized revenues, whether conditions, external factors (donors‟ response). The deficit indicates the country’s dependence on external resources (Tadesse 2011). Tilahun, Cogent Economics & Finance (2021), 9: 1929680 https://doi.org/10.1080/23322039.2021.1929680 Page 4 of 18 Moreover, so as to have further understanding on the trend of government expenditure in Ethiopia, it is of vital importance to give glimpse of points on the share of government expenditure in GDP of Ethiopia over time. Figure 2 below portrays the updates of graphical illustrations of the share of government expenditure in GDP of Ethiopia between 2011 and 2019. As it seen from the figure the highest share of government expenditure in GDP was recorded in year 2017 which can be attributable to government dire attention to capital expenditure supported by its 5-year growth and transformation plan (GTP). Generally, it is clear observation that the trends of public expenditure show fluctuation over the years pertaining to the effects of different policy programmes of government. Figure 3 above reveals that the share of government recurrent expenditure averaged between 7 % and 20 % over the period 1999/00–2019/20 while that of capital expenditure has been constantly below 11% throughout the whole period. The relative declining trend of capital expenditure Figure 1. Total government expenditure in millions. Own calculation Based on NBE data Figure 2. Trends of government expenditure (as a share of GDP) for Ethiopia, 2011–2019. Own calculation based on NBE data Tilahun, Cogent Economics & Finance (2021), 9: 1929680 https://doi.org/10.1080/23322039.2021.1929680 Page 5 of 18 over the 1990s may be credited to austerity measures enacted on the government by the Bretton woods institutions—either in form of World Bank’s structural adjustment programmes or through IMF’s stabilization programmes. As of most recurrent expenditure goes to fixed (salaries and wages, interest on public debt, constitutional offices etc), the only opportunity the government has in the wake of these austerity measures is its development budget. Therefore majority of the expenditure cuts have been implemented through decreases in development expenditure, in which this will in turn contribute to the diminishing trend of total government expenditure particularly in the 1990s. The implication is that it is displeasing trend since capital expenditure is anticipated to offer the needed infrastructure for private sector investment and growth and therefore low budgetary allocation on this item means these services have been underprovided. On the other hand, recurrent (consumption) expenditure has remained relatively high (and could have been much higher had we included the debt redemption component) and shows an upward trend in the 1990s. However, the share of capital expenditure in GDP begun to take its lion share in total government expenditure from 2007/8 onwards. This is so for the reason that prior to year 2008, there was less importance is attached to public sector investment and most of the government expenditure devoted to its current component. However, from recent years onwards the aim has been given due attention for the public sector developments. Consequently, the share of capital expenditure has been increasing. On the other hand, as it is revealed in Figure 3 below the government spending has been growing rapidly in recent years while prioritizing poverty reduction expenditures in the main sectors of health, education and agriculture. Before 2014/15, the national expenditure pattern mainly focused on allocating more resource for building economic and social infrastructure to provide basic services (MoFED 2014). During those periods, the majority of the yearly budget was dedicated to capital expenditure, which is important to bringing potential benefits in long run through development of physical assets and infrastructures, as well as supporting human resources development. In recent times, nonetheless, capital expenditure as a share of total expenditure dropped consistently (MoFED 2014). It is palpable that expenditures in social sectors are of dire importance in the fight against poverty and even more indispensable for development of social welfare. In essence, public expenditure has been aligned to poverty reduction priorities in Ethiopia. Sub-national expenditures are also consistent with poverty reduction goals. In this regard, the GoE has allocated colossal resources to lift spending in what it refers to as the “main pro-poor sectors”, namely health, education, water and energy (which includes all energy projects, such as the construction of mega dams and power plants), roads, as well Figure 3. Trends of expenditure (as a share of GDP) for Ethiopia, 199/00–2019/20. Own Calculation Based on NBE data Tilahun, Cogent Economics & Finance (2021), 9: 1929680 https://doi.org/10.1080/23322039.2021.1929680 Page 6 of 18 as agriculture and food security (with approximately half of the agriculture budget allocated to the PSNP). As shown in Figure 4 below, the strong commitment to educational development is reflected in expenditure allocated to the sector, which has increased steadily since 2012/13 to reach 27 per cent of total government expenditure in 2016/17. Road construction as well as agriculture and food security each received 10 per cent of national expenditure in 2016/17, while health and nutrition, and water, energy and electricity received 8 per cent and 7 per cent of national spending respectively in the same period. 