The Effect of Increasing Government Employment on Growth:Some Evidence from Africa

This paper shows that expanding the government sector has tended to increase GDP and employment growth in certain parts of Africa for extended periods of time and sometimes by significant amounts. But, on the assumption that crowding out dominates, these effects on growth should be viewed as upper limits of the true effects. A simple model is analyzed that suggests that one should keep an eye on the ratio of government debt to GDP when attempting to link current growth performance to what is sustainable; growth that is inflated by expanding the government payroll is unlikely to be permanent. Nonetheless, growth in certain African countries does appear to have been boosted in this way. This phenomenon seems to have been less prevalent in other parts of the world, such as Asia. The existence of a growth differential between the government and nongovernment sectors has implications for assessing GDP growth performance in general and the impact of structural adjustment on GDP growth in particular. Restoring fiscal sustainability by cutting government employment will initially depress overall growth of output, particularly in relation to a period when the government sector grew unsustainably. In such cases, a more meaningful assessment of growth performance would focus on the growth of nongovernment GDP. This paper also shows that in the African countries studied, the government.s contribution to employment growth tends to considerably exceed its weight in output; the short-run employment costs of structural adjustment may therefore be large. Indeed, with the labor force growing at up to 3 percent a year in these countries, and the existence of already substantial unemployment, it is unsurprising that cutting the government payroll is meeting resistance.