4. Theoretical consideration and model 4.1. Model specification public investment equation Kirchgassner, (1988), Tanzi and Davoodi (1997) and Sturm (2001) classified main factors that play a detrimental role for the public investment into three natal A summary of the contributing factors to public investments (explanatory variables) was classified into three sets of independent variables: structural, economic and politico-institutional variables. These variables were used to test Wagner’s Law which stresses the transformation of traditional societies into industrialized societies with their shift from the family to the public sector of services that is, education and health care (Henrekson & Lybeck, 1988). Thus, this study employed public investment model by borrowing the theoretical foundation of Tanzi and Davoodi (1997) and Sturm et al. (1996). Accordingly, public investment ratio for varied range of countries was modelled by Tanzi and Davoodi (1997) as a function of corruption, real per capita income, and the government revenue to GDP ratio. Their findings suggest that an increase in corruption index increases public investment while reducing its productivity. With his focus on developing countries, Sturm (2001) models public investment using three sets of independent variables: structural variables, such as urbanization and population growth; economic variables, such as real GDP growth, government debt, budget deficits, and foreign aid; and politico-institutional variables, such as political stability and political business cycles. Sturm (2001) investigates that that politico-institutional variables do not seem to be important in explaining public investment in developing economies, in contrast to structural and economic variables. In line with this study uses the real per capita income(LYRPC),foreign aid as a percentage of gross national income(AIDNI), rate of growth Figure 4. Pro-poor spending. Data from MoF. Tilahun, Cogent Economics & Finance (2021), 9: 1929680 https://doi.org/10.1080/23322039.2021.1929680 Page 7 of 18 Another variable that shows positive relationship with public investment is private investment and shows that private investment and government capital spending are moving in tandem. Its coefficient shows that the elasticity of private investment was positive and statistically significant at 1 per cent level of significance, suggesting these two series move in tandem. The finding shows that a 1 per cent increase in private investment had the potential to result in a3.2 per cent increase in public investment. This finding is similar to Mataya and Veeman (1996), who found a positive relationship between private investment and public investment in Malawi. However, the results differs from M’Amanja and Morrissey (2006), who found a negative but insignificant coefficient of private investment, confirming a possible crowding out effect of private investment in the long-run in Kenya. As indicated in Table 5 above foreign aid has statistically significant and positive impact on public investment. Besides alleviating immediate catastrophes, foreign aid is mostly intended to help create a better environment for sustainable economic growth. Donations are often restricted in their use to, for instance, improving infrastructure. Additional foreign aid leads to larger spending of the government on capital. The result from the table reveals that even though it is insignificant, external debt service has positive impact on the public investment which is against the expectation that countries might have offset increases in debt interest payments by winding back public capital spending. Moreover, the positive sign of the degree of urbanization suggests that levels of public spending are higher in the urban sector than rural economies. Wagner’s law also suggests that public investment spending might increase with urbanization Adolf Wagner and Musgrave and Alan T. Peacock (1958).This finding is similar to most studies explaining government sizes include the so-called structural variables to test for Wagner’s law, especially in the version that stresses the transformation of the traditional society into the industrialized society with its shift from the family to the public sector of services like education and health care (Henrekson & Lybeck, 1988). However, other studies also showed that in case of government capital spending there is also another demand-side reason for including the degree of urbanization. Most public capital spending concern infrastructure and rural areas are in relatively more need of those. The table also shows that there is a positive and significant relationship between trade openness and the level of public investment in the long run in Ethiopia. This finding is also confirmed in the earlier researches such as Cameron (1978), Rodrik (1998) and Shelton (2007). The result can be expounded as a country is hit by foreign shocks through openness rises public investment meanwhile government needs to offer additional goods and services to people to moderate the foreign shocks originating from the rest of the world. Moreover, it implies that more openness give an indications to higher demand for various types of infrastructure such as transport facilities, economic services, governmental and established support systems through introduction of new establishments and organizations which have the ability to drive public investment to higher level. 5.5. Short run error correction model The error correction term (ECT) is derived from the corresponding long run model whose coefficients are obtained by normalizing the equation. The error correction term indicates the speed of adjustment to restore equilibrium in the dynamic model. The ECM coefficient shows how quickly variables converge to equilibrium and it should have a statistically significant coefficient with a negative sign. According to Bannerjee et al. (1998), the highly significant error correction term further confirms the existence of a stable long-run relationship. 5.5.1. ECM for public investment model The result (table below) for Public Investment shows that the expected negative sign of ECM is highly significant. This confirms the existence of the long run relationship among the variables with their various significant lags. The coefficient of ECM = −.629, imply that deviation from the longterm growth in Public investment is corrected by 63% by the following year. The coefficient of determination (R-squared) is high explaining that about 75% of variation in the real GDP is attributed to variations in the explanatory variables in the model. In addition, the DW statistic does not suggest autocorrelation and the F-statistic is quite robust. The short-run result discloses Tilahun, Cogent Economics & Finance (2021), 9: 1929680 https://doi.org/10.1080/23322039.2021.1929680 Page 14 of 18 a positive and significant relationship between real per capita GDP and public investment consistent with the long-run result. This has an implication that at growth in the GDP of Ethiopia has a contribution in explaining the growth of public investment in Ethiopia in the short run. Just like the long run case this finding also implies that Wagner’s law applies for Ethiopia as that rate of economic growth and level of development influences to a huge degree that volume of public investment in the economy. The shortrun coefficient of openness is found to be positive and significant which shows supporting evidence to the positive and significant nexus found in the long run. 6. Conclusion Similar to other developing countries, public investment through infrastructure development has a pivotal role to lifting up economic growth in Ethiopia. There are several empirical studies that are undertaken to analyze the determinants of public investment in developing countries specially in sub- Saharan Africa; but they came up with different results. This study based on theoretical motivation of Wagner’s law by including other important variables that are supposed to be significant in explaining growth of public investment in Ethiopia, it is aimed at investigating the determinants of public investment in Ethiopia using time series data ranging from 1985 to 2019. In order to examine the long run and short run public investment model, the study applied an autoregressive distributed lag (ARDL) approach over the specified period. This is because that ARDL gives reliable estimates even if in the presence of endogenous variables; It’s possible to apply whether the regressors are I(0), I(1) or mixed; it is relatively more reliable and efficient for small size sample, which is the case for this study. This study found different types of remarkable results that help economic policy makers for informed policy recommendation in public investment decision. The stationary properties of the time series data were tested so that variables were stationary at level and difference which helps to take advantage of employing the autoregressive distributed lag (ARDL) model. At the same time results of the bounds test showed that there is a long-run co-integration among the variables in the model. The short-run and long-run results provide strong evidence in support of Wagner’s law. The implication is that an expansion in public investment through embarking on the development of infrastructures shows desire for industrial transformation and economic prosperity which is supported by the theoretical model of Wagner’s law to hold for Ethiopia. Acknowledgements This paper represents the personal opinions of individual staff member and is not meant to represent the position or opinions of the Policy Studies Institute or its members, nor the official position of any staff members. Any errors or omissions are the fault of the author. Funding I do not have research funding for this paper. Author details Solomon Tilahun 1 E-mail: [email protected] 1 Solomon Tilahun, Poverty and Social Welfare Studies Center, Policy Studies Institute, Addis Ababa, Ethiopia. Disclosure of potential conflicts of interest The author declares that He has no competing interests. 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